SPAC Transactions: The Players and the Paper: Part I

HOST: Welcome to The Drawdown, a podcast by Cherry Bekaert's Private Equity Practice. In each episode, we explore the latest trends in the private equity sector, as well as challenges and opportunities in the ever-changing investment environment.

CAMERON SMITH: Today we're kicking off a multi-part discussion on special purpose acquisition companies, also known as SPACs or blank check companies, which continue to dominate the M&A headlines. The series is called SPACs, The Players in the Paper, because we'll be sharing various perspectives from the advisors who are key to closing deals for both the SPAC and the company taking the investment, including investment bankers, lawyers, and today, the accountants.

CAMERON SMITH: I'm Cameron Smith with Cherry Bekaert. I'm joined by Chase Wright, one of Cherry Bekaert's partners leading the charge on accounting do's and don'ts of a SPAC deal.

CHASE WRIGHT: Glad to be with you, Cameron. You're correct. A SPAC transaction is a highly complex undertaking for business owners seeking liquidity, particularly earlier-stage technology companies or middle-market businesses considering options to access the public markets.

CHASE WRIGHT: Selling to a SPAC can be challenging but can also be a great option.

CAMERON SMITH: SPACs have been around for some time and recently have dominated the headlines. Do you think this is a recent phenomenon, or is it a vehicle here to stay?

CHASE WRIGHT: If you take away the media attention, SPACs have been validated as a viable deal flow alternative. On the buyer side, there is an abundance of capital and dry powder, and SPACs provide an innovative way to deploy that capital. Generally, this structure can provide investors a return of capital and include a warrant for early SPAC investors, which can be valuable even if they choose to redeem their capital.

CHASE WRIGHT: On the sell side, companies often need liquidity to execute operating plans and pursue their vision. A SPAC can be a quicker and easier alternative to an IPO, with more interaction with investors early on and, in some cases, reduced market or pricing risk. SPAC sponsors also bring board expertise and industry knowledge. There are about 470 SPACs now, and while that number will fluctuate, we believe SPACs will remain a viable investment vehicle long term.

CAMERON SMITH: It's been an active M&A market across the board. There's a tremendous amount of capital to deploy, and some sellers are going to market earlier than planned due to potential capital gains tax changes. With that in mind, can you walk us through the rules of engagement on a SPAC deal from an accounting standpoint and explain why it's so important to get it right?

CHASE WRIGHT: The SEC has become very familiar with the SPAC product, and rules of engagement are emerging quickly. On the buyer side, a SPAC is a public registrant and must have financials that withstand SEC scrutiny and PCAOB audit scrutiny. Recent headlines around warrants are an example of areas where the SEC has focused and asked questions.

CHASE WRIGHT: Valuations matter; you want a valuation reasonable for retail investors so they remain invested rather than redeeming. Market instability from COVID is another factor to consider in assessing how targets will emerge post-pandemic.

CHASE WRIGHT: On the seller side, having the right advisors in place is table stakes: legal, accounting, and investment banking advisors are essential. Undergoing a PCAOB audit is a sign of maturity and requires that all the i's be dotted and t's crossed. The SEC expects extensive disclosures early, particularly around projections, internal controls, and overall compliance.

CAMERON SMITH: You mentioned dotting i's and crossing t's and that the numbers have to be spot on. Can you dig deeper into the accounting methodology and outline the typical process a buyer or seller would experience? What are the key steps and why must they be done correctly?

CHASE WRIGHT: A SPAC transaction is complicated because it involves a business combination, SEC filings, and de-SPACing to become an independent public company. Step one is ensuring you have two years of audited financials that can be audited by a PCAOB auditor. That often means getting revenue recognition correct, addressing lease accounting under the new standard, and confirming proper cutoff procedures.

CHASE WRIGHT: Step two is preparing pro forma financials that combine the company with the SPAC for a specified period. Step three is de-SPACing, which is equally complex because the company becomes its own public registrant. Many business owners don't realize this can be nine months of intensive accounting work that can slow the deal significantly if issues arise.

CAMERON SMITH: Beyond accounting, what other advisors and areas are critical to ensuring a SPAC transaction is done correctly?

CHASE WRIGHT: There are many players. On the buyer side, SPAC sponsors are typically sophisticated and may be affiliated with venture capital, private equity, or investment banks. You will see experienced M&A attorneys, SEC counsel, tax advisors, and investment bankers. SPACs have public company filing requirements, including Form 10-Qs, 10-Ks, and 8-Ks.

CHASE WRIGHT: On the seller side, transactions can be more complex. You need valuation, tax, and deal advisory expertise. Early engagement with an investment banker and attorney is critical. Investment bankers help tell the company story and test projections to ensure they will withstand SEC scrutiny. Attorneys help navigate acquisition accounting, legal nuances, and SEC requirements. We frequently advise clients to line up investment bankers early because they are critical to marketing the deal and supporting the valuation.

CAMERON SMITH: I'm looking forward to speaking with the other advisors in this series to hear their perspectives and dig deeper into SPACs. Chase, I appreciate your time talking about the accounting aspects and look forward to speaking with you again soon.

CHASE WRIGHT: Thank you, Cameron. It's always a pleasure.

HOST: Thank you for joining us on this episode of The Drawdown. For more information on SPACs or if you have questions about this episode, contact us at spaccbh.com or find us on our website or social media channels.

HOST: Thank you for listening to The Drawdown, Cherry Bekaert's private equity podcast. The views presented by our guests do not necessarily represent the views of their respective firms. For more information on how Cherry Bekaert serves as a guide forward to private equity funds and their portfolio companies through accounting, tax, and advisory services, please visit CBH.com.