Ready, Set, Grow
If you’re a business owner or a part of the leadership team, you’ve likely felt some company growing pains. The remedy for this—and the avenue to greater success—is often business capital. Simply put, business capital is an infusion of cash or credit to help companies expand, acquire or merge—events that the promotional products industry has experienced on an exponential scale over the past several years.
Jonathan Isaacson, CEO of Lawrence, Massachusetts-based supplier Gemline, says the reasons for raising capital can depend, in part, on what stage of operation or growth a company is in. “Young or early-stage companies may raise operating capital simply to get started,” he says. “There’s less startup capital in this industry than in, say, technology or biotech where getting an initial product launched can be very expensive, but it does exist.”
David Nicholson, president of supplier Leed’s, a Polyconcept company, in New Kensington, Pennsylvania, adds that the most common reason companies in promotional products may raise capital is to support growth and expansion, through acquisitions, inventory investment and/or additional capacity. “Raising outside capital can also be a path to address family business transition needs or business succession issues where a founder may be looking to retire,” he says.
If your company wants to finance inventory to support client programs, that’s another reason to pursue capital, says Phil Koosed, co-founder and CEO of distributor BAMKO, a division of Superior Group of Companies, in Los Angeles, California. “More and more we are seeing that bigger programs, particularly when working with Fortune 500 companies, require significant capital to support them,” says Koosed. “This can be a significant restraint on growth for distributors with capital requirements.”
He adds that overseas sourcing also can require an infusion of cash. “Factories usually require a significant upfront deposit, and you many need to pay the entire balance before seeing any revenue from your client. For bigger orders, this requires access to large amounts of capital.”
Business capital takes a few forms, including traditional bank financing, independent investors, a private equity group, venture capital, and friends and family. Each type serves a specific need, and also comes with its own limitations or caveats.
While small companies tend to rely heavily on capital provided by friends and family, Koosed says, “The issue here is that the pool of available capital is only as wide as your circle of benefactors, and it can get pretty expensive.”
The next option, traditional lines of credit from banks, often requires companies to be both large enough and profitable enough to be creditworthy, he says.
Traditional bank financing, says Nicholson, often comes in the form of a secured loan that allows a company to borrow against the assets or cash flow of the business. “For more significant needs, business owners can sell a portion—or all—of their business to an outside party that can bring additional capital and resources to the table. This could be either a private equity group or independent investors.”
The difference between venture capital and private equity, Isaacson says, is this: “Venture capital is early-stage capital. [Venture capitalists] are there to help a company start, and they can provide both cash and advice. Private equity companies invest in more mature companies. They might provide growth capital, liquidity for the owners; or both. We do not have much, if any, venture capital working in the industry, but there is a fair amount of private equity activity.”
At Gemline, says Isaacson, they have a more traditional banking relationship which provides them with a revolving line of credit to fund the supplier’s working capital. “There are many different types of loan arrangements to meet the needs of different types of customers,” he says. “Two of the more typical types of loans are asset-based and cash-flow loans. With asset-based loans, banks take a look at a company’s assets, such as their inventory and receivables, and provide a loan based on a percentage of those. With a cash flow loan, banks lend a multiple of the stated cash flow.”
Koosed points out that self-financing growth is yet another alternative. “There are also some individuals with sufficient net worth to self-finance their business, but the issue here is risk—you’re gambling big with your nest egg on an outcome that isn’t certain,” he says.
What may come as a surprise to companies that are new to raising capital is that money isn’t the sole factor in a successful growth strategy. “We look at three things in descending order of importance,” says Koosed. “Culture, competency, and cash flow.
“First and foremost, there has to be a cultural fit. You’re bringing two disparate things together and making them one. If the culture isn’t the right fit, you’re taking two things that worked and making one bigger thing that doesn’t,” he says.
“Competency is another huge one. You want to be sure that you have complimentary skill sets and competencies so that the whole is greater than the sum of the parts. Finally, cash flow. We want to acquire good companies and give the support to become even better. The opportunity cost involved in trying to take a company that isn’t working well and trying to fix it just takes too much time, energy and focus away from growing the core business.”
Nicholson adds, “Make sure you have a clear and well-developed business plan to support the reasons and uses for the capital. It is also important to evaluate the risks and demands associated with an expansion or acquisition plan—what will the impact be on the existing management team, will it be a distraction to the core business, are other investments going to be required?”
Once you feel you’re ready for an infusion of cash, it’s crucial to be sure you’re in a position to both obtain and successfully manage business capital. “The business must be in a reasonably strong financial position," says Nicholson. “If the business is not generating consistent profitability or cash flow, it is going to be difficult to obtain capital.”
Additionally, he says, the business must show the bank it has sufficient assets—in the form of inventory, receivables, equipment, etc.—to secure the loan. “If the capital is in the form of an equity investment, there may be ownership or governance conditions associated with the purchase agreement.”
Isaacson affirms this, adding that banks want confidence that a business is viable. “Banks will have both objective and subjective measurements and, although most banks use a common set of measurements, it is not always exactly the same. Banks will not only look at the business, but the management team as well. And just as banks are assessing the business, the business needs to assess the bank to make sure the bank is a good fit for the business. For example, it is important to have a bank that works well with a business your size. In addition, some banks specialize in specific industries or sectors.”
Koosed advises company owners not to put their personal assets on the line as collateral, but he notes that sometimes it is unavoidable. “Banks often have strict covenants that include specific debt-to-equity and debt-to-EBITDA ratios,” he says. EBITDA (earnings before interest, taxes, depreciation and amoritization) is a popular indicator of a company’s financial performance. “It can be a bit of a Catch-22 if you don’t have sufficient equity or profitability to obtain the financing needed to help grow your business. And, almost all debt requires interest payments on a set schedule.”
Companies that are just starting out will need a plan to present to the bank, says Isaacson, and the bank will “pressure test” the plan. “The bank wants to lend you money, but they don’t want you to pay it back—they want you to be able to pay it back.”
Nicholson recommends companies make sure they have plenty of time to pursue raising capital and are also in a “reasonably strong” financial condition. “You will have more options and more attractive terms. It’s also a good idea to engage with an independent third party when exploring your options,” he says. “An experienced advisor can help navigate the process and potential options.”
Partners you can trust, who are committed to your business long-term and understand the nature of your business are key to the process, adds Koosed. “Also, don’t overextend yourself. If you’re not sure you can service the debt, don’t take it on. Similarly, don’t pledge collateral you’re unwilling to lose.”
He says a good rule of thumb is not to raise capital unless the benefits are clearly worthwhile, citing a decision by BAMKO to turn down some deals overseas prior to the company’s acquisition by Superior Group because the capital costs at the time were too prohibitive. “It was a uniquely tricky regulatory environment, and we simply could not afford to do some otherwise very profitable deals because of the capital restraints,” he shares.
Isaacson suggests asking for more money than might be needed at the outset, because “you want to make sure you have enough, especially if things don’t turn out exactly the way you thought they might, and you don’t want to keep going back” to ask for more. He also advises companies to enlist the help of third parties. “It’s good to have someone help you who is not in the weeds with you. Have someone with a dispassionate view look at your business—an accountant, a lawyer, or an investment banker,” he says.
On the other side of the coin, companies should put time and effort into finding investors who will support their business goals. Nicholson and his team sought investors that understood the promotional products industry and their company’s business strategy beyond the financial aspect.
“This ensured we would have alignment around our growth plans and use of additional capital,” says Nicholson. “We also did a fair amount of diligence in talking with other companies they had invested in; was this group a good partner during difficult times, and what was their level of involvement on a day-to-day basis?”
Other desirable characteristics to look for in an investor are trust, a long-term vision and cultural fit, says Koosed. “We always want to have the environment of a family business—building a legacy that will last for generations. Character counts, and you need to be certain of the character of any investor you allow to impact the legacy of what you have worked so hard to build. If an investor doesn’t have a long-term vision for your business, there will be a price paid for that.”
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What We Learned
Industry leaders share lessons from the process of raising capital for business.
PPB asked Phil Koosed, Jonathan Isaacson and David Nicholson what lessons they and their respective teams have learned about the process of raising capital for some of the industry’s most common business deals—mergers, expansions and acquisitions. Here’s what they said.
Phil Koosed
Co-founder and CEO, BAMKO (A division of Superior Group of Companies)
"Culture is king. You can fix processes and streamline inefficiencies. It’s so difficult to fix a broken culture. Conversely, there’s an exponential impact that comes with the combination of two very strong, positive cultures. Make sure the cultural fit is there and that you’re comfortable with the culture you’re about to enter. There is no such thing as too much diligence about culture. If the right fit isn’t there, it will never work out."
Jonathan Isaacson
CEO, Gemline
"Banks are businesses like we are. When there is a recession or things take a turn for the worse, banks will react in
their own self-interest. No matter how much they like you personally, they have a job to do like you. It’s always good to be prepared for when things aren’t going so well. Part of managing debt is thinking about your own personal tolerance level. For some, having a ton of debt might be uncomfortable. What level of debt will allow you to sleep at night?"
David Nicholson
President, Leed’s (PCNA)
"When it comes to acquisitions, there will always be surprises, no matter how thorough your diligence process is. Acquisitions are very difficult to execute successfully—most companies overestimate the upside opportunities and miss many of the inherent risks. One of the most important steps we follow is to have a very well-developed integration and business plan for the acquired company for the first 12 months. This is completed as part of the acquisition process and helps to ensure alignment with all parties around what will happen on day one after the deal closes."
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Gearing Up For Growth
Ready to take the plunge and pursue capital? Consider these tips, from global fast-growth technology company Ansarada, before you go for the green.
1. Develop a detailed narrative.
Your business narrative should include a realistic, detailed strategy that incorporates the current and future plans for your company. It should also articulate a thorough understanding of the industry in which you operate. Narratives can include identified direct and indirect competitors, how your company differs from them, and any other unique competitive advantages. Narratives should also demonstrate a thorough understanding of your target market, as well as growth potential and demand for your products and/or services.
2. Nail down the numbers.
Be ready with historic, current and projected numbers, which need to be audited prior to disclosing them to any potential investor. Be prepared to show how funds will be used and how they may influence key figures.
3. Anticipate investor questions.
Potential backers will want to know who the major players are in your organization, as well as any role played by government or regulation in your business. They will want to know your strategy, your markets, when and how you plan and produce strategic plans, how your marketing and operation plans work, and how much your investment plans and business case might cost.
4. Refine your risk management strategy.
Identify the risks in your business and develop a plan that deals with each risk, including how to mitigate investor risk.
Source: “Capital Raising: A Practical Guide,” from Ansarada Pty Ltd.
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Jen Alexander is associate editor of PPB.