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3 Pitfalls of Raising Capital Without an M&A Advisor

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The best M&A advisors work with clients during a capital raise to help them position their business at the right time to minimize the actual and perceived risk of investing, so that the client achieves their income and valuation objectives and maintains optimal control, profit, and participant.

As an advisory firm, we work directly with clients to strategically plan a growth path for effective and efficient growth. The growth plan aligns transaction goals, strategic relationships, and cost of capital to maximize owner value through the raise and beyond. To do this, we often become integrally involved in the management team, gaining an understanding of the business strategy, planned growth, operating performance, structure, staff, and governance. Great advisors bring a unique “capital market view” to the team. This market view prepares a business to achieve a capital raise at the optimal cost of capital.

As an advisory firm, we reach beyond monthly and quarterly management updates to help our clients actually achieve their return on investment by assisting in achieving growth and aligning leadership and cost.

Sometimes CEOs think they can “go it alone” during a capital raise. Here are the 3 biggest pitfalls we see from that decision.

1. It’s just about the numbers.

A capital raise is much more than revealing solid financials and asking for money. A capital raise, especially a “non-optional” raise, can be one of the most important marketing events in a company’s existence. Many times, people open up their books without clarity on future strategy, proof of execution, and the full story of how their business is a very attractive investment opportunity. They don’t market professionally, and they show their numbers through simple spreadsheets —  leaving much open to interpretation.

Smart management teams take the time to position their company, position their numbers, and market the investment at the right risk levels. If you don’t, you give away more than you should. Get outside help on marketing your company, unless you’ve got members on your team who have successfully marketed a raise before. 

2. Frequent trips back to the well.

[pull_right]A classic mistake is to raise what you think you can get.[/pull_right]A classic mistake is to raise what you think you can get. I’ve seen companies ask for $350,000, when they really needed $5 million. There are obviously two problems here. First, at some point, the owner/management team has talked with “experts” who tell them that it is easier to just do an initial raise, then go get some more. These expert opinions can often be based on bad past experiences (see #1 above). In fact, today’s market still has significant funds available for attractive investment opportunities.

The second problem relates to the company under-estimating the funding required to get to their strategic growth plans. This is actually more dangerous. So, they ask for too little, get started, don’t yet hit their goals and wind up having to go back to the well. The trouble is, the well just got a little deeper… you’re going to have to make a better case for why you “have it right this time.”

Smart management teams vet their strategies with experts, get a cushion, and carefully under promise, so they can over-deliver. Don’t get caught in the significant “cram down” and cost of capital that comes from going back to the well too often.

3. No meat on the planning bones.

I was recently involved with a company in the medical marijuana space who was doing a capital raise. The strategy underneath the raise was merely to ask for the money the company “thought they needed,” with little meat on the planning bones. For example, the marketing budget was 10% of revenues… exactly 10%… every year. Nice ratio! Now, what’s underneath the spend? Which new markets are you entering? What is the market entry versus market growth versus market protection level of investment? With limited answers underneath the financial plans, the company struggled to get past meeting two.

Smart management teams have a lot of meat on the bones of their plans before they get into even the first conversation. With the details in place, you can withstand the prodding that gives investors comfort. If you’ve not recently done a raise, take the time to get outside help even just to “vet the plan.” The modest investment you make will make all the difference in ownership and cost of capital.

 

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