Are You Ready to Raise Capital to Grow Your Business?
As the owner or operator of a company you might feel like it’s time to raise money to grow your business. If you think you’re ready for a capital event then it’s important to be sure the three factors below are in alignment. Without these important factors in place, then you may not engage the right partner, or find the best solution for your needs, and you most likely won’t get the capital that you need on terms that work for your business.
These three factors are:
(1) predictable business performance
(2) use of funds
(3) return on investment
If you have all three factors in your favor, then you are ready to go! You’re ready to capture your future!
Predictable Business Performance
You will want to review and analyze your business performance over the last three years. And, you will also need to identify the unique attributes of your business that would appeal to potential capital partners.
It is important to view this area in an objective manner and, as an owner, it’s not often easy to do that. But if you take an objective view of your company and its performance and you believe that it is solid and strong, then you are ready to tell the story of future successes. Using your historical trends and the understanding of your business, you can build a credible business forecast that demonstrates to the capital markets your ability to grow the business and provide them with their desired return on investment.
In some cases, however, when business performance is not strong or you identify obvious improvement areas, it will be better to postpone a capital raise endeavor. This provides you time to make necessary improvements and implement changes and changes that would appeal to investors.
Use of Funds
What do you intend to do with the capital that is raised? You need to show potential investors that you have a plan in place that will improve and grow the business. Early stage capital is the most expensive for companies. We encourage them to only raise (debt or equity) what you can reasonably deploy and come back at a later time for additional capital. With your past successes, future capital will be less expensive further accelerating your company’s performance. For example, taking the money and paying off your car loan would not be a good use of funds. Expanding the factory to increase output is, on the other hand, a good example of the use of funds.
The capital should be used to drive business results either through efficiency or expansion activities.
Return on Investment
The third factor is return on investment. What financial business results will you expect to achieve as a result of the capital raise? This return on investment is a critical outcome of the forecast that you develop. You must demonstrate to investors how and why their investment in your company is prudent and reasonable. Your company’s past ability to delivered desired results gives you the credibility to show what you can do with the capital investment.
You, Your Company, and the Marketplace are Ready,
There are many ways in which you can raise capital for your company. You can go at it along and ask your network of friends, family and business associates and perhaps get very lucky and find a capital partner. Most people use this approach when starting a business and spend as much time (maybe more) looking for money as developing a business. Or you can engage a capital broker. Or you can hire an investment banking firm to help. Let’s explore these options below.
The first option above, raising capital on your own, which is probably what you did early on in your business by tapping into your family and friends or your personal business network. Now you’re likely at the point where you need more capital and those sources are no longer a good fit for you. Frankly, most business owners can create more value by spending time working on the business to keep it in top condition for prospective capital partners rather than taking time away from the company that could reduce business performance
The second option, working with a capital broker is not ideal because they function much like real estate agents and utilize simple listing details that only include major metrics like revenue, owner’s income, and the asking price. Capital brokers don’t prepare detailed company information that is used to actively market the opportunity.
The third option –Investment Bankers– do all of the above, but so much more. Investment bankers present a comprehensive offering of the business to the marketplace. They seek to truly understand the business and its potential. They create an Confidential Information Memorandum (CIM) document which presents the business as a whole but also includes information on how the business fits into the current and future market place. Investment Bankers also contact a range of capital partners with relevant industry experience —smart money. They work toward the goal of attracting a larger number of potential partners who present offers with multiple pricing and structure options.
In short, Investment Bankers do more. The role of an investment banker is to act as your advisor, to help with all aspects of a capital transaction and to provide you with options. Investment Bankers are able to manage every step of the process with you. They do what they do best —make the best deals happen. Investment bankers focus on the business of raising capital for your business so you can continue to focus on running the business and driving value.
Investment Bankers are also licensed by FINRA, the Financial Industry Regulatory Authority, a not-for-profit organization authorized by the United States Congress to ensure that the broker-dealer industry operates fairly and honestly.
John Illes, Founder and CEO of Illes Investment Banking is also a Managing Director with Merit Harbor Capital, a Washington state based investment banking firm. John works with Merit Harbor Capital for all investment banking activities. Together they have many years of experience running and selling small to medium sized companies and they understand what it takes to build an organization.
Why Work With An Investment Banker?
Raising capital is an important tactic you can use to achieve long term success. Finding the correct capital partner with the correct amount of related experience and capital will allow you to grow the business while still maintaining the ownership position that you desire.
Investment Bankers specialize in finding smart money, whether for minority or majority investment. That means we help business owners and executives raise capital by working with the best partners. Since raising capital is one of the main focuses of an Investment Banking firm, Investment Bankers have the contacts and the experience to manage the process quickly and efficiently.
But more than just raising capital for your company, an Investment Banker can provide a range of financial options. These options might include a minority sale, recapitalization, or a majority or control sale.
Investment Bankers also help you understand the capital partner’s point of view. An often overlooked reality of the marketplace is that capital partners are looking for a foundation for growth. Their goal it to see a return on their investment. So, the stronger foundation your company presents, the less expensive your capital cost will be.
Importantly, there must be a process to raise capital. Investment Bankers follow a process and, the team at Illes Investment Banking and Merit Harbor Capital uses a proven process that has worked successfully in the past. It encompasses deadlines and key milestones which are designed to create the best go-to-market plan for your company and deliver as many potential capital partners as possible in the current market.
The Illes Investment Banking Success Pathway
While other Investment Bankers may have a process to help you raise capital for your company, Illes Investment Banking has a continuing, evolving and successful process that works well for our clients. This process involves three phases, each building on the others, to provide options and choices that are good for you, your company, your employees and customers.
This process is fairly straightforward, but is important to acknowledge and manage. Our process employs three main phases; (1) Deal Preparation, (2) Active Marketing, and (3) Deal Close.
The Deal Preparation Phase is our opportunity to get to know you and your company. It’s also your opportunity to get to know us. When we determine that there is a good fit and when we believe that we can be successful in helping you to raise capital for your business. Phase 1 has two steps; (1) Client Engagement and (2) Market Preparation.
Client Engagement begins with identifying your goals and determining your best options and alternatives. Here we determine the best beginning deal structure for you; are you raising debt for debt consolidation, seeking debt to support a specific project, minority equity or strategic partnership? We discuss your needs and identify your goals to provide a structure to present to the marketplace. The time invested at this stage to clarify your needs and goals will lead us to a more efficient and effective outcome.
In the next step, Market Preparation, we work together to build marketing materials that will attract the best capital partners to support your goals. We ask a range of questions and gather information about your company. Sometimes we ask about areas that you take for granted and haven’t thought about in years.
That’s okay. They are important questions that potential capital partners will ask, so it’s always better to be prepared and provide good information. We are building the foundation for a transaction, and the quality of the foundation will be reflected in the quality of the final transaction.
Our goal is to present the opportunity in the best light possible to potential capital partners by utilizing a Confidential Information Memorandum (CIM) deck.
In fact, much of the information gathered at this time will be used again during due diligence. The effort up front allows us to be more efficient toward the end of the process. The Market Preparation step is the foundation for the entire capital raise process and the time and effort spent here will pay dividends as we progress into the next two phases. We cannot emphasize enough the value of good and extensive preparation. It really will pay off throughout the process with speed, accuracy and overall efficiency of the deal.
At the end of the Market Preparation step, we will have created a one-page blind company overview, or a “teaser”, a detailed book (CIM) with historical and forecasted financials, and a broadly focused potential investor list. Once we have created those marketing materials, we are ready to launch your company into market!
This is the part of the process when potential capital partners step up and express an interest in investing in your company. It is the time when they learn a little more about what kind of opportunity exists so they in turn can provide you with a competitive offer that is reflective of the current market conditions.
It is critical to remember that we are selling an opportunity to invest in your company and the business opportunity that exists for capital partners to realize a solid return on investment. Frankly, the biggest mistake that business owners make is not being completely committed and dedicated to finding capital to grow their company. Being passive and playing hard to get rarely results in a successful transaction.
The Active Marketing Phase also has two steps; (1) Market Launch and (2) Deal Review.
When we launch a client into market, we create a potential capital partner’s list and reach out to everyone on that list. Our goal is to review your opportunity with everyone, obtain market feedback and secure as many executed Non-Disclosure Agreements as possible. In many cases, we’ll identify new potential investors and, with the Client’s approval, we’ll add them to the list to contact and receive materials as qualified.
Our job is to review the Confidential Information Memorandum (CIM) with prospective capital partners, answer early questions they may have and gauge the deal fit and their capability to execute a transaction. When there is interest by you and the capital partner, the next step is a one hour phone call where we share details regarding your company’s history, performance and your future growth plans. Remember that we are selling the potential capital partner on the investment potential. We need to be selling during this and each capital partner interaction.
If the capital partner continues to remain interested in the process, the next step involves their presentation of a Term Sheet, or Indication of Interest document, which is an offer with the basic details regarding the capital transaction. Since Illes Investment Banking is a boutique investment banking firm, we work with you through all phases and steps of the transaction. At this juncture, we also work with the capital partner to be sure that their Term Sheet is competitive and relevant. The real value of the Term Sheet is to ensure that both parties are in alignment regarding a proposed transaction. In many ways, the Term Sheet is the ticket for the capital partner to proceed further with the process, including the on-site visit and face to face meetings with you and your team.
We believe there is little sense in meeting with a capital partner if the Term Sheet is not in line with your expectations and needs.
At the same time, we encourage you to meet with as many groups as possible. This is a learning process for all parties involved, and in the past, we have been pleasantly surprised by partners that we might have initially passed over early in the process but came forward with attractive alternative approaches. It’s important to allow for relationships to build so that both you and the capital partner can see a future in exploring and developing a transaction.
While it is easy to become focused on the capital transaction terms, in most cases the fit between you and the capital partner drives the transaction. And, yes, we have had clients pass over the best terms offered and take instead “the best fit” offer which presents exciting growth opportunities and other intangible value for the company. We often call this “smart money” in that it brings brings experience and potential to the business beyond the dollar investment.
Our goal is to lead a broad, but focused auction to provide you with a range of quality capital partner options.
During Deal Review you will see qualified potential capital partners present a more formal offer, known as a Term Sheet.
The stage is where everyone sharpens their pencils. It is important to remember that the Term Sheet is the high water mark for the transaction and it will contain all of the deal points for the capital raise documents. It is critical at this stage that the transaction valuation and transaction structure are clearly defined and detailed. Any issues left unanswered now can result in a less-than-ideal transaction emerging during the Due Diligence phase. All other things being equal, the transaction terms will remain as stated in the Term Sheet.
It is wise to invest the time and effort at the Term Sheet stage so that the final phase, Deal Close, can proceed smoothly and on schedule.
At this point you have chosen your capital partner and it is time to finalize the transaction. This phase also involves 2 concurrent steps and they are (1) Due Diligence and (2) Deal Completion.
By this time in the process most everyone is excited –but fatigue can often begin to creep into the equation. It is easy to get frustrated and annoyed with the tedium of due diligence. The work that was completed in the Deal Preparation phase pays dividends now as you are prepared to answer capital partner due diligence questions and respond quickly to unique requests. To keep the transaction moving to schedule, we suggest setting milestones for key document and information requests at the start of this phase.
The most important milestone in this step is the closing date. Once the closing date has been determined all other key dates can be established from there. The absence of key dates and milestones can cause the due diligence and deal completion steps to drag on and on and on. It’s important to heed the industry saying that “time kills all deals”. We strive to keep a deal on schedule to reach the closing date.
Any capital partner will likely have a wide range of detailed information requests, and if most of those requests have been anticipated, then there is quality time to focus on the remaining information requests. The preparation helps to minimize the frustrations and manage through the fatigue to reach your goal of closing the deal on time at the valuation and structure agreed in the Term Sheet.
Deal Completion is the final step in the process and it involves the finalizing of the capital raise documents.
We have found it to be extremely helpful to take the initiative and draft the documents early in the process so that you can present them to the capital partner. This approach accelerates the process by providing a starting point for the transaction documents to be discussed and finalized.
For equity investment, we recommend that the documents be presented during the LOI negotiation step to allow the capital partner to share in your vision for how the transaction can be executed. If a mutual alignment cannot be achieved then, an alternative partner may be a better solution. Better to find out earlier than later if you are going to have documentation issues. This proactive approach helps identify any conflicts or complications early and provides ample time to find mutually acceptable solutions thereby maintaining the closing schedule. Loan documents are crafted by the lender but we like to see them early in the process so that we have adequate time to work through the details.
Note that it is critical for all parties to work diligently to review and provide comments to one another as quickly as possible. Communication between each party’s attorneys is also critical. Neither side can assume that the other side is dong “something” when they don’t see any activity.
Setting and communicating aggressive but achievable expectations helps to keep everyone on schedule for a successful close. Once all the capital raise documents and supporting schedules have been agreed the transaction can be funded and you can begin creating value with your proceeds.
The transfer of funds is a critical milestone that represents the end of the process. It is important to remember that the deal isn’t completed until the money is in the bank. Both parties must be committed to “putting the ball across the line” to avoid coming up short towards the end.
As with all deal closings at Illes Investment Banking we seek to reward the deal team for their work and efforts throughout the process. Since we stay involved during all the phases and steps described above, we find ourselves glad to have been part of the effort. This is the time that we work with you and your capital partner to plan a celebration dinner. So everyone can come together and share in the satisfaction of a job well done, a goal achieved and for you and the capital partner.
Why Work With Illes Investment Banking?
It is important to find the right partner to lead you through the process and there are many investment banking companies who can help with this endeavor. But there are not many investment banking firms that are led by people who have owned and operated companies like you.
John Illes of Illes Investment Banking is not your “typical Investment Banker”. He has lived in your shoes and he has real life business experience. He held a variety of positions in large Fortune 500 companies, and he has also worked for smaller independently held companies. He has managed and operated companies with over 300 employees and has been Chief Operating Officer, Operations Vice President and Vice President of Marketing.
After turning around and helping to sell a small company based in Las Vegas, NV, John became interested in investment banking. In 2012, John became a Certified Mergers & Acquisition Advisor and since then has helped lower middle market companies.
His past experience running companies helps him identify “sticking points” where prospective partners will have questions. His experience as an investment banker will help him recommend an appropriate course of action for the long run.
John is also a Managing Director with Merit Harbor Capital, a Washington state based investment banking firm. John works with Merit Harbor Capital for all investment banking activities. Combined they have many years of experience running and selling small to medium sized companies and they understand what it takes to build an organization.
To learn more about how we create capital raise success for you and your company, please contact John today. It is never too early to plan to “capture your future”. Complete the form below and John Illes from Illes Investment Banking will contact you shortly to learn more about your investment banking needs.