In a previous article I discussed the pressure that a business’s growth--even profitable growth--puts on working capital. Companies generally need to step up their capacity or infrastructure to support their ability to deliver the goods and services they sell-- well in advance of receiving the revenue that will come from a growing base of sales.
Making up this gap requires a long term financing transaction. If a funding transaction is a necessity for your company, how does it happen?
Planning and Improving Your Financing Transaction
Preparation Time
Ideally preparation for a funding event should involve an 18 months-plus timetable and include the help of an advisor. You want to present a company that has not only maximized current opportunities but also presents to a buyer the prospect of a path to a higher level of profitability. Let us take a look at the basic building blocks.
First, you will need to develop a strategic plan, piece by piece, which looks out three to five years. Your key staff must be involved in its development. If you have key positions open that are needed to create the plan, you should fill them quickly.
Next year’s operating plan needs to flow seamlessly from the strategic plan. Again, key staff has to be involved, aligned with the goals and participate in refining them. If not already doing so, initiate monthly reporting of financial results for Income Statement, Balance Sheet and cash flow. Most importantly have an operational narrative that relates the key performance statistics of the business to the operating plan targets. The operating plan needs to be reported on monthly to track monthly and year to date results.
Performance
Performance statistics can come out of the strategic plan but you probably need an operational and financial audit to be sure what your base line is. For example, it is difficult to analyze performance improvement statistics on Lean Manufacturing if you do not know your base line labor and material usage. The same applies for other key metrics such as the cost of acquisition of a new customer. The issue of which products to prioritize for improvement in sales and profitability and which to eliminate must be considered.
Performance Improvement
You should prioritize improvement in operating performance and asset management, as these will go to determine the valuation of the company. Cleaning up usually involves minuses to EBITDA. You want those minuses out of the valuation year (year for which trailing 12 month EBITDA is computed and the multiple is applied). Elimination of products usually takes time and involves recognizing obsolescence, which requires write offs. Aged inventory should be another early target and so should old receivables. When you get to an equity event you want to demonstrate a solid team of professionals managing the company for higher levels of profitability. Aged inventory, receivables and even aged payables would detract from that story.
We started this discussion on the basis that we did not know what level of demand for financing we required. We also need to consider the supply of financing. You will not know the state of the future economy, future credit market financing rates nor whether the credit market will for all practical purposes be shut down when you need it. Remember September 2008, when the financial market ruptured and credit markets seized up for a couple of years. If you think that was a one off event remember the challenges of borrowing after 9/11/2001!
Preparations
So you have now completed the preparation for a financing event. Take a look at your current and projected performance and determine whether you need additional funding and where it will come from. You need to be prepared for a range of meetings, whether with investors or bankers. There are lots of things left for you to do but you have the right starting point for the process of making your pitch for bank financing or equity from prospective investors.
If you are an emerging growth company and would like to learn how you can break free of No Man's Land, download our free ebook below on the 3 Step Strategy to Improve Profitability.
“Life is what happens to you while you are busy with other plans.” - John Lennon
More next time on the 4 M’s when we address the challenges of management.
About the Author
Peter Duff is a versatile operating executive with a long record of accomplishments running a wide range of companies. As an EVP, COO and CFO, he has been responsible for significant improvements achieved in revenue, margins, expense and cash levels. Contact or learn more about Peter here.
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