What it means
When a company raises money publicly it hires an underwriter to market the offering. There are two main ways to structure that relationship, and best efforts is the version in which the bank acts as an agent rather than as a buyer.
Under the alternative, called firm commitment, the bank purchases the whole issue at an agreed price and then resells it, absorbing the loss if demand disappoints. Under best efforts the bank simply canvasses investors, collects orders, and passes on whatever it manages to place.
The distinction matters because it tells you a great deal about how confident the market is in the deal. Banks put their own capital behind offerings they expect to sell easily, so a best efforts structure often signals a smaller, riskier or less well-known issuer where the bank is unwilling to take inventory risk.
In practice, best efforts deals frequently include a minimum threshold. An all-or-none structure means the deal collapses and money is returned unless the entire amount is raised, while a mini-maxi structure sets a floor and a ceiling, so the deal proceeds only if the minimum is met.
Investor funds usually sit in escrow until that condition is satisfied. The nuance for a management team is that best efforts is cheaper in commission terms but leaves genuine funding uncertainty.
If you are budgeting a factory expansion on the assumption of $50 million and the offering brings in $37.5 million, the shortfall lands on the board, not the bank.
In practice
Real-world examples.
Example
A regional brewery raising growth capital agrees a best efforts placement with a boutique bank. The bank places 70% of the target amount, so the brewery opens two new sites instead of the three set out in the prospectus.
Example
A biotechnology company with no approved products lists on a junior market using a best efforts offering, because no bank will commit its own capital to an issuer with pre-revenue science. The commission is lower than a firm commitment would carry, but the funding total is not guaranteed.
Example
A municipal issuer sells a small bond series on a best efforts basis through a local dealer. Because the issue is tiny and highly specialised, the dealer is happy to market it but unwilling to warehouse any unsold bonds on its own balance sheet.
Formula
Calculation
Net proceeds to issuer = (Shares actually sold x Offer price) - (Commission rate x Gross proceeds).
Take a company aiming to raise $50 million by offering 4,000,000 shares at $12.50 each on a best efforts basis, with a 6% selling commission and a minimum of 2,000,000 shares. Demand proves patchy and the bank places 3,000,000 shares.
Gross proceeds are 3,000,000 x $12.50 = $37,500,000, which clears the minimum of 2,000,000 x $12.50 = $25,000,000, so the deal completes. The commission is 6% x $37,500,000 = $2,250,000, leaving net proceeds of $37,500,000 - $2,250,000 = $35,250,000. The company raised $35.25 million against a $50 million plan, a shortfall of $12.5 million in gross terms, and must either scale back the project or find other funding.Case study
Seen in the real world.
This is an illustrative and entirely fictional scenario. Cobalt Harbour Brewing, an invented craft brewer, planned a $50 million raise to fund a new canning line, a distribution warehouse and a regional marketing push. Two large banks declined a firm commitment, so the company appointed a smaller house on a best efforts basis at a 6% commission.
The roadshow coincided with a period of weak sentiment towards consumer businesses, and the bank placed 3,000,000 of the 4,000,000 shares offered, delivering $35.25 million net. Because the board had approved all three projects on the assumption of a full raise, it had to make a choice under time pressure.
The directors funded the canning line and the warehouse, deferred the marketing push, and later regretted not agreeing a mini-maxi structure that would have forced an earlier decision. The illustrative lesson is that best efforts shifts placement risk onto the issuer, so the capital plan should be built in tranches that can survive a partial raise.
Watch out
Common mistakes.
- Reading best efforts as a promise that the full amount will be raised. It is a promise of effort, not of outcome.
- Building a capital budget that only works at the full target figure, with no plan for a partial raise.
- Comparing offers on commission rate alone. A firm commitment at a higher fee removes funding risk entirely, which is often worth more than the fee difference.
Questions
People also ask.
What is the difference between best efforts and firm commitment?
In a firm commitment the bank buys the whole issue and carries the resale risk; in best efforts it acts as agent and only passes on what it sells.
What happens if the minimum is not reached?
In an all-or-none or mini-maxi deal, investor money held in escrow is returned and the offering is cancelled.
Why would a company choose best efforts at all?
Usually because no bank will offer a firm commitment on acceptable terms, or because the issuer wants a lower commission and can tolerate an uncertain total.
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