PPB July 2018

FEATURE | Raising Business Capital position to both obtain and successfully manage business capital. “The business must be in a reasonably strong financial position," says Nicholson. “If the business is not generating consistent profitability or cash flow, it is going to be difficult to obtain capital.” Additionally, he says, the business must show the bank it has sufficient assets— in the form of inventory, receivables, equipment, etc.—to secure the loan. “If the capital is in the form of an equity investment, there may be ownership or governance conditions associated with the purchase agreement.” Isaacson affirms this, adding that banks want confidence that a business is viable. “Banks will have both objective and subjective measurements and, although most banks use a common set of measurements, it is not always exactly the same. Banks will not only look at the business, but the management team as well. And just as banks are assessing the business, the business needs to assess the bank to make sure the bank is a good fit for the business. For example, it is important to have a bank that works well with a business your size. In addition, some banks specialize in specific industries or sectors.” Koosed advises company owners not to put their personal assets on the line as collateral, but he notes that sometimes it is unavoidable. “Banks often have strict covenants that include specific debt-to- equity and debt-to-EBITDA ratios,” he says. EBITDA (earnings before interest, taxes, depreciation and amoritization) is a popular indicator of a company’s financial performance. “It can be a bit of a Catch-22 if you don’t have sufficient equity or profitability to obtain the financing needed to help grow your business. And, almost all debt requires interest payments on a set schedule.” Companies that are just starting out will need a plan to present to the bank, says Isaacson, and the bank will “pressure test” the plan. “The bank wants to lend you money, but they don’t want you to pay it back—they want you to be able to pay it back.” Nicholson recommends companies make sure they have plenty of time to pursue raising capital and are also in a “reasonably strong” financial condition. “You will have more options and more attractive terms. It’s also a good idea to engage with an independent third party when exploring your options,” he says. “An experienced advisor can help navigate the process and potential options.” Partners you can trust, who are committed to your business long-term and understand the nature of your business are key to the process, adds Koosed. “Also, don’t overextend yourself. If you’re not sure you can service the debt, don’t take it on. Similarly, don’t pledge collateral you’re unwilling to lose.” He says a good rule of thumb is not to raise capital unless the benefits are clearly worthwhile, citing a decision by BAMKO to turn down some deals overseas prior to the company’s acquisition by Superior Group because the capital costs at the time were too prohibitive. “It was a uniquely tricky regulatory environment, and we simply could not afford to do some otherwise very profitable deals because of the capital restraints,” he shares. Isaacson suggests asking for more money than might be needed at the outset, because “you want to make sure you have enough, especially if things don’t turn out exactly the way you thought they might, and you don’t want to keep going back” to ask for more. He also advises companies to enlist the help of third parties. “It’s good to have someone help you who is not in the weeds with you. Have someone with a dispassionate view look at your business—an accountant, a lawyer, or an investment banker,” he says. On the other side of the coin, companies should put time and effort into finding investors who will support their business goals. Nicholson and his team sought investors that understood the promotional products industry and their company’s business strategy beyond the financial aspect. “This ensured we would have alignment around our growth plans and use of additional capital,” says Nicholson. “We also did a fair amount of diligence in talking with other companies they had invested in; was this group a good partner during difficult times, and what was their level of involvement on a day-to-day basis?” Other desirable characteristics to look for in an investor are trust, a long-term vision and cultural fit, says Koosed. “We always want to have the environment of a family business—building a legacy that will last for generations. Character counts, and you need to be certain of the character of any investor you allow to impact the legacy of what you have worked so hard to build. If an investor doesn’t have a long-term vision for your business, there will be a price paid for that.” Jen Alexander is associate editor of PPB. “Bankswill have both objective and subjective measurements and, although most banks use a common set ofmeasurements, it is not always exactly the same. Bankswill not only look at the business, but themanagement teamas well. And just as banks are assessing the business, the business needs to assess the bank tomake sure the bank is a good fit for the business.” — Jonathan Isaacson 58 | JULY 2018 |