Business owners face many challenges, but one of the most critical tasks is to ensure there is enough capital to prosper while achieving growth targets. Companies are generally able to generate sufficient revenue and operating profits, but they may not have excess capital to fund a transformational event for continued growth or expansion. For a relatively mature company, an entrepreneurial owner may need to look for capital from an external source to invest in people or equipment, introduce a new product or service, reduce the company’s existing debt, or finance a significant acquisition.
Growth capital may be provided by a bank as senior debt, a mezzanine debt lender, or as an equity infusion from a private equity group. Companies that seek growth capital investments are often not good candidates to borrow additional debt, either because of the stability of the company’s earnings or because of its existing debt levels. As a result, growth capital is typically sourced from a private equity investor, structured as either common equity or preferred equity, and often equating to a minority investment in the company. The key to success in raising growth capital is being fully prepared. Since the capital raising exercise may involve providing ownership in your company to the private equity investor, there are several points to consider before engaging in this type of transaction:
- Know the current valuation of your company. If your company is mature and has a track record of profitability, then you certainly do not want to give away too much of the equity in your company. You should have a good idea of the amount of equity you are willing to offer to a potential investor.
- Develop a solid and achievable business plan with an executive summary. It is critical to have a growth plan that defines how much growth capital is needed, how the newly obtained capital will be utilized in the business, and how this capital will enhance growth in revenue and cash flows.
- Understand your growth capital readiness. Is your business attractive to a potential investor? Do you have a solid management team in place? Does the company have solid market traction with proven historical financial results? Is there any significant intellectual property?
- Identify business risks associated with your plan. Potential risks such as changes in competition, significant customer concentrations, technological changes, and global economic factors could impact your business model going forward. A well thought out business plan will address and/or minimize these risks.
Once you address these points and are prepared to seek potential investors, you should consider timing and how to identify the right investor partner. The best time to raise growth capital is when you can, not necessarily when you need it. This means when the market conditions are ripe, investors have the appetite to partner with businesses like yours, and the market views your industry sector favorably. Looking for capital when you desperately need it may not coincide with strong market conditions and, as a result, you may give up too much equity to an investor partner.
Finding the right investor partner is critical to a successful deal. The best partner will have interests that are aligned with yours. They will bring experienced advice and coaching and may have industry contacts and resources that will help your business grow and increase its overall value.
Raising capital can be a challenging and time consuming task for a business owner, but it is a critical component of the long-term success of a growth-oriented business. Whether you are looking to finance a significant acquisition, expand or restructure operations, enter new markets, or finance the development of a new product or service, you should consider all available sources of growth capital. Proper planning for such a transaction will likely translate into a successful deal and may drive increased value and continued growth for your business.
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