Difficult Financing--Renaissance consultants

Financing the Closely Held Business

Opportunity for Creative Debt Financing and the Acquisition of Capital

Currently there is more money available for creatively structured loans and investments than there are businesses looking for financing and equity sources.

With properly planned and executed strategies, closely held businesses can obtain needed debt and capital on favorable terms, and position a company for accelerated growth and/or liquefy the net worth of the owners.

Avoiding Problems

There are two basic reasons why so many businesses find it difficult to attract capital when needed.

1.	The very attributes which contribute to operational success of the closely held business often limit financing growth. Owners/managers, busy with day-to-day operations, generally do not plan ahead in the vital area of financing, and rarely look beyond their regular banking relationships to meet financing requirements.
2.	Owners/managers of these companies seldom recognize that the product they must present is the business itself. Generally they do not "package" or "market" their company in a form that is acceptable or targeted to the most appropriate sources.

Successful planning involves multiple considerations: deciding on the proper method of financing; searching out suitable targets; packaging the business to fit those targets; negotiating terms and timing; and integrating the additional capital into company operations.

Timing - When to Seek Additional Capital

Businesses should continually be planning and searching for additional sources of capital -- so it is available when needed. This is especially the case with faster growth companies, which generally require significantly more working capital than can be generated internally. Without additional working capital, the fast track business can quickly flounder.

Packaging the Business

Depending on its financing needs, companies must start early to: prepare a thorough financial plan, including prior three year history; define priorities and make forecasts for the next five years; organize assets and ownership to minimize tax liability; prepare a valuation study; carefully select potential targets; and prepare for the use of proceeds.

Type of Financing

Often, managements narrowly restrict their financing options. Owners of closely held companies too often simply stay with the bank which financed their initial funding needs. It is not unusual for such borrowers to overlook changes relative to their own needs, and/or changes in bank management and policies.

Depending on needs and goals, all types of financing should be considered and reviewed including bank financing, creative debt financing, private placements, initial public offerings (IPOs), secondary public offerings, corporate partners, strategic alliances, etc.

Searching Out Suitable Financing Sources

Once the type of financing needed has been determined, the search for specific sources of such financing on the most advantageous terms can begin.

Success in raising funds and the cost of funding will depend on the quality, thoroughness and impact of the financing document, and the extent of outreach to financing resources whose interests are known to match the needs of the business.

Negotiating Terms

Negotiating the terms of a financing far transcends the presentation of a balance sheet and income statement of the business to be financed. Confidence in the management team and the "chemistry" between financee and financor can help assure the success of the financing, and can be a vital determinant of the terms of the deal. If the financing source feels comfortable with the team it is entrusting its money to, more favorable terms can usually be negotiated.

Furthermore, there are many creative methods of structuring a financing (e.g. debt, equity, debt with warrants, subordinated debt, convertibles, government guaranteed debt, etc.), which can help assure success of the business going forward.

Most often, an experienced, knowledgeable intermediary can be much more effective than the company itself in both "selling" the attributes of the business and the benefits of becoming a lender/investor, and in negotiating the best possible terms.

Integrating the Capital

The most important, and often most overlooked aspect of a financing, is effectively integrating the capital into the business. Initially, the use of funds should adhere strictly to the plan presented to the financing source. However, personal involvement in the "close" and initiating open communication with the source will smooth the post-deal period when continuous analysis of results may dictate changing the original goals. Planning and looking forward, combined with clear new goals and exacting procedures to achieve these new goals, can help assure that additional financing will be available when needed.

Going Public

A public offering can provide a source of considerable funding for growth, while also making it possible to liquefy owners' net worth. The total proceeds of a public offering can be added to the cash, assets, and net worth of a company, and/or can be used in part to purchase owner stock.

With such potential benefits, why don't more privately held companies consider going public? Primary reasons are a lack of familiarity with the process, the opportunity and the consequences. In fact, many more companies could go public than actually do so. Entrepreneurs may believe that their companies are too small, and/or that they will lose control of their business; neither may be the case. It is possible for owners to raise substantial dollars for expansion, partially liquefy their estate, and still keep operational control.

What about the necessity of reporting to both stockholders and the SEC? As with the timing of a public offering, early and proper preparation can make reporting requirements a procedure rather than a costly undertaking, and thus ease the cost/benefit decision of whether to go public.

Conclusion

Whether maximizing funding sources through bank loans, creative debt financing or a private (or public) offering, the owner of a closely held company will find it highly advantageous to think and plan far ahead. Experienced specialists can help with such planning, while playing a critically important role in raising funds on the best possible terms.

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Renaissance is a management consulting firm that specializes in implementation and adding value in short time frames for companies engaged in manufacturing, distribution and service.

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