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RAISE CAPITAL - THINK STRATEGICALLY - CREATE WEALTH

The keys to growing your business and wealth creation are to obtain capital and to obtain knowledge from those who have made money already, especially from those from within your industry. This article will examine some aspects pertaining to the first of these two important areas – raising capital.

4 May 2009

BY WARWICK PEARCE BEc, LLB, CA
Senior Account Manager
Wholesale Investor

Capital and knowledge are the keys to growing your business and generating wealth

Banks are not lending so freely in this economic climate and revenue is down so other sources of cash are required. Raising capital is the answer. Capital, if spent correctly, can accelerate the growth of your company.

Raise capital today!

Now is the time to be raising capital! If history is to be repeated, one half of all businesses will be raising capital this year and five percent of companies will be looking for capital at any one time. However, don’t be guided by what the general business community is doing. Raise capital today and reap the rewards tomorrow.

If available at the right price, you should raise sufficient capital now to fund your company’s growth up until a significant revaluation milestone can be achieved. Raising capital now means that you won’t have to generate it through profit and it will allow you to fast track the growth of your company. Raising capital now will mean that you won’t have to raise it when you are in a desperate position later.

Raising capital now will also give you a competitive advantage tomorrow. If you know how to raise capital you have a significant advantage over your competitors.

Source capital from successful businessmen

Raise capital from businessmen who have achieved what you want to achieve. This concept is commonly referred to as smart money. If you raise capital from successful people they will share their good ideas with you which will greatly enhance the value of the cash they invest in your company.

Capital can accelerate the growth of your company

There are, of course, many ways in which the capital your company raises can be utilised in order to accelerate the growth of your company.

The capital could be spent on de-risking your business; marketing; branding; advertising; customer relations; business or asset acquisition; manufacturing expansion; distribution expansion; the purchase of equipment; the retirement of debt; research and development; and on many other items, all of which have the propensity to fast track your company’s growth.

I will examine a number of specific areas in order to illustrate how the money your company raises can be spent to multiply the value of your business and allow for the maximum valuation possible at exiting.

Spend capital on de-risking your business and multiply its value

One of the best uses of capital involves spending it on de-risking your business. Every risk that a business has is a reason for a prospective investor or purchaser to bargain you down on price. The majority of companies contacting Wholesale Investor have not adequately de-risked their business and as such, their value is discounted.

The vast majority of small businesses have only one or two directors. An excellent use of capital involves creating a management team and a board. Many small businesses are almost totally reliant on the owner for their continued operation. This makes them very risky propositions and greatly lowers the multiple of profit which can be applied for the purpose of arriving at a valuation.

Ask yourself this question; if something happened to you, what would happen to your business? If the business would collapse, you should definitely look at raising capital for the purpose of replacing yourself with two to three people. Train them and work yourself out of an operational role. Your business will multiply in value and you will be able to concentrate on strategic issues, including selling the business and starting a new one!

Securing rights over your intellectual property will make your business more valuable. Make patent applications and register any trade marks and logos that are applicable to your company.

Capital spent on systemizing your business and making it scalable will add value. Deploying cash to standardize your business in a manner which will permit it to be replicated at various locations through franchising and/or brand awareness is money well spent. Scalable businesses are attractive businessesto investors and potential acquirers because the core elements of the business can be replicated easily to permit rapid growth.

Spending money on lawyers seems repugnant to many business owners. However, it can make good business sense to retain a lawyer and engage their services. Have a commercial lawyer perform a legal audit of your business. Strengthen your company’s contracts with its staff, customers and suppliers. Create a data room of documentation. You will need to in order to entice a buyer later. Weak contracts, where the contracts are weighted heavily in favour of the other party, even if with blue chip companies, will reduce the value of your business. Furthermore, they could prejudice a proposed trade sale or investment.

Similarly, capital spent on accounting services is not wasted expenditure. You should have historical financials prepared for your company and you should seriously consider having them audited, even if you are not required to by law. This will provide a great deal of comfort to anybody examining your company and provide your company with a higher degree of credibility. This is especially so in the current economic environment. Audited financial statements will make your company more marketable and therefore more valuable.

Using capital to retire debt will improve your company’s balance sheet. Large ASX listed companies are doing this at present and so should you. It will de-risk your company and improve its value.

Spend capital on advertising and brand awareness

Spending capital on advertising to drive your brand and sales is an excellent use of capital raised. Each sale you make will add something to the bottom line. The value of your business will appreciate by a multiple of the amount you add to the bottom line.

Spend capital on acquiring other businesses

Capital allows you to make opportunistic and strategic acquisitions. Opportunities are available now at cheap prices.

Baby boomers want to sell their businesses. There are roughly 837,000 businesses in Australia and 22% of them are owned by people over the age of sixty. Approximately 180,000 businesses will be sold or closed within the next five to ten years. Few business owners understand the strategies required to build the value of their businesses and this means you can acquire them at attractive prices and multiply the value of the acquired businesses.

Acquisitions and mergers allow for economies of scale. Overheads can be shared by the larger operation. Volume discounts can be achieved on purchases and marketing costs can be shared. You might save ten percent on your company’s costs and achieve ten percent growth in revenue by merging with or acquiring another company.

Capital can be deployed to acquire companies for their revenue and profit. You can buy companies cheaply from private vendors who do not understand the value of their businesses and build on multiples of profit. This is especially the case where you have grown to the point of being a viable prospect for listing on the ASX, where companies trade at a much higher multiple of profit than their unlisted counterparts. A private company which is acquired by a listed public company can double in value by virtue of the fact that ASX listed multiples of profit can suddenly be applied to the profit that the former private company generates.

You can use capital to make a strategic investment. You can buy out a competitor that is a thorn in your side. Or you might buy out a company to gain access to its product or technology or to support that company with a view to the investee one day becoming a customer of yours. It’s not hard to appreciate how these corporate actions will accelerate the growth of your company. Cutting competition will improve your margins and supporting your customers will drive sales growth.

Successful growth companies have investors ready to go when they find a good target to acquire. They perform their due diligence on the target and, if the results of the investigation are acceptable, they acquire the target swiftly.

Spend capital on developing an exit strategy

The capital raising process is ninety five percent similar to the process of a trade sale. As such, a very good reason for raising capital today is to prepare yourself for a trade sale tomorrow at which point you will reap the rewards of your hard work. Preparing your company for a trade sale will cost money, so use some of the capital you raise for this purpose.

Spend capital on making your business worth a lot to a larger company. Know your industry. Who is a potential buyer for your business? Find three or four larger companies that might be interested in your business and look at the last acquisitions they made. Spend the capital you raise on making your business look like the ones they have purchased. Transform your business into a similar business to the ones purchased. After all, those larger companies must be interested in that type of business.

One day you might want to sell to a public company or a private equity fund. What multiple of profit are the public companies within your industry trading at today? Find out. When you do eventually sell, you should try to get around one half of that multiple.

To sell your business you will need to plan twelve to twenty four months in advance of the anticipated sale date. Any money you spend today on de-risking the business, as described earlier, will pay off exponentially at the point of sale.

You should utilize the capital you raise on making your company “sale ready” as a target for the right buyers where the synergies are closest and you can extract the maximum value for your business.

DON’T DELAY, ACT TODAY!

If you want to accelerate the growth of your business, raising capital should be a key priority for you. And right now is the time to act! Contact Wholesale Investor today to learn more about how we can assist you to raise capital and build your wealth.

About Warwick - w.pearce@wholesaleinvestor.com.au

Warwick is a chartered accountant and solicitor who has transformed four unlisted companies into companies listed on the ASX by managing the initial public offering or back door listing process from a legal, accounting and commercial perspective. He was also the Assistant Director of Corporate Finance at the Australian Securities and Investments Commission.

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