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Advisors, Private Equity

3 Essential Preparations for Raising Growth Capital

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John Greathouse, a contributor at Forbes, once compared the process for preparing to issue equity to a Major League baseball pitcher. “Pitchers,” Greathouse says, “… spend far more time preparing to pitch than they actually do pitching.”

The same applies to raising growth capital, whether the financing need results from expanding a manufacturing facility, launching a new brand, making an acquisition, or restructuring a balance sheet. At risk of oversimplifying the process, here are three general steps to prepare for a succetssful capital raise.

Organize Your Historic Financial Statements

It’s critical to provide investors – either debt or equity – with the ability to understand where the company has been, in advance of understanding where it’s going. Although simple internal accounting systems are acceptable, capital providers often require some sort of third-party review of financial results. This process can be costly (and, perhaps, somewhat of a nuisance), but it can help convince an investor of the business merits, simplify the capital raise, and even lead to a lower cost of funding.

Accounting firms offering a review are plentiful, and issuers don’t necessarily need to choose the largest firm with the most-recognized name. Mid-sized firms are usually acceptable to capital providers, and come at a lower cost. Beware of using very small firms, though; investors will be more comfortable with a firm they can easily validate. If your growth capital raise includes equity, you might seek an accounting firm that also offers valuation services, since you might require an expert’s opinion on the value of your equity.

Prepare a Comprehensive Business Plan and Financial Forecast

The business plan should give a capital provider a clear picture of how the company’s strategy has evolved, quantify the addressable market, and describe how that market has been proven. It should also address how the company will achieve its near- and long-term milestones. Finally, it must provide a detailed explanation of how the additional capital will be used, and do so in a concise, organized manner. Yes, it’s a difficult exercise, but one that will yield benefits to providers and users of capital alike.

As part of the plan, a company must present a comprehensive financial forecast including income statement, balance sheet, and cash flow statement. The forecast will quantify the business plan and demonstrate the company’s expected ability to service debt and provide a return to the equity investors.

Identify the Best Potential Capital Sources

Although there have been articles written about the importance of choosing the right investment banker, it is equally important to choose a company’s capital sources carefully. One can think of this task as the “Four P’s”:

  • Prior Industry Experience: The best capital sources will have some experience in the company’s industry. This ensures that both company and capital source are speaking the same language.
  • Partnership: Not only is partnership critical when a company is negotiating terms of their growth capital, it’s also important down the road. Sometimes things don’t go as planned, and a good partnership will ensure that any necessary adjustments to the financing are accomplished in a productive manner.
  • Pricing: Clearly, a company wants to pay a fair price for the capital it secures.
  • Personality: Whether it’s regional differences, business philosophies, or background, every firm has it’s own personality. It’s important that the character of the capital source is compatible with that of the company.

With changing economic conditions, competitive considerations, and differences in industries and strategies, no two capital transactions are the same. How to prepare for a transaction, however, must be approached thoughtfully to result in success.

Brooks Crankshaw is Managing Director and CEO of Highland Ridge Capital. Securities issued through Growth Capital Services Inc., Member FINRA/SIPC, 582 Market Street, Suite 300, San Francisco CA 94104.

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