Even in the best of times the road to the capital markets is difficult for most small companies. In today’s environment, the road can be almost impossible. But some deals are getting done. What makes the difference between a successful deal and one that fails to get done? There can be many reasons, but I believe that if a business owner or executive observes the following eight guidelines the odds of success improve substantially.
1. Honest Assessment – Do an honest assessment of the strengths and weaknesses of the company and the likelihood that a deal can get done under any circumstances. Is the product or service unique? Can it be sold at a profit? Is there a sustainable market? Is the management team up to the task? Do you have competitive advantages? Third parties are often helpful in this assessment process.
2. Forget Your Ego – In any environment, but especially in this one, a capital markets transaction can be a humbling experience. Lenders, investors and buyers are holding all the cards, and few have any inclination to deal with a difficult ego. Bringing a big ego to the table is the surest way to kill a deal.
3. Professional Business Plan – An organized, articulate business plan is important to the long term success of any business, and essential to getting a deal done. The plan should describe the business in narrative form and include a minimum of three years operating history, if available, a current balance sheet and a five-year financial projection including cash flows. A plan should be should be realistic, should fully explain any significant variances between projected and historic results and should be easily readable.
4. Position the Business – Just like fixing up a house prior to a sale, there are many things a company can do to better position itself for a capital markets event. Clean up the balance sheet. Fill any management holes. Clear out deadwood in the employee ranks? Take steps to maximize revenue and minimize expenses. Closer to a transaction, work on the cosmetics. Paint, clean, organize, file, enforce dress codes, dispose of junk, trim, water and do anything else to make the business look like an orderly, pleasant, functional place to work. Just like a house the cosmetics are often just as important as the substance.
5. Get an Audit – If your business has revenues of $10 million or greater, have your accounts audited by a reputable CPA. Audited numbers will always help to get a deal done. The numbers will have greater credibility with investors, lenders and buyers, and will enable them to do a faster due diligence. In the case of a sale transaction, the cost of the audit will normally be recovered several times over in the sale price.
6. Rally your Stakeholders – Get all your stakeholders on board, including your investors, board of directors, professional advisors and at the right time, employees. You will need everyone’s support and you will want everyone speaking with the same voice. Nothing can shoot down a deal faster than dissenting voices or conflicting stories.
7. Use Professional Advisors – For all but the most routine financings, get help from professionals that make their living advising on capital markets transactions. You will recover the cost of a good advisor many times over, and often his or her credibility is the key to getting a deal done. Pick your advisor not only for his or her reputation, but also for his or her ability to work with your lawyer and accountant. Most of the advisor’s compensation should be in the form of a success fee, but be willing to invest a small amount up-front in the way of a retainer. It will motivate the advisor and will be a clear indication of your commitment to the process.
8. Do Not Be Greedy – Especially in this environment, do not be greedy. Do not draw lines in the sand. Do not quibble over a fee. Do not reject a financing because the rate is not as good as the last time. Do not reject a reasonable buy offer merely because the price is less than you wanted. Understand that you will have to give up a higher percentage of the company than you would have two years ago. Understand that loans are hard to get at any interest rate, and that lender requirements are much more onerous now. Understand that price multiples have come down in all industries. And understand that the cost of capital is never too high or the selling price never too low if the alternative is the failure of the enterprise.
Following these guidelines is no guarantee that the road will lead to a successful transaction. There are too many variables at play with any given situation. But observing the basics outlined here will increase the chances of success.
Contributed by Howard Fletcher, principal owner of Bayshore Management Partners (www.bayshorepartners.org), a consulting firm that advises entrepreneurs, owners of small businesses and CEOs of mid-size companies on the “Art of Raising Capital”.
About the Author, Howard Fletcher
