Financing business growth at all stages
Value/Exit
Mature businesses are able to pick and choose from a number of capital raising sources. Debt and equity funding provide opportunities to continue growth, often through acquisition. Private equity businesses are more likely to take interest in an established business rather than a start-up.
The value phase requires business owners to decide on the future of the business and their role within it. The business founder may use this phase to crystallise their business asset value and exit the business. A private equity partner provides the opportunity for the owner to step out of the business. This often includes an incentive-based remuneration model over a number of years or some type of earn out. The founder uses this period to progressively step out of the business and hand over control.
Loyal employees or family members are a potential source of business purchasers. Their intricate business operations knowledge makes for an easy transition. Employees are less likely to have the cash or ability to fully leverage the business purchase. Alternate arrangements, including vendor finance and earn our agreements can be used to finance the transaction.
A public float should only be considered after becoming fully informed of the costs involved. It is wrong to assume a public float is the best way to maximise businesses’ asset value.
Debt funding becomes more appealing as businesses mature. Mature businesses with proven profitability are lower default risks. Banks will increase the gearing ratio they are prepared to accept, making available more funds to embark on new growth projects. If the business owner has no desire to exit, debt funding provides the capital needed to continue to grow the business without forgoing any equity.
The business cycle draws funds from a wide variety of sources. In the early days it’s often a matter of wherever the money can be found. As profitability and cashflow improve, the ability to source funding becomes easier and helps fuel further growth. Private equity funding or business sale provides an avenue for the business founder to exit the business and realise the value of the asset they created.
-Adrian McFedries is managing director of DC Strategy (www.dcstrategy.com) and a member of the Dynamic Business expert panel.
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Funding Business Growth
Good article about Business Growth.
Too right!
When we started our business expectations were really high but fortunately one of our partners had plenty of start-up experience and a previous career as a small business adviser. Anticipating that the first year was the one most important to securing our future success we settled on a business plan that reinvested the bulk of our income into a rainy-day, no touch business account. We did reasonably well but later on we hit a few unexpected road bumps and boy were we glad to have kept a tight hold on profit disbursement. It was such a welcome success (our reinvestment strategy) that we kept it in place for the following year, building the equity in the business, and allowing ourselves secured borrowing options. We didn’t mortgage the business at any stage but our credit rating was excellent and that is something very worthwhile to us should the time come to expand.
Well stated. Many folks I know who have started from scratch tended to focus too intently on the start-up costs alone, not taking the effort to formulate a long-term strategy. When to lean times came they found the cash on hand wanting and many had to borrow to stay afloat. This was a downfall of many a business I’m familiar with. Plan, plan and plan again!