Internet Radio Show | 21st Century Entrepreneur: A Discussion on Capital Raising | Aired October 17, 2014 at 12 Noon.
This Friday October 17 will be airing another program of the “21st Century Entrepreneur” which is an Internet radio program aimed towards educating business owners and their advisors on how to make their businesses more successful and profitable. It is a show hosted by JC Maldonado who is the CEO of BizGro Partners, a Business Development Firm that helps small and midsize companies grow, expand, and transition. This week we will be interviewing Corey Massella. Corey is a Partner of Citrin Cooperman, a major New York City Accounting Firm that employs more than 600 accountants. He is also President of the Long Island Capital Alliance, which is an organization that helps entrepreneurs in Long Island procure funding for their businesses. Corey’s specialty and expertise is in the area of Mergers, Acquisitions, and Capital raises. The topic we will be covering is how business owners can develop a Capital Raising Strategy to grow their business. Below is an article JC wrote on utilizing Financial Partners as a Capital Raising approach which is a perfect introduction to our discussion with Corey this Friday. Finally, last week we aired a show on Word of Mouth Marketing and interviewed Word of Mouth marketing expert Cynthia Greenawalt. To hear a recorded version of the show click on the recorded screen icon below:
UTILIZE A FINANCIAL PARTNER TO GROW YOUR BUSINESS
In our experience advising hundreds of successful small and medium sized companies, there are times where we have come across businesses that have reached plateau. This simply means that the business owner(s) has exhausted the company’s resources for further growth and needs a substantial re-investment in his/her business in order to take the business to the next level. The investment required usually equals to either hundreds of thousands of dollars or in some cases millions of dollars, and its use is normally focused on investments in sales and marketing, new technology, updated equipment, new product development, strategic business acquisitions, and/or new personnel. Oftentimes companies that require investment for growth are already extremely profitable. However, maintaining and protecting the consistency of this profitability will require further substantial investment; resources that many entrepreneurs are simply not willing to reallocate towards the growth and preservation of their businesses. Such companies often produce anywhere from $10MM to $50MM in revenues and produce net earnings of $1MM+, operate in the light manufacturing, wholesale distribution, import/export, healthcare, and business service related spaces, and sell a basic product and service that is either a commodity or is a common item.
Another kind of business we come across that requires significant monetary investment is a company that owns intellectual property with lots of “sex appeal.” It may be a bio-tech company or a healthcare company that sells an innovative medical device, or a company in the pharmaceuticals arena that has developed a new drug that helps cure a disease, or an invention of some type that solves a significant human problem. Oftentimes these companies are early stage companies and produce anywhere from $0 in revenue up to $10MM in sales. These companies often need money to make the product, test the product, package the product, distribute the product, and brand the product through various marketing and public relations venues. The potential of these companies are great and they will need the infrastructure of a larger company if they are going to be successful. Engaging in a systematic capital raising route is the proper direction for such companies so that they can fulfill the vision outlined in the business plan.
So How does a Company Raise Money in Today’s Tough Economic Climate?
A small or medium size business may consider the use of a financial partner to grow the company.
What Is a Financial Partner?
A financial partner is any entity that has the sole purpose of owning a business for the purposes of funding the growth of a company. They are not interested in the day to day operations, although they typically want to be involved in significant strategic decisions. A Financial Partner also wants to share in the profits, which justifies a return on investment on any initial cash outlay the Financial Partner invests.
Financial partners can include private equity groups, venture capital firms, larger corporate entities that operate in the same or complimentary space, and accredited and institutional investors that invest in early stage public companies, assuming a company wants to go public.
How does a Financial Partner operate?
A financial partner will typically buy a portion of the business, typically a controlling interest in the business which can range from 50% ownership to 80% ownership. Essentially they will maintain effective control of the business via a board of directors they set up that will make the major management decisions. The selling owner will remain as an operating partner and will typically receive the financial support necessary from the financial partner to grow the company. The operating partner normally will be responsible for the day to day operations. The exception of this basic set up would be if a company goes public; this strategy can normally be devised in a way where the selling owners can maintain both effective and operations control of their company initially.
What are the Benefits of a Financial Partner?
A company can normally sell a part of their company or ownership in intellectual property for money today to compensate them for the work and dollars they have previously invested. This compensation, which can come in the form of cash, promissory notes, or future payouts and bonuses, can give the entrepreneur the opportunity to recoup his investment or even make a profit today. Conversely, going forward, the entrepreneur will retain substantial ownership in a business that is now well capitalized and still managed by the entrepreneur on a daily basis, as well as receive the opportunity to receive a substantial payday in the future when he sells his ownership in an entity that will most likely be larger and more profitable in the future. From the entrepreneur’s perspective, the advantage of using a Financial Partner is that the Financial Partner will rely on the entrepreneur’s subject matter expertise to grow the company as well as the opportunity to receive two substantial paydays without having to invest more resources to grow the company.
What are the Disadvantages of Using a Financial Partner?
One disadvantage is the complexity of procuring the right deal with the right entity. Like any transaction, there must be chemistry between both parties in a deal for the venture to be successful. Further, financial partners such as private equity groups and venture capital firms are picky and have very strict investment criteria; hence finding a good deal is not easy. Finally, if you are control freak, a financial partner may not be for you. The prospects of giving up effective control of your company may be problematic especially if you have the resources and wherewithal to grow the company.
To learn more about using financial partners as a growth strategy, click on the email icon below to inquire within: