Utilize a Financial Partner to Grow Your Business
Has Your Company Plateaued?
In our experience advising hundreds of successful small and medium sized companies, there are times where we have come across businesses that have reached a plateau. 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 either hundreds of thousands of dollars or in some cases millions of dollars; it’s normally used for investment in sales and marketing, new technology, updated equipment, new product development, strategic business acquisitions, and/or new personnel.
Types of Businesses that Benefit from Capital Investments
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. Here’s a great case study of a bread manufacturer who received $7 million in funding from a private equity firm.
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.
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.
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, usually 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 operational control of their company initially.
The Benefits of Working With 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.
The Disadvantages of Working With 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.
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 partnerships and how they could help your business grow, please contact us today or call 201-496-6931.