Increasing options for funding a business
Without doubt, the most common of these remain debt focused. Whilst the availability of straight cash flow loans to fund growth has declined, the gap between supply and demand has been filled by the emerging popularity of asset-based lending, with the occasional top-up cash flow loan attached.
We have all witnessed the volatile environment of 2020 accelerating advancements in remote working; something that would have taken years or decades in normal times. However, this volatility also looks set to increase the openness of business owners to equity investment, rather than debt, to fund their growth plans.
Private Equity investment has rarely been the option that owners of SME businesses most want to discuss when we meet them for the first time. But this has been changing, albeit slowly. Owners are sometimes sceptical about this option, worrying that ‘suits’ will take control of their business. However, in my experience, modern private equity firms are not like this and, instead, look for a friendly rapport with the management teams that they invest in.
Investment can come in various guises and ranges from a small minority stake up to a majority stake. The size of most businesses in the SME bracket, unless they a fast-growing young company, mean that most investment firms will be looking for a significant stake.
However, this isn’t necessarily a negative move. It does come with some tangible advantages for the business owner.
Funding can be received as a mix of cash at completion, deferred consideration, which is a portion of the purchase price that is payable by the buyer in the future, and loan notes, which is an agreement to repay debt between the parties at a future point in time.
A correctly structured deal could give the business
- a cash injection to grow, either through acquisitions or organically.
- a cash sum to the owners.
- a stream of payments over a set period.
- loan notes which can be redeemed on a future sale or event.
In addition, a sizeable shareholding is normally retained by the owner to incentivise the continued growth of the business.
This gives the perfect base for an owner to partially de-risk their position whilst being given the tools to ‘go again’ and grow for a future sale, which would achieve another payday by potentially selling the rest of their shareholding.
Sounds good to me!