Fund Raising – On the Buy and Sell Side!

One recurring theme in recent weeks that we are seeing in the news, as well as in our business interactions is  the continued need for small to mid-sized businesses to obtain funding. “Whereas we have seen banks being more prepared to issue loans these days throughout the region we serve (the corridor generally stretching from Albany to Baltimore), we also have seen many business owners not finding the banks in a lending “mood” and thus, continuing to have challenges in meeting the financing needs for their business,” says Achim Neumann, President A Neumann & Associates, a New Jersey based M&A advisory and business brokerage firm. “As a matter of fact, quite often we are approached by a business owner with the need to search for an investor to inject much needed equity capital into a company as an alternative to debt funding”.

Moreover, a recent article in the Wall Street Journal, Loan Scheme Delivers Blow To Small Business, underlines the challenges many businesses face in raising funds. Said article outlines several challenges, including what is called “Advanced-Fee loan Schemes”, and the often dishonest agenda of questionable loan brokers.

“We have seen quite a few (buy side) investors try to raise funds for acquisitions by way of advanced fee loans,” says Frank Arcoleo, Managing Director of A Neumann & Associates, Lancaster, PA. “essentially, such investors try to leverage the acquisition, and their targeted returns, by raising debt. However, we have been cautioning such buyers again and again to be very diligent in evaluating their sources.”

Still, the increased number of requests for help in finding suitable investors seems to indicate the need on the side of current business owners to expand the scope of capital raising venues. Said owners have often exhausted their traditional banking relationships and their existing banking partners – banks, due to a potential internal policy change might not be willing to lend to a certain company anymore, or perhaps have decided to withdraw from a particular market segment altogether, for example, the logistics and trucking market.

“It is in their need to raise funds that these business owners approach our firm for the services we provide,” says Michael “Mick” Feite, Managing Director, Doylestown, PA. ”for us,  the sale of a whole company or a portion thereof, are essentially  the same process.”

To improve the probability of success and speed the process, the first step is to preform an appraisal (what is commonly referred to as a “valuation”) through a national independent accredited valuation firm, thus, establishing a Fair Market Value for the entire entity. Then  the business owner needs to determine how much money is to be raised by selling a certain percentage of the company. In taking on an equity investor, it is important that the business owner feels comfortable in entering into a partnership, whether it be on a majority or minority basis.

Once such decisions have been made, A Neumann & Associates, will then access its deep pool of investors searching for “passive” investment opportunities.  With an abundance of available liquid private capital seeking suitable investments, this process can usually be completed within three to six months.

Needless to say, that the actual matching process in a partial acquisition (equity investment) might be a little bit more challenging than a full sale due to the compatibility requirements between the business owner’s objectives and the investor’s objectives. For example, a business owner seeking a long – term capital injection to continue growing the business would most certainly be in conflict with an investor’s objective to sell the company in three years at a premium.

On the other side, companies with an established and disciplined financial reporting system, formal management structure, and proven growth record with nice margins, will not have any challenges in finding the right investors.

For a thorough discussion, and to learn more about opportunities in finding investors or investing into a business, please contact any one of the firm’s Managing Directors or visit us at our upcoming workshop on June 19, 2014 at the Double Tree Resort By Hilton, Lancaster, PA.