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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.

Question:

When is the right time to seek capital for my business?

Answer:

When you really don’t need it. Having capital gives you flexibility and is more likely to be available if you don’t need or want it immediately.

The process of securing financing invariably takes longer than anticipated. Traditional lenders can take months to evaluate your credit request, and more equity-driven approaches easily require a year or more to complete. Unforeseen headline events can also impact the availability of financing aside from simply your company’s performance.

The exercise of meeting the people and working through the process is also healthy for your business even if you never access the funding you’ve identified. Developing a financing plan will not only help you tell your story in a precise and forward-looking manner, but likely will lead to improved financial insights. You’ll also gain valuable intelligence about your competition, the value of your business in the marketplace, and the choices you have once you do need the money.

 

Question:

What should I do to position my company for growth?

 Answer:

1. Develop a strategy for the future of your business. Couple it with a detailed execution plan. As part of that effort, identify the core competencies of your organization as well as your competitive landscape. How is your sector evolving—what are the threats inside and outside your business sector that could affect you?

 

2. Include actions necessary to deliver on your strategy in your plan. What changes operationally will be needed? Identify those ultimately responsible for successful execution along with a timeline for implementation. Track your success in meeting key strategic initiatives and celebrate accomplishments and learn from missed opportunities.

 

3. Communicate your strategy. You and your company’s leadership need to fully understand your strategy so it becomes reality. Put it in writing, update it at least annually, and communicate it to owners, managers, employees, and other stakeholders in a manner that is understandable, engaging and motivating to those you count on to make it happen.

 

4. Finance for the future, not the past. Consider available capital another weapon in your arsenal, like a new product or territory, to ensure that your business can continue to grow successfully. It’s always a good idea to put cash aside, or raise money when you don’t need it, for planned initiatives or expansion opportunities that come along unexpectedly.

 

 

 

Question:

What should I look for when considering a partnership with another family-owned business?

Answer: 

You probably know the statistics: more than 2/3 of the world’s businesses are family enterprises, according to the Family Firm Institute, generating between 70%-90% of annual GDP. That makes them attractive investment partners. The characteristics of a healthy family-owned business are similar to other stand-out companies: a strategic plan and corporate vision that is effectively communicated from the board and CEO, to employees and investors; a strong market position and value proposition, a strong balance sheet and a functioning board of directors. Understand and appreciate how the family dynamic has impacted the performance of the organization externally and internally; for example the relationship between the family and key customers; the culture established by the family; and whether relationships between existing family shareholders can make the investment difficult to finalize. Most importantly, know oneself and have a game plan for how the investment partnership in your opinion should be structured and function moving forward.

Question:

We’ve decided to invest in another family-owned business. Now what?

Answer:

Spend time doing “family due diligence.” Family businesses are unique. Complete a traditional diligence review of the operation’s markets, customers, operations, and financial performance, but acknowledge where family dynamics play a role.

• Get to know the family’s distinct culture, values and ethos. You need to understand the unique identity of the business you’re investing in.
• Understand customer profiles and relationships intimately, as well as the underlying dynamics driving those relationships. These relationships may be linked to family members so try to meet key customers or accounts as early in the process as is practical.
• Appreciate the true nature of family ownership, with its formal and informal management styles, and create a plan to address these moving forward.
• Analyze policies to determine which you want to keep, modify or eliminate all together and decide how to make these changes with as little disruption to the organization as possible.
• Analyze financial performance similar to that performed by private equity investors – diving deep into market segmentation, sales performance by customer, product lines and geography to name just a few areas to eliminate surprises moving forward and to truly understand the opportunity at hand.
• Agree well in advance of closing the investment what role if any family members will continue in or assume in the entity going forward.
• Agree how the transition will be communicated both inside and outside your organizations. Communicate often and as a united “family” front.