Facing Creative Destruction: Time to Revitalize Capital

We are in the midst of one of the most dynamic periods of “creative destruction” (a borrowed phrase made famous by economist Joseph Schumpeter) as a result of our current recession, or depression if you have been severely impacted, as many have. This is the time to replace old ways with a new paradigm.

We see public companies making strong moves forward – closing plants, ’right-sizing’ the employment force, buying and selling subsidiaries.

Another major trend has been the recapitalization of public companies. In the first six months of 2009, more funds have been raised in public offerings than in the same period last year. This new capital was not the result of new public companies (IPOs). It was raised by existing public companies that needed to shore up the shredded balance sheets caused by ‘creative destruction.’ This fundraising was most prevalent and visible in the financial services sector.

Many good businesses are struggling today because of the lack of capital, also known as good ol’ cash. The private company sector needs to take the same aggressive actions in revitalizing its capital. This is difficult for two primary reasons:

  • The limitations of ‘emotional’ capital of owners
  • The requirements to access new money.

Owners struggle with many issues when trying to access outside capital but the key ones are the business valuation and fear of giving up control. I believe business valuations are down by an average of 20-30%. Private companies can ignore this devaluation just as a homeowner can ignore the price drop of their house by simply not trying to sell. However, this does not change reality.

But if private owners want new funds to strengthen the financial condition of their businesses to accommodate accelerated growth, they need to release the emotions that support unrealistic valuations. The amount raised needs to be based on current valuations, not last year’s level.

Outside capital also forces an owner to face control issues, something public companies have long since addressed. Many good companies have never grown to their potential, or in some sad cases quietly disappeared, because owners were not capable of trusting outside investors. Yet, the foundation of our country’s economic success is based on sharing responsibility and control with employees and outside investors (shareholders).

We need to remember that investors want the same economic success that business operators/owners desire. Despite the current economically challenging times, there is plenty of capital looking to invest in well-managed businesses.

I was recently reminded to “always take advantage of a good crisis.” This IS the time for business owners to make the difficult changes required to keep their companies efficient for years to come and be in a position to grow great value for their owners.

If you have comments or questions about this article, or would like more information on this subject matter, please contact us.
Michael Poole

Investment Banking
Orlando Office

407-621-2100 (main)
407-621-2112 (direct)
407-621-2199 (fax)