Growing Your Business Through Acquisition

By: James Cassel, March 18, 2012

Now is an interesting time to consider acquisitions. Baby boomers are beginning to retire, and their children may not have interest in the family business. As a result, plenty of opportunities will arise in the next few years as businesses change hands. This year may present additional opportunities because of uncertainty about tax increases on capital gains.

Many investment bankers and business brokers are working with businesses that are for sale. However, finding a business to buy — one that’s not already on the market for an exit — is a major challenge. There are ways to find these opportunities, such as talking to your competitors or your accountant, but this is like finding a needle in a haystack. Engaging an intermediary such as a mergers and acquisition attorney may be a wise choice.

Managing the risks involved in an acquisition can be equally complicated. Acquisitions might provide business owners with a way to grow and strengthen their companies, but they can also present unique challenges.

For a smooth acquisition process, get your strategy in place now.

Know why acquisition as a growth strategy makes sense for your business. You might think buying a business is only for large corporations, but this is not the case. An acquisition can jumpstart growth — buying an existing enterprise means the foundation is already in place. For example, the firm may have employees with talent and experience as well as a hard-to-replicate customer base. By finding a business with a good track record or a desired geographic footprint, you can improve your own company.

Stick to what you know. Looking for a business to acquire so you can expand? Choose wisely. While buying direct competitors is one way to approach acquisitions, you can also consider similar companies in different geographic areas or complementary companies for cross-selling purposes.

Don’t bet the farm. Be sure you have the financial resources available for the acquisition, which include integration costs and working capital. Be realistic about estimated costs and the time investment required to complete the deal. You cannot take your eye off your existing business or starve it for capital for the sake of an acquisition. Even the cost of lawyers, accountants, and other professionals who will assist during the due diligence phase can be a significant expense, and you don’t want to cut corners when it comes to professional guidance.

In most cases, it is not worth “betting the farm” — taking on too much debt or using all of your capital— to purchase another company. If it turns out that the deal isn’t as good as expected, your existing business may be threatened. And considering many business owners have the majority of their net worth in their business, excessive risk can threaten your financial security.

Research in advance. Acquiring companies can be a shortcut to growth, but there is risk involved. Before contacting the company you want to buy, get as much information as possible. Some of the best opportunities might be competitors you have known for years who are ready to sell. You may have an advantage over other rivals if you know the families and have an existing relationship.

Don’t rationalize buying a business. Be objective regarding what you arereally getting and what it is worth. A team of experts can help you analyze your potential purchase, its value and its fair price so you do not overpay. Be careful not to get caught up in a deal simply for the sake of the deal. Many times it is better to just walk away, because the opportunity may reappear later on more favorable terms. A deal can be like a train – one might leave the station, but generally it will be followed by another train.

Plan your approach. As enthusiastic as you might be to expand, many small business owners feel threatened during initial contact. Even if you and your representatives experience a lukewarm reception, keep in mind you can see results in the future. Playing your cards right means you could be contacted in six months, one year, or later. It is important to stay in touch. Sellers generally need a reason to sell, such as illness, divorce, or retirement. Since they generally cannot replace their income with the proceeds of a sale, they need a triggering event.

Prepare an employee transition plan. Employees make up a significant part of a company’s value, so make sure they are on board with the transaction. Keep them informed and engaged to avoid hostility, anxiety or demoralization. Not only is a communications policy extremely important, but so is face-to-face interaction. Never underestimate the value of employees.

Know how you are going to pay for the business. Can you borrow? Do you have excess capital? If you don’t have the capital to fund an acquisition, you can also look at the assets or cash flow of the company you’re acquiring. The appropriate mix of equity and debt is deal-specific. Many times, sellers will be part of the solution by taking back seller financing. Creativity is a plus. Banks are eager to lend, but only in the right circumstances.

Plan the integration of your new business up front. Many companies don’t plan their post-acquisition integration strategy with enough foresight to anticipate changes in company culture. Without proper execution, the strategic advantages that attracted you to the deal in the first place may disappear. A poor integration plan can minimize the value of the acquired business as well as your own.

Let’s say that you’re not looking for acquisition opportunities at this time. Establishing relationships with businesses that you could acquire in the future will keep you informed about how you can leverage your business in your industry, and how certain geographic locations might be acquisition targets. You might also discover opportunities to buy a division or product line of a company.

Although companies are not always available when you are looking, sometimes you just need to be opportunistic. Don’t let them pass you by.

A ‘Wish List’ to Spur Growth of Small Businesses

Small businesses are the lifeblood of the nation, however, they face innumerable roadblocks that stifle growth, and in turn, stifle the overall economy.

James Cassel, December 18, 2011

Turn on cable news, and it’s not long before a political candidate or a pundit tells us how small business growth is the key to a healthier economy. Well, they’re right. That’s because more Americans work for small businesses than large companies, and small businesses create 65 percent of new jobs in the United States.

But what is a small business? The term itself means a lot of different things to different people. When we hear the term “small business,” most of us probably think of a single-location boutique, a mom-and-pop restaurant or an auto repair shop. However, check with the Small Business Administration (SBA), and you’ll find that companies in certain industries have hundreds of employees, earn tens of millions of dollars in revenue, and are still considered small businesses.

It’s this amorphous definition that causes so much confusion. Let’s keep it simple. For the purpose of this column, we can consider small businesses any company with less than a few hundred employees.

These firms are truly the lifeblood of our nation, however they face innumerable roadblocks that stifle growth, and in turn, stifle the overall economy. In order for small businesses to thrive in a more sustainable way, they require streamlined regulations at the local, state and federal levels, as well as a little TLC. More specifically, I’ve put together the beginnings of a “wish list” on behalf of America’s small businesses that would position them for real, achievable growth, because I believe this is who will solve America’s employment problem.

• Continue health insurance reform, but ensure small businesses can more easily benefit from the intended advantages.

The Patient Protection and Affordable Care Act includes a number of elements designed to encourage small businesses to offer health insurance to their employees. However, notwithstanding the availability of tax credits for these businesses, only one-third of companies with less than 50 employees even considered whether they were eligible for these new tax credits, according to a 2011 Kaiser Family Foundation survey.

But why? The new rules haven’t been adequately explained to these business owners. Or, despite the intent, the rules exclude many of the companies the Act intended to help.

In addition, health insurance pricing continues to favor larger companies where risk can be spread across more people. We need to pool risk so small businesses can obtain affordable health insurance with acceptable benefits. Raising premiums and lowering benefits won’t work. Neither businesses nor their employees can afford it. We need to find a way to control the increasing costs.

• Revise rules and regulations to level the playing field.

Government regulation — while sometimes quite necessary — is disproportionately burdensome to small businesses, especially when it comes to licensing fees, permitting fees and the like. Both small and large businesses require the same time and resources to address these regulations, but the opportunity costs to small businesses are much greater when we consider their size. Therefore, regulations need to be streamlined and the process expedited.

Moreover, the very threat of additional regulation creates uncertainty for small businesses. Will a permit be too costly to obtain? How many inspections will be required? The unknown nature of impending regulation diminishes small businesses’ willingness to invest, to hire, and to grow.

• Provide hiring incentives for small businesses.

Given the fact that small businesses are so plentiful, incentives that specifically target small business hiring would serve to kick start overall job growth. Large companies have benefited from stimulus and incentives, but they have failed to put their profits into job creation here in the U.S. Sure, they’re hiring, but the job creation is outside our borders.

Many states dangle large amounts of money and tax breaks to have businesses move from one state to another. This tactic helps one area while hurting another, and states should better use these incentives to encourage existing businesses to hire and grow.

Look at economic policy enacted to repair the job market – the vast majority is really only relevant to big businesses. Perhaps that’s why large corporations are sitting on more cash now than at any time in recent history.

Help for small businesses doesn’t have to come in the form of stimulus, although meaningful tax credits would help. Why not more strenuously encourage lending from our recently fortified banking community? In this regard, banking regulators should stop penalizing community banks for lending to small businesses. Instead, why not expand the scope of the SBA to educate and advise businesses about their capital options? Easier access to credit for small businesses would bolster confidence and provide the necessary capital for these companies to expand their workforce.

• Recognize the growing impact of international economic turmoil.

Whether you’re selling hotel rooms or hair care, circumstances on the international stage may have an effect on your business. But, we are frequently far more focused on the weather. The fact is, our world is growing increasingly flat, and the uncertainties in Europe, Asia, and Latin America have immediate and physiological impact on all businesses, regardless of size.

• What small business owners can do.

Nice wish list, but how can we make these wishes a reality? Start with these simple tips:

Use HR consulting firms. Any additional expense can seem like a waste, but HR consulting firms not only carry the burden of your human resources tasks, but reduce your liability, streamline staffing, and most importantly, capitalize on regulations designed to help small businesses. If your company doesn’t qualify for these incentives, professional employment organizations can dramatically reduce the cost of providing benefits through outsourcing models.

Budget for regulatory compliance, and be prepared for regulatory delays.For the moment, bureaucracies are not going away — so accept the reality that compliance with various local, state, and federal regulations will require time and money — and plan for it.

Take advantage of the availability of capital. Money is available for all sorts of companies. As a small business owner, you may need to tap into the resources of investment banking firms to raise significant amounts of money. This may start by establishing a solid relationship with your current bank — and if you’re not getting the results you want, look for another bank. You can also seek the assistance of the Small Business Association.

Diversify your customer base. Whether your business is local or international, the global markets will affect your bottom line. Therefore, take advantage of new markets, seek variety among your customers and explore new revenue streams.

For this country to begin fixing the unemployment problem, we need to encourage, nurture, and support small business growth. We barely know the rules as they stand today, and the disagreements over future legislation and tax policy only amplifies this uncertainty. Lack of clarity and lack of compromise lead to lack of confidence — it’s time Washington got its act together and worked together to provide real solutions.

I’m looking at this issue from an investment banking perspective. What changes do you recommend to stimulate small business?

 

Buyout Firms Expand and Prosper in Florida’s Environment

By James Cassel, November 20, 2011.

Leveraged buyout firms, private equity firms — call them what you want — these companies have dug their heels into the South Florida sand. Certainly, 2011 has seen volatile market swings, and the general state of the economy pretty much stinks. Nevertheless, South Florida has attracted a growing roster of private equity firms that have identified our turf as fertile ground for their operations, and that means more options for Florida-based companies contemplating a sale or recapitalization.

Buyout firms raise capital from deep-pocketed investors — or leverage their capital — using equity along with borrowings to purchase or invest in companies that have the potential for growth. In addition to these companies with growth potential, buyout firms are looking for undervalued or underperforming companies, businesses with strategic value to other companies in a firm’s portfolio, or companies in financial distress or bankruptcy. Many of these companies are capital constrained.

After a firm purchases a company, it may rely on existing management or regime change (new management) to grow the company and ultimately sell it for a profit, typically after a period of five to seven years. The profits get distributed back to the investors, and a portion, along with a management fee, goes to the private equity firm itself.

South Florida’s oldest private equity firm, Trivest Partners, has operated here since the 1980s and has handled high-profile transactions such as Aerobed, Banana Boat and Polk Audio. It also has the good company of other legacy firms based in South Florida including HIG Capital, Brockway Moran, Sun Capital, ComVest, Palm Beach Capital, Pine Tree Equity Partners and Boyne Capital Partners. Newcomers to South Florida include Empire and Huntsman Gay, to name a couple.

What brings private equity firms to South Florida? As simple as it may sound, many come here for the same reason as tourists and snowbirds — the lifestyle! Come January, it’s a heck of lot nicer to do a deal on the beach than on Wall Street. The strategic value of our location means private equity firms can attract sun-starved talent from the northeast as well as investors who enjoy a yearly meeting in the subtropics. Since most travel regularly, a good hub airport is a must.

There are solid financial reasons as well — the tax benefits. Florida’s low corporate income tax and absence of state individual income tax are notable draws. Plus, Florida has many entrepreneurs, a magnet for private equity firms operating in the state.

Perhaps most significant is that Florida — and South Florida in particular — has grown up. South Florida has a growing finance community. As the fourth-largest state in the nation, and with a more sophisticated international business community, private equity firms have come to recognize that South Florida is a viable alternative to New York, Boston and California.

Whether your business has revenue of a few million dollars or over a hundred million dollars, it’s good for you to have an army of eligible buyers right outside your door. Business owners no longer have to travel to New York to find someone high-profile to sell to or to recapitalize.

This applies to distressed companies as well. Sun Capital and HIG have been two of the most active buyers of distressed and healthy companies in North America and Europe over the last few years.

There are other firms with established specialties, such as MBF Healthcare Partners, which focuses on investments in healthcare, and Trivest, which specializes in family-owned businesses. Firms have honed their expertise to suit particular segments of the Florida business landscape.

Entrepreneurs can benefit from this enhanced investment activity. Venture capital is available to high-risk and early-stage companies.

During the first two quarters of 2011, businesses in Florida had more funding opportunities. We saw increased investments in small and mid-size businesses, increased inquiries from business owners seeking to acquire firms, and, best of all, increased buzz.

We anticipate merger and acquisition activity in 2012 to expand to a wider range of companies, with many deals involving private equity firms. Specifically, we will see more acquisitions in industries like technology, healthcare, distribution and manufacturing.

The growth of buyout firms in Florida spills over into lots of other industries, including sectors like my own, investment banking. We also see commercial lenders, the legal community, and the accounting industry benefiting from the increased deal activity these private equity firms generate.

If you’re a business owner, watch what’s happening here — what businesses are being bought and sold, who’s joining forces, and what new firms form. Private equity firms in Florida made national headlines and drove a lot of attention our way this year, and they are poised to continue to do so. Also, keep in mind middle-market firms, distressed companies, and family-owned businesses are the specialties of several Florida firms.

And if you are in the market to sell right now and want to get the best deal, try the direct approach by calling a firm directly or getting an introduction from a law firm. When trying to sell or raise capital, don’t forget that competition is good — it generally gets you better terms or a better price.

Is it the Right Time to Sell Your Business?

Now may be as good a time as any to sell a company. But know what buyers want — and why you’re selling.

By James Cassel, October 16, 2011.

With talk of a double-dip recession, continued high unemployment, and a schizophrenic stock market, business owners contemplating selling their businesses might think they would be better off closing the doors and throwing away the key. However, now is as good a time as any to take a serious look at selling your business. By waiting, you may not get a better price. Or worse, you may not be able to sell at all.

Right now, money is out there. Companies have squeezed more productivity from workers and refrained from hiring (unfortunately keeping job numbers dismal). In the process, they have accumulated lots of cash. As a result, many companies are sitting on capital, and they’re ready to invest in acquiring other businesses.

Debt is available for quality opportunities, too. Despite what the U.S. Congress and the White House have been saying, debt is not always a bad thing; and the Federal Reserve agrees. The Fed’s policies have dramatically increased the availability of money for banks to lend, at least through the middle of 2013. In addition, banks have spent the past two years cleaning up their balance sheets, and now they’re poised and ready to lend. That means buyers can obtain the financing to acquire your company.

What’s Hot

How can business owners know if their company will sell? Buyers are attracted to profitability, opportunities for growth, a diverse customer base, and the potential for a competitive advantage among others. In terms of specific industries, at the moment buyers are paying lots of attention to health care, manufacturing, social media and technology companies. However, any business that has successfully weathered the recession can be an attractive target to buyers. These companies have proven their stability.

Know your circumstances

Before a business hangs a “for sale” sign, though, owners should take a good look at their circumstances to clearly understand their reason for selling. That will help you and your advisors determine the best deal structure, identify the right buyer, and command the highest price.

Sometimes life circumstances beyond the business owner’s control force a sale. Illness and death are two common examples. Likewise, divorce can lead to a sale. (Just ask the owner of the L.A. Dodgers.) Often in these situations, selling is not “optional,” so you may have to make certain concessions on price and deal structure.

When divestiture is less urgent, there are more options to consider. For instance, when business owners want to cash out of their company — either to gain liquidity or to minimize risk — they may opt for a sale or partial sale.

Keep in mind, a partial sale brings outsiders into the business, and that comes with risk as well as strings. Owners may want a buyer with in-depth knowledge of their business, someone who can carry on the legacy of the company and grow the brand. Also, recognize that the new owners may change the status quo, especially as it relates to employees and customers.

Negotiating Price

Buyouts in the middle market typically don’t produce enough proceeds for the seller to replace the income generated by the business, unless it happens to be something like Facebook. If the business produces $1 million a year in cash flow, an owner would need to receive a net sale price of approximately $20 million to replace this annual profit (assuming your financial advisors can earn annual investment income of 5 percent). However, a business generating $1 million is rarely sold for such a large sum. Companies in today’s economic climate usually sell for four to eight times earnings.

If the seller of a business expects a higher price than the buyer is willing to pay, then an earn-out can provide additional funds if (and only if) the business achieves a certain level of earnings or revenues. The valuation gap between the seller and buyer can also be addressed if the seller retains a small stake in the business to generate future income — and maintain some control.

Owners can also negotiate an employment agreement where they stay around to lend expertise and experience to the new owners. Just be prepared to adjust to a different management style and no longer sit in the boss’ chair.

What Next?

If you decide a sale is right for you, you will need to have several documents readily available in preparation of the sale. Sellers will be asked to provide interested buyers with accurate financial reports in a timely manner — such as profit-and-loss statements as well as customer contracts, inventories information and lease agreements. Don’t even begin marketing your business until you can produce the necessary documentation.

Many owners have no idea what their business is worth, and finding the right price is essential. Unlike the sale of a home, the seller typically doesn’t have a true asking price, so hire financial advisors with specific experience in mergers and acquisitions. The right team can help market a company confidentially and structure a favorable deal that helps you achieve your goals.

 

 

Florida M&A Deals Likely Flat in 2011

Merger-and-acquisition activity in Florida may be flat this year, despite earlier expectations that it would exceed last year’s total.

A boost in Florida’s merger-and-acquisition market may not come this year, while financial institutions are eager to fund deals, local experts said Wednesday.

Across the state, mergers and acquisitions have slowed since the beginning of this year, and although the volume and dollar value of deals previouslywas expected to exceed last year’s totals, the outlook now is that it will likely be flat, said James Cassel, chairman and co-founder of the Miami-based investment banking firm Cassel Salpeter & Co.

Among the reasons: Business valuations are down, and owners are cautiously holding onto their companies unless they have a compelling need to sell, such as a divorce, losing a major customer or pressure from a bank.

“People are still nervous,’’ Cassel told attendees Wednesday morning during a CFO Alliance presentation at the Coral Gables Country Club. “People are feeling better than two or three years ago, but they are still concerned.’’

Yet, at least one company, Miami-based Trivest Partners, has multiple deals in the works. Those rank in the middle market — companies with minimum annual revenue of $20 million and minimum cash flow of $5 million.

Trivest, which currently owns 10 companies, typically holds its investments for an average of 5.5 years. It recently sold one business and is in varying stages of selling three others and buying two more, said Chip Vandenberg, a Trivest partner.

Trivest focuses on founder- and family-owned businesses that are in need of a transition.

“It’s pretty busy for us right now,’’ Vandenberg said after his presentation at the meeting of the CFO Alliance, a nationwide group of finance leaders that started its South Florida chapter two years ago.

Meanwhile, banks are aggressively looking to fund merger-and-acquisition activity, said J. Eric Hartman, Fort Lauderdale-based senior vice president and market executive of corporate banking at PNC.

“The pendulum has swung back,’’ Hartman said.

“Banks are eager to deploy capital to finance M and A activity,’’ he said. “However, for those firms with EBITDA [earnings before interest, taxes, depreciation and amortization] under $15 million, finding traditional bank financing can still be challenging.’’

The meeting was held in partnership with the University of Miami School of Business Administration. Among those in attendance were corporate chief financial officers, bankers, executives of private equity firms and academicians.

 

Prophase Advisory July 2012

Imperial FO July 2012

What Does Affordable Healthcare Act Mean for Business?

Making the right choices now could go a long way toward protecting your bottom line later.

By: James Cassel

To view original article click here.

MIAMI, Florida, July 22, 2012 – With all the debate surrounding the Affordable Care Act, one could easily get lost in the rhetoric and lose sight of the issue that’s important now: The law is here, whether you like it or not. Clearly, the new or expanded coverage slated for millions of additional people will bring more costs – whether in the form of a tax or penalty. No matter how you feel about that fact, it’s time to set aside politics and take an objective look at the implications of this new law for your business.

One of the most frustrating challenges that middle-market business owners will likely soon face is continued uncertainty. While some people say that the Affordable Healthcare Act will save a substantial amount of money over time and others say it will do just the opposite, nobody knows the ultimate implications because this law is still new. Even the threats ranging from slight modification to repeal of this law will probably remain unknown until after the November election and beyond.

Although it’s impossible to predict the future, we know at least one thing is certain: Because some provisions have already gone into effect and other provisions will be phased in during the next three years, companies will have to redesign their current plans and/or offer new plans to employees.

The time to begin studying this is now. If not managed properly, the issues associated with this law could hurt the bottom line for businesses. For example, automatic enrollment provisions for businesses with more than 200 employees make it critical for businesses to gauge how many of their employees are likely to opt out and to develop appropriate strategies.

Some key points to keep in mind:

• Many businesses that currently provide employee group coverage at reduced premiums may face higher costs. If this happens, some business owners might feel motivated to simply pay the penalties for not offering health insurance to their employees, which was not the intended effect of this law. On the other hand, some believe that insurers may end up competing for your business, bringing down premiums (although this seems highly unlikely).

• Businesses that provide the top-tier plans for certain employees may face higher costs with a 40 percent excise tax tagged onto those “Cadillac” plans if the values of those plans exceed $10,200 for individuals or $27,500 for family coverage. To help prevent this from happening, you should examine your current policies and determine if you will be subject to the new tax. If so, you might want to modify the benefits.

•  Another issue facing the business community: the non-discrimination provision in the new law. Businesses will not be able to continue to offer top-tier “Cadillac” plans to some employees while offering others more basic coverage. Offering the same coverage to all employees can be a costly proposition for many business owners. Some small-business owners who cannot afford to offer the same high-quality coverage to all employees worry that this could motivate senior talent to look for jobs at bigger companies that offer better coverage. It is possible that supplemental coverage will be available.

• Owners of some smaller businesses may benefit from tax credits aimed at helping to reduce the costs of providing insurance. However, make sure to understand the fine print, as there will be certain restrictions based on income and other criteria. For example, businesses with 25 or fewer employees who pay average annual wages of less than $50,000 and provide health insurance may qualify for asmall business tax credit of up to 35 percent (up to 25 percent for nonprofits) of the costs of their premiums. Starting in 2014, some small businesses could qualify for tax credits as high as 50 percent. This might sound good, but how many businesses will actually qualify?

• Businesses with employer-based health insurance plans that cover retirees between 55 and 64 years of age can now obtain financial help through the Early Retiree Reinsurance Program.

• It’s said that businesses with fewer than 100 employees may be able to shop for insurance in anAffordable Insurance Exchange, a new “marketplace” where individuals and small businesses may look for affordable health benefit plans. Employers with fewer than 50 employees are said to be exempt from new employer responsibility policies and don’t have to pay an assessment if their employees get tax credits through an Affordable Insurance Exchange. There are still unanswered questions, however, about if and how these exchanges will be established.

Some additional key points relevant to coverage:

The new law makes it easier to obtain insurance for children and adults with pre-existing conditions, many of whom have historically been unable to afford or obtain coverage. It also requires insurance companies to cover certain types of preventive care, including things like screenings and immunizations, without requiring you to make co-payments or co-insurance or meet your deductibles. Starting Jan. 1, 2014, the new law will do away with the dollar limits on benefits that had been previously imposed by many health plans, meaning that health plans can no longer cap their yearly or lifetime spending for your covered benefits.

Again, it’s difficult to know with any certainty either how the new law will affect middle-market business owners or how middle-market business owners will respond. For example, this new law could motivate some businesses owners to do more outsourcing or use temporary labor through third-party providers. Companies in medical and biotech industries, for example, could benefit from provisions in the law that allow for intellectual property protection.

The bill is highly complex and exceeds 2,000 pages. The bottom line: every business has unique needs, and it’s important to consult with qualified insurance professionals who can provide a detailed analysis of all the implications of this law to your business and help you consider all your options. Making the right choices now could go a long way toward protecting your bottom line later.

James S. Cassel is co-founder and chairman of Cassel Salpeter & Co., LLC, an investment-banking firm with headquarters in Miami that works with middle-market companies.www.casselsalpeter.com

Obtaining Equity Capital in Today’s Market

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There are several types of investors and equity securities from which to choose. However, they won’t all be a good fit.

By: James Cassel

MIAMI, Florida, July 1, 2012 – Growing a company is seldom easy, and today’s economic environment doesn’t make it much easier. However, even in today’s economy, there are ways to raise equity capital.

But first, put yourself in the place of a potential investor. While investors are by nature willing to take risks, they generally will not just give you money without terms and conditions. Keep in mind that money comes with strings.

When seeking equity capital, there are several types of investors and equity securities from which to choose. However, they won’t all be a good fit. In many situations, the company’s stage of growth and amount of equity financing sought will determine what type of investor, equity, and terms and conditions will be available and most appropriate.

INVESTMENTS

To navigate these waters, here’s a look at the types of equity investments and investors.

Angel Investors: Although angel investors may be friends and family, in most cases they are the type of investors who come after friends and family but before venture capitalists for early stage companies. Angels are people with money and an appetite for risk. These investors may potentially: bring a wealth of experience to this process, have significant relationships with key individuals or companies, and provide valuable management advice. They also may be willing to provide seed money, i.e. startup money, which can become expensive because of the relatively high risks associated with starting a business. Bottom line: Angel investors can be an attractive option for higher-risk, small businesses poised for rapid growth at favorable valuations.

Venture Capitalists: With a more formalized vetting process, venture capitalists invest in a small percentage of the deals they review, as they tend to be extremely selective. Their risk tolerance is often high, and therefore, so is the required rate of return. When they do become interested, it’s usually early in a company’s life. This is usually the first investment by institutional investors. They add expertise, contacts, advice and money. They invest with a planned exit event, such as an initial public offering (IPO) or sale.

Private Placements (of equity): Private placements can include debt, equity or both. While raising money quickly is possible from a legal and structural basis, finding investors of any kind takes time. Private placements can be a good option for growth companies, mature companies looking to expand, and those that want to expand without going public. This money can come from individuals or institutional investors. There can be great flexibility in both the structure and valuation of the deal.

One consideration in private placements is the Jumpstart Our Business Startups Act (JOBS), signed into law in April. The bill basically removes the prohibition on general solicitation and advertisement by issuers relying on Rule 506 of Regulation D (Reg D) under the Securities Act of 1933, as amended. In other words, thanks to Reg D, you may, subject to certain rules and regulations, advertise for investors. The SEC has yet to issue the required regulations under the JOBS Act.

IPOs: Going public for most companies provides an infusion of capital as well as the ability to use its stock as currency for making acquisitions. While IPOs can be expensive, and becoming a public company involves much higher levels of accountability and regulatory requirements, IPOs can also bring many benefits. Although generally thought of for large, established companies, they can be good for small, highly visible, rapidly growing businesses. IPOs take all kinds of shapes and forms. One of the recent notable IPOs, Facebook, was clearly not a particularly well-executed offering. Although its success has been debated, it undoubtedly provided an effective exit strategy for some of its private investors and raised substantial funds for the company.

Private Equity Funds: Private equity (PE) funds are professionally managed funds that invest or purchase control of a wide variety of companies. These organizations usually want majority control, though some funds might be willing to only purchase a minority stake. Some prefer mature, stable companies that can show significant growth opportunities, while others like distressed businesses. PE firms focus on multiple factors such as industry, size and geographical location. Perhaps the biggest advantage is that these organizations can provide access to capital beyond what a traditional bank would finance, as well as strategically assist a company. However, companies considering private equity funds must plan long in advance, and they must be ready to withstand the scrutiny of the due diligence of the PE firm. And remember, the investors will impose many restrictions and conditions.

EQUITY SECURITIES

There are a variety of equity securities from which to choose. Depending on the type and situation of the company seeking growth capital, several choices may make more sense.

Common Stock: Common stock represents a form of ownership in a corporation. The common stockholders own the economic benefit of the company. They are inferior to the rights of preferred shareholders. They receive the profits as well as losses of the enterprise.

Preferred Stock: Preferred stock, like common stock, is an equity security. It can take many forms and have lots of flexibility. It can provide for, among other terms, special voting rights, preference on liquidation, dividends, conversion into common stock and certain restrictive covenants.

Warrants & Options: Warrants are a derivative security that represents a privilege or right to purchase securities at a specified price within a certain time period. Warrants are long-term instruments that typically last several years, but will lapse if the right isn’t exercised during the specified time. The intrinsic value of a warrant is found by comparing the price to exercise your right (also known as the subscription price) with the market price of the stock. If the price of the stock increases in value, the warrant represents an opportunity for an investor (option holder) to profit by exercising his or her right.

Mezzanine Financing: Mezzanine (mezz) financing is debt capital that can be convertible and gives the lender the right, if he or she so elects, to convert to an ownership interest in the company. Many times mezz financing is coupled with warrants. Generally, they are not control investments, and because it may be treated like equity on the company’s balance sheet depending on the structure, it might be easier to get bank financing. However, while mezz financing is less expensive than pure equity, it is still more expensive than debt.

TIPS

Whatever path you choose, the following tips can help:

• Don’t underestimate the power of relationships, introductions, and good advice from those in the business, like lawyers and investment bankers.

• Be realistic about your business, the valuation of your company, and the amount you seek.

• Conduct due diligence on your investors, as they will check out you and your company. All money is not equal. Make sure you are compatible with the investors because they will own a part of your company and may partake in important business decisions.

• Think about the timing. It will take longer than you imagine. Don’t make rash decisions.

• Consider seeking the counsel of seasoned lawyers, as well as an investment banker.

Navios FO June 2012