The Upside – Raising Growth Capital Without Giving up Control

Posted on: March 15th, 2018

raising growth capital Growth Capital fuels forward progress for ambitious companies in scale up mode. The faster the growth curve, the more capital is needed, which can present an interesting dilemma for ownership.

Often an acquisitive small company needs a quantum of growth capital equal to their overall company value. This is particularly true for companies doing roll ups or strategic regional expansions.

Most middle market businesses are independent enterprises, having prospered through the hard work and creative leadership of their owner. These owners know how to be successful on their own having mastered the high level skills of team building, new business development and innovation.

At the inflection point of growth acceleration, they need a capital provider to fit within their strategic approach for long term growth. If they need more growth funding that they can easily get from a bank, they may have to take a large amount of equity from an investor.

Most independent entrepreneurs would rather not take an investor due to the need to give up ownership and some level of control. While the growth equity world has grown dramatically and offers many positive options, continuing the path of independence is preferred by many business owners.

Over the past 25 years, this path has been a slim one, as the private lending market offered limited access and preferred funding deals backed by private equity funds.

This has changed slowly over the years and now more than ever, it is possible to raise growth capital without giving up control. The following 5 tips will help you master this exercise:

Find the Right Lenders – Many lenders today, particularly cash flow lenders, will provide larger loans based on higher multiples of EBITDA. There is a strong focus in the private loan market for direct lending to non-sponsored deals. Find lenders that operate at higher multiple levels, who truly understand and support your growth.
Present a Strong Growth Story – Lenders like growth they can understand and grasp. Anchor your story in relatable, objective frameworks and explain the growth through historical financial data and statistics.
Bring Value to the Table – Lenders always want you to put cash in a deal but there are alternative equity currencies to capitalize on with a lender. These include non-cash consideration such as a seller note or earn-out, or quasi equity such as a low purchase price or small equity position contributed to the deal.
Utilize Pro Forma Presentation – expressed in the right way with the proper adjustments, your EBITDA can become larger and enable you to gain 100% financing.
Appear Financeable – Lenders want to do business and make loans to professional enterprises. Gain a quick understanding of the best way to engage and communicate professionally with them.

As the Fed decides to ease interest rates, middle market acquisition financing structures will benefit in a number of ways. The underlying values of middle market companies will increase leading to a higher enterprise value and lower loan to value ratios for existing portfolio companies of acquisition financing lenders.

The role of acquisition financing is infrequently elevated above a functional transactional one. When a business needs financing to acquire, they go to the market and source acquisition financing to supplement their equity investment to close the deal. Despite existing in many different forms, acquisition financing is rarely explained in terms of the value it brings to the acquirer.

Acquisition financing underwriting usually focuses on business and financial issues that underpin the stability of cash flow. Providers of acquisition financing usually validate the durability of a company’s competitive advantage and the depth of its resource base. Environmental issues are usually not a major part of the analysis in today’s service and technology-based economy.