Recapitalizing Your Business As A Growth Strategy
The Breakdown of Business Funding Source
Recently, we discussed the notion of using a Financial Partner to expand your business. We described a Financial Partner as any entity that buys a controlling interest in a business and funds all of its future growth activity while its Operating Partner, typically the entrepreneur who sold a controlling interest in the company, manages the business’s day to day affairs. We stated that the selling entrepreneur can retain personal wealth by selling a substantial part of the business along with effective control in his business for a significant payday.
Subsequently, the entrepreneur will typically retain a sizeable portion of ownership in the business going forward, while also being retained to run the company or implement strategic growth objectives for the business. This transaction setup can lead to a second payday when the entrepreneur sells his retained shares in the new entity, which is oftentimes worth more than the controlling interest that was sold originally because of the growth that most likely would have transpired during the time period the company was funded by the Financial Partner. This payday can also be received in shares in a valuable public company if the Financial Partner decides to take the company public and the value of those retained shares skyrockets.
Today, this arrangement has become very popular in a market that features consolidation and cooperation among competitors and complementary businesses alike, as well as established baby boomer business owners who do not want to sell and exit their businesses, but rather keep the business and reduce the responsibility of being the sole owner. It is important to understand the various options that are available in striking Financial Partnership deals.
Private Equity (PE) Groups are entities that manage monies on behalf of wealthy investors and invest in businesses that are established, already profitable, and have growth potential. Typically, the PE group seeks high returns but is very protective of their investors’ monies. They often will not pay top dollar for a business, invest in speculative deals, and will want the entity they invest in to demonstrate stability in its earnings.
Your business will not qualify for a PE Financial Partnership deal if you produce less than $1MM in earnings and oftentimes PE groups are looking for companies producing $3MM+ in earnings, especially in today’s market. The advantage of working with PE Groups is that they are money managers and are open to striking Financial Partnerships with entrepreneurs who are willing to run the company going forward. PE groups also like to fund business acquisitions as a growth strategy which gives the entrepreneur the opportunity to accelerate the value of his retained ownership. Finally, PE firms as a whole are willing to invest in any business that demonstrates stable earnings at a certain level, although each group will have industry preferences based on the experience of their management team and the nature of their current business holdings. In other words you do not need to have the cure for cancer in order to procure private equity funding.
VC Firms often get a bad rap and are a very misunderstood by the marketplace. In simple terms, VC firms are entities that are similar to Private Equity groups in their set ups (Money managers investing monies on behalf of wealthy investors), but fund early stage companies with enormous growth potential. They are looking for aggressive returns and are always seeking control of the business; they will oftentimes put together the management team to run the company. They are extremely picky with deals and will only work well with an entrepreneur who is not looking to control the business.
We see VC firms as perfect for an inventor or product developer who wants to sell, license, or create wealth and ongoing value from the intellectual property he/she owns. VC Firms may also work well with the serial entrepreneur who is not attached to any one business and who is open to different ways of creating wealth. When you think VC, you should think medical devices, innovative technology, biotech, and any invention or product that is patented and can have major impact. If you are looking to retain control of the company and believe you are the person to take the company to the next level,venture capital funding will most likely not be for you.
There are more and more public companies, particularly public parent companies, which operate like Private Equity Groups/Venture Capital Firms. They are in the market to make Financial Partnership deals with private subsidiaries that are either established businesses or early stage companies. These Public Companies raise monies via private accredited investors, institutional investors, and other funding sources that are attracted to the value of the parent company’s stock if that parent makes successful business acquisitions.
The advantage of being in a partnership with a Public company is unique access to capital support, and the possibility of one day becoming a public company which can lead to greater wealth and prosperity. The is also a lot more flexibility in the deal and operating process since the Public company’s relationship with its money sources is different from the PE and VC ‘s relationship with their respective money sources. Finally, working out Financial Partnerships with Public Companies is becoming a viable capitalization strategy in a world where Banks, Angels, PE Firms, and VC Firms have considerably reduced their funding activities.
The major challenge that entrepreneurs have with the entities above is the idea of losing control of the company, and whether their business is qualified since most small businesses do not produce over $1MM in earnings and do not own innovate intellectual property. For the small business that sells a common place product or service and that is also profitable making less than $1MM earnings, the model for striking Financial Partnerships can be used to make a deal with another business or individual who is looking to make an investment in an existing business and has the resources to fund all future growth. In fact, dealing with entities that are not in the “Financial Partnership” business may give you the flexibility that is needed to maintain more control of the company as well as receive more value in the transaction.
BizGro Partners, a business development firm, has over a decade of experience in helping small and medium sized companies successfully expand their business. If your company is looking to learn more about financial partnership deals and how they could help your business grow, please contact us today or call 201-496-6931.