The current recession in the U.S. has created a range of opportunities and difficulties for most mid-market companies. While some have tightened their belts as taught as possible to weather the downturn others are using stronger positions to their advantage to take market share or complete acquisitions. In both of these cases the highly coveted and valued resource today called “capital” is needed to successfully execute either strategy.
In better markets ongoing operations and/or growth are typically funded through the cash generated by the business or bank lines of credit. In today’s market these sources of capital are scarcer and may only allow the business to move along sideways and not take advantage of strategic opportunities that require additional funding. For those business owners who have initiatives that are out of reach with their current capital structure, who desire to potentially supplement their internal strengths with some outside expertise and who may also seek to lock in some liquidity from their business, partnering with a provider of outside capital could be wise choice.
Over the past four years, massive amounts of capital have been raised to make non-control and control investments in both publicly-held and privately-held businesses. Even in 2008, despite what most will agree was one of the worst years on record for the financial markets, another $265 billion was raised for private equity investments. This capital is actively looking for the right opportunities. While the current depressed market makes it more difficult to put this money to work, for the right opportunities it is highly desirable for private equity firms to invest these dollars at today’s valuations. So there are many investors looking for creative ways to fund quality businesses – this may include your business and the strategic and personal liquidity desires you have.
Total Buyout Capital Raised
Source: Buyouts Magazine. Includes mezzanine fund of funds.
There are clear pluses and minuses to taking on outside capital that must be considered. Below is a sample of those considerations:
- Allows the business to pursue opportunities that would otherwise be missed without the outside capital – greenfield branches, acquisitions, new product line additions, etc.
- The capital is likely “smart capital” from outside investors with experience and networks in the given industry segment. This added intellectual horsepower may help the business owner weather the downturn better and exit the downturn sooner and in a better competitive position.
- For owners who are interested in taking some capital out of their business but not selling 100% at today’s lower valuations, selling a minority or majority stake is a viable alternative. This would allow for a staged exit from the business and the ability to take advantage of the current favorable tax rates.
- Taking on an outside partner typically involves giving up some control of the business. Even if only a minority investment is made, the investor will likely require board seats and regular involvement with the business.
- With current market conditions, the outside capital will be taken on at lower valuations. It may be difficult to agree on fair pricing and terms for the transaction.
- The financing markets remain very tight and selective. Providers of equity typically pair their investments with borrowed funds so not all businesses will be viable candidates.