Should I Stay or Should I Go? A Keen Comparison

Posted on: November 22nd, 2017

growth capital or buyout Growth or exit are the two strategies available to middle market companies. While not mutually exclusive, these options offer vastly different benefits for the owner.

Growth capital is like climbing off the fence whereas the buyout is more like swinging your legs off to one side and jumping off. That means there is good news: one side of the fence is bound to look greener than the other.

If you’re looking for direction and scratching your head–here’s a few questions to help guide you: Do you want to maintain control of your business or not? Are you ready to cash out or not? Do you want to gain capital to accelerate growth so you can build value for an eventual exit down the road? If so, then growth capital is the right choice for you.

Growth capital takes the form of private equity, mezzanine debt or any type of debt that expands your resource base within your company. It’s typically a choice made by businesses that has a strong runway of growth ahead, and needs capital to get there.

The other option is a buyout, where the business is sold to a financial or strategic buyer. With a buy-out scenario, full control rests with the buyer and they call the shots.

If the valuation works for you and you are ready to exit the business, then pursuing a sale is a smart move to make.

Growth Capital

Growth capital is intended to accelerate growth by means of expanding operations, entering new markets, or consummating strategic acquisitions. Growth capital is long term, patient capital that gives the company the proper amount of resources and time to execute the growth plan.

The riskiness of the growth plan in part determines the best type of growth capital to raise. The riskier the path ahead, the more likely the project should be funded with equity.

The less risky the path ahead, the more likely the project can be funded with debt capital. In all scenarios, you will retain ownership of your business and continue to call the shots.

Your bet with raising growth capital is that you can build value and exit the company when it is larger and worth more to an acquirer.

Buyout

Selling your business via a buyout is great option if the valuation works for you and you cash out at your price. If you have a growing company in a hot sector, you can receive a premium multiple and exit quite happily.

Buyout structures should be carefully considered as often there are several forms of consideration paid by the buyer which results in an overall lower valuation on a discounted basis.

Sometimes, business owners make the mistake of pursuing a change of control transaction as a means to raise growth capital. When this happens, while you may receive some cash out, but you will lose control which may jeopardize your ability to maximize your remaining equity value.

If the numbers work, and you are ready for a change of pace, then pursuing a buy out of your company is a sensible approach. Selling is always best conducted when the company is growing and in a position of strength.

For this reason, most business owners first opt to bring in growth capital to set themselves up for the exit down the road.

In the acquisition financing arena, capital availability is destiny as companies require reliable access to capital to grow over the long term. Unforeseen capital needs usually arise when acquirers least expect it. This can cause some concern for the acquisition financing provider, especially when covenants tighten up and that working capital availability is utilized faster than expected.

Mezzanine debt borrowing is usually a straightforward activity that many companies use for funding of transitional growth. Mezzanine debt lenders are highly transparent about their due diligence approach and their post-closing loan management making it easy for companies to engage with.

Elections have consequences and positive ones at that for the acquisition financing middle market. While much media attention is paid to the direction of the yield curve and the Fed’s likely rate cuts, scant attention is paid to the more important drivers of the acquisition financing market – business psychology and regulatory climate.