The investing environment endured the recession, shifted a bit, and has come out in favor of business owners.
Early Tuesday morning, investors and business owners discussed raising capital for a growing businesses at a conference hosted by financial-services firm Hilliard Lyons Investment Banking and Ironwood Capital, a Connecticut-based private-equity firm that focuses on middle-market companies.
The market is heating up, the panelists said.
“Frankly, for business owners, the cost of capital has probably never been lower,” said Jerry Henderson, national industry partner for BKD LLP. He noted that private-equity funds are created from institutional investors and pension funds, which are seeking returns on their investments.
“You’ve got a lot of money that’s out there chasing returns,” he said, “and (that has) created more liquidity in the environment.”
But with increased amounts of money invested per deal, the dynamics have changed and investors are placing a higher level of scrutiny on deals, Henderson added.
Throughout the discussion, panelists offered advice for business owners who are seeking growth capital. Much of the conversation centered around disclosure, diligence and the importance of having a board. Here are selected pieces of advice from the panelists:
- “The best deal isn’t the highest price,” said Jonathan Blue, chairman and managing director of Blue Equity LLC, a Louisville-based private-equity firm that focuses on growth capital. It’s a huge misconception to believe the higher the number the better, he said, because it doesn’t show what’s included in the deal.
- If you’re thinking about raising capital in the future, start meeting investors now, said Marc Reich, president of Ironwood Capital. Get to know investors so that when you’re ready to raise capital, you’ll already understand who you work best with.
- “We like to see good governance in a company,” said Reich, regarding having a board. Most investors probably require a company to have a board in place. He said it’s better to implement a board now, rather than in a rush later when it’s required. John Sweeney, managing partner at Hilliard Lyons, added that boards offer outside perspective, especially when members have expertise in specific areas.
- When seeking investors, expect a due-diligence process, said Henderson of BKD. More and more, he’s also seeing “reverse diligence,” with companies taking it upon themselves to understand how investors will view their company. This shows him how serious a company is, he added.
- Keep partners and advisers in the loop, said Gerald Plappert, CFO of Andrew Elliot Group LLC, a privately held holding company. Informing the board and disclosing what is happening will make it easier when the company goes to seek funding.
- “Who you partner with matters a lot,” said Bob Saunders, managing partner of Saunders Murdock & Associates and entrepreneur-in-residence at Greater Louisville Inc.’s entrepreneurial arm, The Enterprise Corp. A good match between investors and business owners is especially important during an exit or if things go wrong.
- Understand early on that you, as a business owner, likely will have to give up controlling interest in your company when you accept an investment, Saunders said.
- “Time kills deals,” said Vincent Tyra, president and CEO of ISCO Industries, a global piping solutions provider. He recalled “dragging his feet” during a deal that almost fell through. The sooner “you get off the roadshow, the better,” he said. Plus, acting quickly eliminates non-serious buyers or investors.
Article by Rachel Aretakis, reporter, originally appeared in Louisville Business First, Feb 17, 2015, 5:43pm EST