Introduction
The SWK underwriting process generally consists of an approximate four-week diligence period followed by an approximate four-week legal documentation process. Key steps in SWK’s process include data review, key opinion leader (“KOL”) calls, customer calls, and finally, legal documentation. When working with counterparties who prepare a well-organized data room, assist in arranging KOL and/or customer calls, and utilize legal counsel that is familiar with securities documentation, the timeline from initial meeting to transaction closing may be even shorter. SWK believes following the steps outline in this article will make the underwriting process meaningfully more efficient, freeing management’s time for focus elsewhere within their business.
Stage One: Introductory Call (30-60 minutes)
The introductory call includes the management team, SWK, and (if applicable) a capital broker/banker. Following introductions and an summary of SWK’s financing structures, company management provides an overview of the business and presents a financing request.
Topics typically addressed in this initial meeting include:
- Management’s background
- Description of the company and its products
- The value proposition of the company’s product and how it is differentiated vs competition
- Barriers to entry or “moats” surrounding the company and its products
- Sales and marketing strategy
- High-level financial overview including revenue tends, gross margins, operating expenses, cash runway, and current capital structure
- The company’s financing ask
To ensure the call is productive, it is helpful if the company provides an investor presentation prior to the call. This allows SWK to arrive prepared and economize management’s time.
Stage Two: Due Diligence (~2 weeks)
The majority of SWK’s underwriting is completed during this stage and consists of the following diligence tasks:
- Data room review with a focus on product information, competition and market analysis, intellectual property, and capital structure
- Review of company’s financials
- Financial modeling
- Independent industry research and KOL calls
- Valuation analysis
- Additional management calls to discuss questions raised during this diligence process
This stage is made more efficient when the company prepares a well-organized data room and assists with arranging KOL and/or customer calls.
Stage Three: Preliminary Proposal (~1 week)
When Stage Two is complete, SWK meets with its Investment Committee (“IC”) and presents a business overview and preliminary financing proposal. If the IC provides preliminary credit approval, SWK presents the company with a brief, non-binding financing proposal outlining high-level terms including the facility dollar size, cost, term, repayment schedule, and covenants (the “Preliminary Proposal”). This Preliminary Proposal is typically five pages in length and delivered in PDF’d PowerPoint format.
The company and SWK will then discuss the proposal and negotiate terms. SWK will continue performing due diligence during this stage.
Stage Four: Term Sheet (~1 week)
Once the Preliminary Proposal is accepted, SWK circulates a formal term sheet.
In terms of content, the term sheet will largely mirror the Preliminary Proposal.However, it will be different in that each term will contain enhanced language and descriptive detail, such that SWK and the prospective borrower are all “on the same page” prior to engaging attorneys to draft full documentation.
Clear communication and alignment of understanding on key terms during the term sheet stage typically leads to a shorter legal documentation process and lower legal counsel costs.
SWK’s philosophy is to issue term sheets only when we have high conviction in our ability to close from risk and structural perspectives. When it comes to certainty of available funds, SWK always reserves 100% of its term sheets from the time the term sheet is signed to the time that it expires. We believe that this differentiates us from other capital providers, which may issue term sheets much earlier in the diligence and approval process and in the context of less certainty around availability of funds. That is to say—SWK takes very seriously, and stands behind, its term sheets.
Stage Five: Documentation and Closing (~4 weeks)
Each party engages legal counsel to negotiate documentation, a process that typically takes about one month. SWK encourages borrowers to engage counsel that is (i) already highly familiar with the business and management team and (ii) has experience negotiating credit documents. This reduces time, energy, and cost allocated to the process, while giving the borrower ample opportunity to negotiate salient points.
After legal documents have been negotiated, the facility is funded.