h. Would the sale be on an underwritten or best efforts basis?
Randy’s, a family-owned restaurant chain operating in Alabama, has grown to the point that expansion throughout the entire Southeast is feasible. The proposed expansion would require the firm to raise about $18.3 million in new capital. Because Randy’s currently has a debt ratio of 50% and because family members already have all their personal wealth invested in the company, the family would like to sell common stock to the public to raise the $18.3 million. However, the family wants to retain voting control. You have been asked to brief family members on the issues involved by answering the following questions:
The sale should be on an underwritten basis because the banker promises to raise a specified amount by selling the securities on the behalf of the company in an underwritten agreement whereas, the banker promises to make his best efforts for selling the securities but not assure the company for raising specified amount in a best effort agreement.
It is quite safe from the company's side to accept underwritten agreement as the risk of selling securities is transferred from the company to the underwriter in lieu of a fixed commission.
In an underwritten agreement, the banker assures the company of raising a fixed amount by selling the securities but assurance of selling the securities is not given in case of best effort agreement. So, the company should adopt the underwritten agreement for selling the securities to mitigate the risk.