Is Your Business Ready for Outside Capital?

Earlier this month, I was privileged to speak on a panel at the Imperial Capital Consumer Summit about securing financing for consumer products companies. While a company looking to grow—and looking to secure the capital to do so—might be tempted to focus on external factors (debt markets, demand, potential financing partners, etc.), it’s perhaps more important for them to look inward first and get their own house in order. If the value proposition is strong and the company has done its homework to prepare, the transaction will move forward with far fewer obstacles.

The first step a company must take before it seeks external financing is to understand the point in its lifecycle and what the appropriate next steps are. A company should consider the following questions before moving forward:
  • Is the product/brand a known quantity with proven viability?
  • Is there a strong, clear growth plan in place?
  • What will future capital needs be?
  • What is the intended use of the capital raised?
  • Who is the right type of capital partner?
Assuming the company has answered all of these questions in the affirmative and is ready to forge ahead with a financing transaction, focus on four main areas of preparation in order to ensure as smooth a process as possible is highly recommended:
  1. Retain expert counsel (both legal and investment banking). These transactions, particularly junior capital and equity raises, are complex. A company will want strong advocates to work on its behalf and to navigate the technical issues underlying the transaction.
  2. Have a clear investment thesis. As noted above, a company seeking outside capital needs to have a detailed plan for exactly how much money they need and what they intend to do with their new funds, whether it’s expanding distribution or opening a new location.  This needs to be supported by a detailed financial model that ideally shows the ROI on each dollar invested and how it will benefit the business.
  3. Prepare financials and leadership team. A company should anticipate when they will begin the financing and allow enough time to have at least one to two years of audited (or reviewed) financial statements available in addition, putting a stellar management team in place who are capable of committing the time to the process and successfully navigating due diligence.
  4. Anticipate due diligence. With respect to due diligence, any investor is going to do a thorough analysis, and any company seeking capital must be prepared for it. The focus areas of diligence will vary depending on the stage of company (whether it’s an emerging business or mature), but one way a company can prepare for this is to appoint an outside due diligence provider who can “front load” the process and identify any issues long before the transaction encounters any surprise findings that can derail the deal.
Of course, preparation is only one element of the transaction process, and any financing will need to navigate issues related to debt markets, consumer spending and other indicators of economic health and viability. However, it is critical that a company thinking about raising capital take the time to make itself as attractive an investment opportunity as possible. Eliminating variables on one side of the equation will make for a smoother process overall.