CEO Advisor Newsletter July 2021
Growth Funding for Later Stage Companies
Private equity investments are typically reserved for companies that have achieved a minimum of $7 – 10 million in sales, and are on the verge of substantial growth. Strategic investors are corporate partners who can provide guidance and management help, sales and distribution strengths coupled with a substantial cash investment.
What is Private Equity?Private Equity firms are financial investors that source capital from extremely high net worth individuals or raise and manage funds from pension funds, large trusts or extremely large organizations. They typically purchase shares in private companies, but they can also purchase equity in public companies with the intention of delisting the business from public stock exchanges. Private equity investments can be as small as $5 million and as high as a few hundred million dollars.
What are Strategic Investors?Strategic investors are corporations that have a strategic interest in a company now or for in the future. They purchase shares in companies with the goal of generating a favorable return and diversifying their investment portfolio. Strategic investors primarily become involved in the management and operations of the company to a greater degree in addition to providing capital. Strategic investors are meant to complement existing management, owners and partners. Based on their needs, strategic investors can invest in any later stage businesses.
When Should You Seek Private Equity?Private Equity firms generally only invest in proven businesses as A) Growth capital for lower mid-market companies, or B) Mid-market companies with substantial earnings that need capital for growth, acquisitions and global expansion. PE firms can also purchase a company outright, either as a portfolio (hub) company or an add-on acquisition to an existing portfolio company.
How Can You Find Private Equity and Strategic Investors?To find Private Equity investors, you need to hire an advisor with expertise in fundraising and growing businesses to the next level. Your attorney and CPA/tax attorney may also be helpful but a dedicated business/fundraising advisor is needed to both prepare your company and connect you with the right Private Equity firm or corporate strategic investor and advise you through the entire process, including negotiating the Term Sheet, managing the tedious Due Diligence process and advising on the business aspects of the legal documents.
Strategic investors can be found within your industry or a related industry. In most cases, these investors will be dominant players in a sector where you already have professional relationships, but proper preparation and extensive expertise is needed for both types of investors.
Here are four common investment scenarios that might help your company as its funding needs evolve:
1) Investment for Growth CapitalThe primary reason CEOs and business owners partner with Private Equity firms is for growth capital. Owners of prosperous businesses often want to greatly accelerate their growth. Every business and personal asset may have already been pledged as collateral on bank loans, jeopardizing the company's growth prospects and competitive standing. Investment by a P. E. firm can provide growth capital, pay of excessive debt, provide expertise, make introductions to prospective customers, vendors and banking relationships.
Private Equity firms can help prosperous businesses continue their winning ways with funding for acquisitions, building out the sales and marketing team, hiring key management team members, new product development and geographic expansion.
2) Buy Out Existing InvestorsEarly investors can become "tired" investors, especially if they've had their money tied up for five or more years in a privately-held business. The terms of these transactions can be tricky but doable, especially if the underlying company still has considerable financial upside ahead. Both Private Equity firms and strategic investors are prime candidates to buy out substantial early investors, while injecting additional capital into the business.
3) Buy out the CompanyPrivate Equity firms can buy 80-100 percent of the outstanding shares of your business, cashing out founding shareholders and small, early investors. The founder may be retained to continue to manage the business, or the buyout firm can install a whole new senior management team and Board of Directors. The great thing about Private Equity and corporate strategic investors is that they have hard cash on hand to buy companies, thereby creating less uncertainty for business owners.
4) Partially Cash out the FounderIt's also possible to partially cash out or to buy out just the owner/founder, while keeping existing investors in place. Sometimes, owners sell because of illness, divorce settlements, retirement, boredom or unsolvable squabbles with investors. Full or partial founder buyouts are commonplace to partner with a Private Equity firm to finance such a buyout. Typically, Private Equity firms are more attracted to cashing out a founder if a controlling stake is available.
CEO Advisor, Inc. has the expertise and experience to help you through this challenging process of raising Private Equity capital or securing a strategic investor. Contact Mark Hartsell, MBA, President of CEO Advisor, Inc. at (949) 629-2520, by email at MHartsell@CEOAdvisor.com or visit us at www.CEOAdvisor.com for more information.