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Recipe for Capital: Four Essential Ingredients of a Middle-Market Firm’s Capital Plan

At its core, capital planning is about budgeting and deploying your company’s resources to support long term goals.  After human and intellectual resources, your financial capital is often the most critical resource at your disposal, making capital planning essential to growing a middle market business into an industry leader.  While “dollars and cents” provide the obvious foundation of a capital plan, the most successful business owners also incorporate these four steps into the process.

1.       Develop a Strategic Vision.  You can’t develop an effective capital plan if you don’t have an honest understanding of where you are today and a view on where you want to go in the future.  While the right financial partner can help you execute your vision, you must start with a clear articulation of your business model and the opportunity you are pursuing.

Most importantly, develop a clear and succinct growth strategy that accounts for two things: a) the industry trends that will impact your addressable market and value proposition, and b) competitive positioning that will allow you to disproportionately benefit from those trends.  Then you can engage in more productive discussions and evaluate which financing option will best help you realize your growth plans.

Be sure to focus on both near-term identified needs as well as long-term unidentified opportunities that may come up.  It is important to choose a capital partner with the flexibility to support your stated goals as well as the unexpected twists and turns that will inevitably appear as your business grows.

2.       Understand the Alternatives.  Well-run companies have a range of options to finance their growth, from minority equity recapitalizations to buyouts to bank loans.  Each comes with its own pros and cons, so make sure you understand their merits in order to optimize your capital structure and best support your strategic vision.

Equity financing is an obvious consideration for many growing businesses and provides an alternative that can bring strategic as well as financing support to your business.  While equity financing will result in dilution to the existing owners, it is a more flexible source of capital vs. debt and allows management to focus exclusively on the long term interests of the company.

While debt financing can allow existing shareholders to maintain their ownership, keep in mind that it does impose operational restrictions through covenants, and it requires cash flow in order to make interest and principal payments.   And while you can minimize dilution by raising debt, lenders typically do not participate in the strategic value creation process and are unlikely to bring anything to the table beyond capital.

3.       Choose the Right Partner.  If all you focus on is the check size, you miss an opportunity to gain a financial and strategic partner that can help accelerate your growth and build as valuable a business as possible. Evaluate potential capital sources by how they will collaborate on your business plan; provide you access to potential partners, customers and talent; and help identify ancillary organic and acquisition growth opportunities that you may not see.  Remember, too, that these are people you’ll have to work with for some time. Personality synergies and a partnership mindset are critical. Investors will check your references – make sure you check theirs to validate that they can follow through on promises and are good people work with.

4.       Balance Company and Personal Goals.  The process of raising capital creates a natural time for transitions within the business, so think about how you want to spend your own time going forward.  For example, should you hire a new executive to run and grow the business units that don’t fit your core strengths?  Your first COO or head of HR can relieve you of those responsibilities and make certain functions more strategic, but funding will be needed to make it happen. Build the required resources into your capital plan and identify which partners can help you source the best talent.

By now, you’ve worked hard to grow a successful business, and you deserve the opportunity to benefit from it. A capital infusion gives business owners the option to liquidate a portion of their ownership or diversify their network. Depending on your stage of life, do you want a certain amount of money in your pocket to cover your children’s’ education? Are you close to retirement? Or do you roll over all your equity and focus on the chance to earn more later? This is the time to do some personal capital planning as well. Handle it professionally but don’t be afraid to make it part of the conversation.

Morrissey_headshotTodd Morrissey is a partner at LLR Partners, a middle market private equity firm. Todd makes minority and majority investments in growth companies and advises management teams on how to grow their businesses. Contact tmorrissey@llrpartners.com or visit www.llrpartners.com.




timthumb-150x150As we advance into the second half of 2013, there are growing indications that business sentiment is improving despite nagging unemployment numbers and a shortage of merger-minded CEOs.

Cindy Crotty, middle-market business watcher and head of KeyBank’s commercial banking segment, once more shared with Middle-Market Executive the findings of a KeyBank’s middle-market business sentiment survey, which reveals that merger-minded business leaders remain a minority in 2013. Download report here. 



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