What it means
When a business needs to raise money by issuing new shares or bonds, it often partners with an investment bank or broker to manage the sale. In a best efforts arrangement, the broker acts purely as an agent rather than a buyer.
They promise to use their best efforts to market and sell the securities to investors, but they take on zero financial risk if the public shows little interest. This approach differs from a firm commitment, where the broker buys the entire batch upfront and takes the risk of reselling it.
For non-finance managers, understanding this distinction is crucial because it directly affects your funding certainty. If market conditions turn sour or investor appetite is weak, a best efforts offering might leave your company severely underfunded.
You might plan a project expecting $2 million, but only raise $800,000 because that was all the broker could successfully place. Companies typically choose this route when they are smaller, riskier, or issuing complex securities that are hard to price in advance.
While it avoids the heavy fees associated with guaranteed underwritten deals, it leaves the business exposed to the harsh reality of market demand. Imagine hiring an estate agent to sell your house.
Instead of buying your house from you upfront, they promise to put their best effort into finding a buyer, but they do not promise to buy it themselves if nobody makes an offer.
In practice
Real-world examples
Example 1
TechStart Ltd hired a broker for a best efforts offering to raise $500,000. The broker only managed to sell $300,000 worth of shares before the deadline, which is 60% of the target. The company postponed the second phase of its product launch.
Example 2
GreenBuild tried a best efforts share issue to fund a new warehouse. Due to poor market sentiment, investors bought only 40% of the targeted units, forcing management to downscale. The directors chose a smaller building and leased extra storage.
Example 3
BioHealth PLC used a best efforts placement for a minor bond issue. Because demand was surprisingly high, the broker successfully sold the entire allotment within just forty-eight hours. The company had budgeted only for the minimum, so the extra funds became a welcome reserve.
Think of it
Imagine hiring an estate agent to sell your house. Instead of buying your house from you upfront, they promise to put their best effort into finding a buyer, but they do not promise to buy it themselves if nobody makes an offer.
Formula
Calculation
Percentage Raised = Amount Sold / Target Amount x 100
Net Proceeds = Amount Sold x (1 - Commission Rate)
Worked example. A company targets $1,000,000 and the broker places $600,000 of shares. Percentage raised = $600,000 / $1,000,000 = 60%. At an illustrative commission of 4%, the fee is $600,000 x 0.04 = $24,000, so net proceeds are $600,000 - $24,000 = $576,000. The commission is charged only on what is actually sold, so a weak result also reduces the fee, but the company still has $424,000 less than it planned for ($1,000,000 - $576,000).Case study
Seen in the real world
This is a fictional, illustrative scenario. BrightWeb, a digital marketing agency, decided to expand its software division by raising $1,000,000 through a share issuance. Due to its niche market and uncertain economic conditions, major investment banks declined to offer a guaranteed purchase. Instead, BrightWeb partnered with a regional boutique broker on a best efforts basis. The broker charged a lower commission fee because they faced no financial risk, but they made no guarantees about the final total.
Over a sixty-day marketing window, the broker reached out to private investors and institutional funds. By the closing date, investor enthusiasm was lukewarm, and the broker successfully placed shares totalling $600,000. BrightWeb's finance director had to quickly revise the expansion budget. Instead of hiring ten new developers and purchasing a new server room, the company scaled back to hiring four developers and using cloud infrastructure. While the best efforts offering did not deliver the full target, it successfully injected vital capital without saddling the business with debt, allowing BrightWeb to grow at a safer, more manageable pace.
BrightWeb had also set a minimum of $500,000 in the offering terms. Some best efforts deals work this way: if the minimum is not reached, the offering is cancelled and investors' money is returned. Because $600,000 cleared the minimum, the sale went ahead, and the directors learned to plan every project in stages so that it can still go ahead at a lower funding level.
Watch out
Common mistakes
- Assuming the broker guarantees the total amount of money will be raised.
- Failing to have a contingency plan for a partial funding outcome.
- Budgeting for the full target amount before the offering period officially closes.
Questions
People also ask
Why would a company choose a best efforts offering over a firm commitment?
It is usually chosen when the issue is risky or market demand is uncertain, making underwriters unwilling to guarantee the sale. It also involves lower fees.
What happens if a best efforts offering is undersubscribed?
The company simply receives whatever lesser amount of money was actually raised from investors, and the leftover shares are usually not issued.
Does the broker buy any of the unsold shares?
No. The broker acts solely as a sales agent and does not take ownership of the unsold securities.