Keeping it All in the Family
November 27, 2018
Conventional strategies to finance your company’s growth with a simple loan or an equity investment are likely at the top of your to do list, but these are not the only choices you should consider.
A 2017 survey from EY and Kennesaw State University’s Cox Family Enterprise Center of 1,000 of the world’s largest and oldest family-run businesses found that entities focused on family harmony and long-term business growth were the most successful. So, it’s not surprising that preserving family control is a key consideration to family businesses exploring ways to grow. Selling equity often is and should be a last resort.
However, at some point every business needs more capital to grow or to provide liquidity to an exiting owner. Adapting your business plan in ways that enable you to access the required capital without compromising your long-term goals cannot only help your business thrive but stay in the family. This may mean bypassing traditional avenues to raise money, such as private investment from high net worth individuals or family offices, taking on an equity or joint venture institutional partner, even going public, or simply borrowing money from a bank.
It’s important to consider your company’s goals for any financing. For example, are you buying new equipment, expanding existing facilities, moving into new markets, acquiring other businesses, or transferring ownership? An objective assessment is also needed as to how much leverage the business can afford from a financing perspective, and whether collateral beyond the business itself will be required. Personal guarantees can be particularly problematic when a private business has multiple family owners.
Equally important is examining financing sources the same way you would potential customers – each has different requirements, specializations and approaches with respect to the capital they extend. Not all banks and financial institutions will meet your needs. Commercial bank loans will be less expensive but come with covenants and reporting requirements that may make them less attractive. Merchant finance companies offer funding based on recent and recurring revenue history. Though pricey, they have quick approval processes requiring much less paperwork or due diligence compared to banks.
Part two of Smart Financing for Growth will look beyond traditional debt or equity solutions to alternatives that can provide the liquidity you need.
Copyright 2018 E.L.I. All rights reserved.