Debt, equity and investment banking are not new concepts, but balancing each of them throughout the business cycle is key to healthy company development. Periodic monitoring of how to optimise and exploit the company's debt and equity is crucial to its success.
I often find that the owners of companies can concentrate too narrowly on debt and equity, perhaps focusing only on venture capital and bank debts. High-risk investors are looking for investments with this profile, but with high profits, while banks are looking for low-risk but low-profit opportunities. This may leave gaps in much-needed capital or liquidity; however, there are alternatives that can provide a balance.
Non-bank lenders often do not experience the same regulatory constraints as traditional banks. Such alternative lenders are more expensive than traditional banks, but they can offer the company more leverage and reduce the need for more expensive capital investments.
Investment needs change throughout the company's life cycle. At first, when it is difficult to carry out a loan, equity may be the best investment.
As the company matures and its value increases, it becomes more attractive to lenders, making it easier to borrow. Initially, this debt may be higher, but with business development and maturity, it can attract cheaper, more effective options.
Owners of companies may be tempted to take as much capital as possible in the early stages of growth, but it should be remembered that capital at an early stage will be the most expensive and dispersed.
The less distraction, the better in the early stages. When it is limited, the share of investors is higher as the value of the company increases. Companies should appreciate the motivation behind each class of investors.
Capital investors are seeking maximum return on investment and debt investors are seeking repayment of the loan with fixed interest.
Owners must appreciate the way their investors assess risks and return on investment and understand that each party has a set of specific interests that may not be linked.
Finally, business owners must make early decisions, which will bring the greatest benefits as the company matures and develops. They also need to know how to switch between debt and capital throughout the company's lifecycle in order to optimize returns when the time of sale comes.
Case study
The US based company was on a fast growth trajectory, after winning a contract that would increase its annual turnover ten times to 250,000,000 USD. At the time, our client lacked scalable infrastructure and capital to support this transformational growth.
This company has engaged our investment banking specialists to create scalable infrastructure, to reliably quantify the financial needs, to target and qualify potential investors, to develop a sales document for investors, to enter the market, field offers and finally close a successful conquest.
Our team was proficient in simplification and quickly determined that we would need around 180,000,000 USD. Based on our experience, analytical advice and knowledge of the target investors we have received many offers for the whole 180,000,000 USD.
Realizing that it was a competitive process, the successful bidder not only provided an attractive package for 180,000,000 USD, but also offered a capital investment of 20,000,000 USD in the company to win the transaction.
Since the successful closure, the company has grown significantly, over 1,000,000,000 USD, and was eventually sold to a larger entity – creating a solid return for the original investors.
About the author
Ken Segal Boston, USA
Ken is a partner in a Boston member company Russell Bedford, LGA, from above 25-Summer experience in helping companies and their owners maximize company value while minimising risk. Ken has extensive experience in helping companies evaluate debt and equity structures, obtaining funding, due diligence and planning exits.
It ensures that companies are prepared to respond to internal and external factors that accelerate or disrupt development, while at the same time using tools and insights developed to achieve return and ensure continuous success.