When an entrepreneur first starts out, the level of risk is high. A great deal of blood, sweat, tears, time and money goes into developing a fledgling business in order to achieve any degree of success. When a business begins to thrive, the entrepreneur subsequently has more responsibility to carry – there is a company, an organization, people he or she is responsible for, clients, customers and more.
It is only natural for an owner to become risk averse when they have a more substantial business at stake. This is when managing the resources of the business, people and money becomes very important. There is an old cliché that goes, “young radicals make old conservatives.” When an owner reaches a certain point in the life of the business, growth can become more difficult and there are decisions to be made.
Business Owners Have to Ask Themselves:
- Are they satisfied with the sales and profits they are generating and are they content to run their company as a lifestyle business?
- Or, would the owner or owners like to have a liquidity event where they get an opportunity to take some chips off the table to reward themselves for all the years they went without in building the business?
- Alternatively, would they like to take the business to the next level and grow it?
Most entrepreneurs have more options than they have money. With limited capital, they are forced into a slow growth mold because they don’t have the means to take advantage of the opportunities they see. Most business owners do not have an appreciation for their ability to raise capital beyond the local bank or local asset-based lender. There is today, however, considerable opportunity to raise capital and take one’s business to the next level with the support of an investment banking partner.
An Investment Bank Can Develop Opportunities for Privately and Closely-Held Companies:
- The investment bank can analyze the company as to where it has been, what its performance is today and if money was no object, what the opportunities for the future would be. The bank helps design a well-thought out growth strategy and then goes to the marketplace and brings in long-term capital. This provides the owners an opportunity to sell off some equity and put money away to secure their financial future. A strong financial partner provides the growth capital to build the business out either through organic opportunities or acquisitions that can grow the business rapidly. In this scenario, ownership continues in the role of managing and driving the business forward with the goal of creating a significantly larger and much more profitable business so that when they are ready to sell, the financial rewards are significantly greater.
- If the business owner has low debt, an investment bank can undertake a total recapitalization of the company and generate significant capital for future growth. The bank stretches out the payment terms so that there is no financial strain on the business. As an example, Allegiance Capital Corporation raised $25 million for a company, and at its current level of operation the company can easily handle the $25 million worth of debt. Deploying the $25 million intelligently will cause the company to grow significantly, increasing both revenue and profitability.
- An acquisition strategy where the investment bank finds a competitor or two in order to acquire. Investment bankers can raise the capital needed to acquire these businesses and provide the money it will take to integrate the businesses. The savings are significant in that you don’t need two or three owners or CFOs or other operational redundancies. So, you increase revenue significantly, add to the customer base, diminish overhead significantly and increase profitability. In addition, owners have the opportunity to pick up some very competent and talented team members.
The above are just a few of the ways in which a business owner today can expand his or her horizons, grow their business and keep risk at a minimum. Today there is $3 trillion on the sidelines – more idle capital waiting to be deployed than there has ever been in the history of American business. Additionally, banks are lending more and money is cheap. For owners who have a business that is performing reasonably well, has decent projections for the future, a strong management team and ownership in good health, there are definitely real opportunities.
ABOUT THE AUTHOR: David J. Mahmood is chairman and founder of Allegiance Capital Corporation, a middle-market investment banking firm that works exclusively with privately-held and closely-held companies. Before becoming an investment banker, Mr. Mahmood started seven companies from scratch. He has a real appreciation for what it takes to meet Friday’s payroll, next month’s bank payment, interview, select, hire and train the personnel necessary to build an organization. He has been exceedingly successful in helping business owners maximize value. Read More About David J. Mahmood.