Private Equity Educational Series

List of Episodes in Private Equity Educational Series

Episode 1 – What is EBITDA?

PRIVATE EQUITY UNCOVERED!

Many owners and entrepreneurs just can’t understand why financial experts and private equity investors use such fancy acronyms. Well, that’s why they get paid the big bucks! Anyway, it doesn’t have to be so confusing. If you need to know just one of these acronyms, EBITDA is the one you really should know.

In this first episode of private equity educational series, Roger Aguinaldo, the Managing Partner of Forest Hills Capital Management, deciphers in layman’s terms, with simple, clear examples, what EBITDA is and how it can benefit any owner or entrepreneur of a successful company, large or small.

Things You will Discover in This Episode:

What is EBITDA?

How financial experts use EBITDA

What owners should focus on in addition to valuation

Episode Transcript

A lot of owners and entrepreneurs hear that from financial investors or private equity firms or they might hear that from Wall Street. [EBITDA is] an accounting term that was made up [by these groups]. EBITDA stands for Earnings Before Interest Taxes Depreciation and Amortization. The reason why this was created was that financial investors on Wall Street really wanted a standard term or a standard format to measure cash flow.

Let’s see, what are the components of cash flow? Cash flow, of course, is the earnings. But you [also] add back interest. Interest could be the interest you pay for debt. So interest and taxes you want to add back to earnings to get cash flow. And depreciation and amortization are accounting items that are “non-cash” accounting items. Even though we subtract [them] out in the income statement, these non-cash items, you want to add the non-cash items back so you can have a better idea what the [firm’s] actual cash flow is.

Owners have personal expenses that potentially run through or non-recurring expenses that run through [their firm’s income statement]. You would then adjust [EBITDA]. So going forward, those Earnings Before Interest Taxes Depreciation and Amortization (EBITDA) would perhaps be higher.

A lot of financial investors in private equity take a look at EBITDA because they want to measure different multiples on that [in the valuation process]. A slow growing company could have an enterprise value multiple off of its EBITDA of anywhere between three to five times EBITDA. A moderately fast growing company could approach six to seven to eight times EBITDA. An extremely fast, a high -growth company could command a multiple in the ten to twelve range. Some of the fastest-growing [companies] can approach multiples in the teens; the company is growing that fast.

That’s one way to measure enterprise value. Once you have the enterprise value, you can get the equity value. Let’s take a simple example. If you have a company having $15M of adjusted EBITDA and they are not growing as fast, they perhaps have a four times multiple. So, $15M times four is $60M [in enterprise value]. Then you add the cash they have on the balance sheet. Perhaps it is $10M of cash. $60M [in enterprise value] plus $10M is $70M. And then you have to subtract off the debt [to get firm equity value]. If they have a debt $40M, $70M minus $40M is a $30M equity value.

There are certainly tons of other ways of valuing a company. This is a sort of the back-of-the-envelope, rule-of-thumb method that a lot of financial investors on Wall Street use. Of course they are also running discounted cash flow [analysis]. This is where you project out all the cash flows out of an item and then apply a discount rate to those cash flows to get a [discounted] cash flow value. And then there are comparable values. This is where companies look at not only comparables, as far as P/E comparables and revenue comparables, but also value by subscriber, by customer, by views, who knows? There are lots of different ways to value it. But, at the end of the day, you are going to look at comparables or market comparables [to answer the questions] “What are other companies trading for?”, “What are other companies selling for in the marketplace?”, and “What are the other market comps out there?” Whether it is three to five times EBITDA or seven to nine times EBITDA, they want to make sure that they are certainly not overpaying; everybody wants a good bargain, everybody wants a good investment.

As a company owner or entrepreneur, you of course certainly want the highest value you can get [for your firm]. But you should not only look at value. You should look at what the financial partner or financial investor or private equity firm is bringing to the table. They may be bringing other resources, other value-added services. Those are the things you should be looking at besides just the value of the company.

Episode 2 – Why Partner with a Private Equity Firm



Collaborating with a private equity firm can yield positive results for firm owners, entrepreneurs, and co-investors. Private equity expert and Forest Hills Capital Management Managing Partner Roger Aguinaldo utilizes his 25 years of experience in the M&A industry to explain these key value-adds. Aguinaldo clearly and cogently details how private equity firms provide much more than equity capital through their financial, sales, and operational competencies.

Things You will Discover in This Episode:

Why you should partner with a private equity firm

Contributing skills from private equity

Financial partners expertise

Episode Transcript

Congratulations! You have just received an offer from a private equity firm. Many firms don’t even get to this level. You’ve obviously designed your exit of your business, and somebody wants to buy it or somebody wants to invest along with you. They could make great financial partners because they are focused in on growing the equity of the business. They are [solely] focused in on being the investor in your business, while you are focused in on selling your product or service, you are focused in on developing, you are focused in on now, while your financial partner will be focused in on growing the equity of your business. So a private equity firm adds a lot of value to company owners and family- owned businesses.

You obviously have received quite a bit of money or some cash from [the sale of] your business that you are going to [now] invest on your own. But you still own perhaps 10, 20, 30 percent of your business, so you want to make sure that they have connections into the industry or connections beyond your industry. Maybe you are good at manufacturing or creating the product or service. But they perhaps can be good with the sales and marketing. A good financial partner not only brings money but also could bring business expertise. Maybe they are bringing some manufacturing expertise, maybe they understand Six Sigma or other types of manufacturing processes that they can bring to the floor that you may not know. They’re going to bring budgeting, they’re going to bring projecting, they’re going to bring cash flow management. They are going to bring lots of things, maybe CFO-level expertise that you may or may not have already in your business. They may bring capital-raising skills, capital-raising expertise. Perhaps you are about to go public or [want to] finance your business in such a way that’s most efficient. So, [financial partners bring] business process expertise, financial expertise, connections into the business world, and [can] manage an acquisitions program.

Mergers and acquisitions is more than a full-time job; it’s a full-time industry. As an owner or entrepreneur, you’re not always going to be out there focused on the types of businesses you want to buy and a financial investor or private equity firm would expect to bring a lot of expertise as far as mergers and acquisitions. They can be putting together the acquisitions strategy, finding the transactions, negotiating the transactions, helping to integrate those transactions, financing those transactions, bringing more money into the capital structure so that you can afford those transactions and do it right. You could do maybe one or two small transactions yourself perhaps if you know the industry very well. But a good financial investor or private equity firm can help you make a lot of those acquisitions and could probably make some of the larger acquisitions that you wouldn’t have been able to do [on your own]. And they help you to integrate [the acquisitions] and get all the expertise on-board in order for that to happen. Those are the [ways] that I think a good private equity firm adds value to any owner or entrepreneur or family owned business that is looking to partner with financial firm.

Episode 3 – What Happens After the Deal?

After selling their businesses, firm owners oftentimes face a great deal of uncertainty about their futures. Should they leverage their extensive expertise to help a new organization grow and achieve financial success? Or should they devote their energy to furthering the business community in other ways? How should they invest the proceeds gained from the sale of their firm and with whom?

In this second video of private equity educational series, Roger Aguinaldo, managing partner of private equity firm Forest Hills Capital Management, answers these thorny questions and more in “Secrets of Private Equity: What Happens After the Deal?” Aguinaldo explains the variety of involvement options available to firm owners, and clarifies the impact of non-disclosure agreements (NDAs) in the post-deal decision-making process. His clear, concise explanations will be of use to firm owners, students, and investors alike.

Things You will Discover in This Episode:

What happens after the deal

What is a non-compete agreement?

What happens if you are still involved with the company?

Episode Transcript

Congratulations, you have sold your company. You worked very hard, you built the company up, and someone was interested in buying your company or investing in your company. And now, what’s next [after] you have closed the deal?

Let’s say you have exited the company or you still have a small, slight investment in the company. Certainly, you want to work with a few wealth managers to manage your money. You do not have to put all in one pot–they’ll want you to put it all in one pot because of their asset allocation rules–but you can spread it out. I would suggest you spread it out to a few wealth managers to see who does best. [All utilize] an asset allocation portfolio strategy in which you diversify your portfolio.

If you have signed a non-compete with the company, you may not be able to go back into that industry for a few years; maybe that’s what you want. But if you do want to go back into the industry or invest your company into other companies that are related directly or indirectly-related to the business you just sold, you will want to make sure that the non-compete does not restrict you from doing that. So check with your lawyer if you are looking to get into the next stage of investing in other businesses within your industry. Obviously, you have quite a bit of knowledge in businesses. Sitting on boards, starting other businesses, investing in other businesses that are not related to your company just sold could be good idea[s] for you. [Here], you are not only giving money but you are also giving some expertise.

Know what level of business life cycle that business is in. Are they a start-up, are they in the growth phase, are they mature or are they in the [ownership] transfer phase (decline). I lean towards more later-stage growth and mature companies; those are always good investments. You can go in there and then you can perhaps put them back on the growth path with a little bit more energy, especially in your business expertise. Otherwise, you could just retire on the beach–maybe you don’t want to work anymore. But I would recommend…a lot of companies still need good minds like the business owner who have sold their companies. So sort of give back a little bit to the business community by sitting on some boards or being on the advisory board of a company and perhaps invest in some of those companies to make them get to the next level.

Obviously, you need to make sure that you are focused in on working with your financial partner. You could focus in on developing more of the products and the services, developing the operations of the business, maybe the sales and marketing and let your financial partner handle the finances or handle the equity portion, the helping you in grow your equity. Let them figure out how to do all of that. Those are the things that you could think about when [determining] what’s next after you sell your business.

Episode 4 – Why Co-invest with Private Equity Firms



While seeking to diversify their portfolio, family offices are looking into multiple investment opportunities. Should they invest directly in a firm, take higher risk and increase the chances of a higher potential return? Or should they devote their energy in co-investing with a Private Equity firm and increase their deal flow?

Forest Hills Capital’s Managing Director, Roger Aguinaldo, answers these questions and more in “Secrets of Private Equity: Why Co-invest with Private Equity Firms.”

Things You will Discover in This Episode:

Why Co-invest with Private Equity Firms

Why Should Private Offices Co-invest?

Benefits of Co-investing with a Private Equity Firm

Episode Transcript

Family offices are looking to diversify their portfolio. They have a portfolio asset allocation model that basically says that they have to have a certain number of stocks, a certain number of bonds and a certain percentage of alternative assets. There are quite a few endowments and pension funds that have been looking at alternatives to really boost up their portfolio return. But instead of just doing a private equity fund or hedge fund that invests indirectly, many family offices and ultra high-net-worth individuals are choosing–especially with their business background and good understanding of how businesses work– to invest directly into private equity deals or to co-invest in private equity deals not only because of the higher return, but also because, of course, they have the business acumen [to contribute]. When you have that business acumen, you understand how businesses work.

You know you need to see lots and lots of different deals. You may not have the time or may not have the connections to see lots of different deals. A lot of these private equity firms, especially some of these independent sponsors who are bringing these deals and putting it altogether are going through all of the bad deals so you don’t have to go through the bad deals. And then they are [also] vetting all the deals so that only the good deals come to you and they structure them. There are a lot of different steps: meeting the CEO, doing a lot of due diligence, etc.. A lot of family offices don’t have the infrastructure to invest directly into businesses. Working with a good private equity firm that you know and you trust and has a good deal usually makes a lot of sense.

Co-investing with a private equity firm certainly saves you a lot of time, brings you the deal flow, and also (depending on the situation) you can save a little bit on fees versus working with a private equity fund in which you are a limited partner. Those are the reasons why co-investing into a private equity firm directly on deals makes a lot of sense.

Episode 5 – How to Prepare Your Company for Sale



Are you planning to sell your company? Watch this video to know how to get your company prepared for the sale and whom you should hire for the particular purpose.

Things You will Discover in This Episode:

How to prepare your company for sale

Who do you need to hire?

Difference between cash and accrual accounting

Episode Transcript

One of the first things you should do when you are preparing your company for sale or exit is to make sure you hire the right trusted advisors. [It is like], if you will, [hiring] a surgeon for your procedure. You wouldn’t hire a foot doctor to heart surgery. It’s just as simple as that.

Mergers and acquisitions is a specific field that [select] lawyers and accountants focus in on and are good with. A good accountant is going to put you on the right program and sometimes it could take six months to eighteen months in order for you to get all of your books in order. Your accountant should make sure that your numbers are at least reviewed, but it is always better [to have them] audited. Audited means GAAP financials–that is Generally Accept Accounting Principles– on an accrual basis versus cash basis and make sure all your financials are in order. And you want monthly financials, not just yearly financials. You should make sure that you at least track all your numbers on a monthly basis.

So you have a good accountant and now you want to make sure that you have a good lawyer. Typically, you will get some lawyers who’ve done private placements or mergers and acquisitions and they will sort of design for you a private placement. That’s not what I am talking about. I am not looking for companies or actually lawyers that will sell you on a private placement. Yes, you might end up doing a private placement, but first, work out that deal and then hire the private placement attorney. What I am talking about is an attorney that is going to go in there, analyze your business, look at all the skeletons in your closet, if you will, look at all the personal things that are going through your business and clean all of that up. [They will] really professionalize your business such that when a potential seller or investor goes in there, they are not going find anything that is surprising, they are not going to find anything that is inappropriate in your business. [For example], you don’t want to deduct unrelated business expenses out of the business that you are preparing to sell.

So, okay. You got a good accountant, you got a good lawyer. Now you may want to hire an investment banking firm or investment broker who is going to look at your business and position your business for sale. And yes, they may get you the highest price for your business, but you may want to go to them because they have some expertise in positioning your business such that it is sellable, it is investable. They could be a good complement to your accountant and lawyer. However, you may want to [sell your firm] directly or you may already have a private equity firm or financial investor or strategic investor that is already looking at your business and you do not necessarily need an investment banker to do an auction process for you. [In this scenario], you just may want to have the investment banker represent you instead of having an auction process. An auction process is basically hiring an investment banking firm that is going send it out to hundreds upon hundreds of potential buyers for your business. And that may not be what you are looking for; you may only want to be talking to one or two firms at the end of the day. So if you are comfortable with a private equity firm or a financial partner that has either approached you or you approached them, continue to work with them. If the valuation is not there, you will be able to negotiate either a higher price or a price that is aligned with market. At the end of the day, your business is worth what somebody pays for it and that’s the value of the business. Those are the things to help you prepare your company for sale.

Usually businesses run cash in or cash out [and] it does not matter exactly what the cash comes in or goes out. But that does not necessarily mean that the money [in question] is earned. Accrual accounting recognizes revenue when money is earned [and] recognizes expenses when money needs to be paid. And that’s really the biggest difference. One example is the deliverable on the product is in August and you receive that money in December of the previous year. So, for a cash basis, you receive and [recognize] that money in December of the previous year, while on a revenue basis you actually could only recognize that revenue in August of the next year. That would obviously affect the amount of taxes you pay on the previous year if you are on a cash basis. If you are on an accrual basis from a tax perspective, then you need to recognize the revenue in the next year.

Episode 6 – Best Practices for Independent Sponsors



Do you want to know the best practices for independent sponsors? Watch this video to know the success strategies for independent sponsors,

Things You will Discover In This Episode:

Success strategies for independent sponsors, #1: Continuous deal flow

Success strategies for independent sponsors, #2: Collaborate with other private equity firms

Success strategies for independent sponsors, #3: Identify your equity sources

Episode Transcript

Well, congratulations. You have made the decision to become an independent sponsor, an independent private equity sponsor. That probably means you have a transaction that you want to be a principal in, that you want to get investment in. You no longer want to only be the advisor in the transaction.

Number one, it is always important for any independent sponsor to have a continuous flow of deals. You might say to yourself, “Of course I have a continuous flow of deals. That’s why I am doing this.” Well, you may be busy closing your deal, but if you are not marketing your company for continued transactions, then three, six, nine months down the road, you are not really looking at anything.

Work with other independent sponsors, work with other private equity firms; there is always a whole bunch of deals that are going on. Work with other M&A bankers that always have a good flow of deals. And, of course, work with your own networks. I think your network is very important, going out to them and saying, “Hey I am looking at transactions, I am looking at deals.” And of course, they are going to want to see your track record, they are going to want to see what you’ve been involved in, they are going to want to make sure that you can actually, at the end of the day, close the deal.

You need the capital in order for that [deal] to get done. It’s not enough to be able to raise debt capital, you have [also] got to have the equity capital. I always say that if you are a dollar short at the closing table, you are not closing that deal. Make sure you have more than enough money from equity partners or family offices or other private equity firms [or] perhaps other investors that you can get your hands on if it’s a good deal. And if you have a good deal, you should not have a problem raising the capital for it.

The number one thing as an independent sponsor you want to make sure [of] is, if you are starting your career in this, is to continue generating that deal flow. Generating that deal flow is extremely important. Knowing how to continually generate that deal flow, knowing how to continually generate more deals and more transactions, that is going to be the key in getting your career started in private equity. Work with a private equity firm that can perhaps give you the infrastructure, give you the capital that you need, because the most important thing is the deal flow side. You can work with the private equity firm that has the capital, has a committed pool of funds, and knows the M&A transaction, you can work something out or negotiate something with that private equity firm in order to get your deal closed. So, congratulations, you are choosing to become an independent sponsor.

Episode 7 – The M&A Process

Things You will Discover in This Episode:

Preparing your company for sale

Term sheet

Due Diligence process

Documentation

Closing and integration

Episode Transcript

Just like in your own business as a company owner, or entrepreneur, or family owned business, you have a business process in order to create your product or service. Same thing in mergers and acquisitions. Mergers and acquisitions is an industry. Mergers and acquisitions have professionals that bring a company through the process of how to prepare itself for sale, selling the company and then closing the transaction.

First step, of course, is preparing your company for sale or for investment. You will be surprised that how many companies go right to market and they are not prepared for sale. And that could cover a whole range of things, like getting your books in order, hiring the right experts in it, getting your structures, your legal structures in order, just really preparing your company for investment or sale.

So, congratulations. Now, you have someone interested in your business after you have prepared the company for sale. They wanna give you an offer for that and you expect what’s called a Letter of Intent or Term Sheet. Much of that term sheet is not legally binding. But a buyer or investor in your business would, perhaps, want a couple of things that are binding for a legal perspective. One of them being confidentiality. The terms of the offer and the terms of the transaction. Sometime, you, as an owner, don’t want the market to know that you are up for sale. So, you may wanna keep all of that confidential. Second thing in the letter of intent is an exclusivity. Pretty much as for the benefit of the buyer or the investor in the business. They are gonna be spending a lot of money looking into your business. They want to make sure that other people, other financial investors or other strategic investors trying to sell your business to them while they are spending a lot of money in the due diligence process. After the letter of intent stage, you have an executor assigned by both parties. Then it goes into the due diligence process.

It’s a way for the buyer to really get to understand your business, get to confirm everything you’ve said during the process and understanding your company is in order. You know there is a number of things that can happen, that could perhaps, you know, change the deal a little bit depending on what was found. But if you did a great job or a decent job of preparing your company for sale, there should be no surprises. This is also an opportunity for the buyer to understand how to grow your business which employees could be managers in the business. So, this is a great time for the buyers to due diligence. And also as a seller or an owner of a family owned business, this is a way for you to do the due diligence on the potential buyers, especially if you have a role going forward. So, do use the due diligence time to figure out whether and how you work.

After a confirmatory due diligence is completed, that usually is the time when documentation or the purchase of sale agreement is going to be drafted and negotiated. So, you negotiate with that. You figure out the terms, the indemnification. If you have a good deal lawyer, they gonna be looking at making sure you are indemnified. From documentation of the purchase of sale agreement, you gonna figure out whether it is an asset for sale or stock sale, usually you figure that during the letter of intent and that’s an act to the pot. And then you negotiate the management contracts, especially if you are staying on consulting your arrangement so all of that is negotiated. After all of that is put together or everything is a OK, the buyer has all the money put together, perhaps there was a financial contingent in the letter of intent which basically means that the buyer has to make sure that they can raise the money from the depth perspective into the company and that also has dealt with financial due diligence that has a good account to do some financial due diligence in there. And that’s when in there all of that is completed, then you close the transaction, and then you’re going into the integration of the company.

Your remaining with the company, that’s a good way to figure out whether you need initial management, how you integrate with the various aspects of the new company or the new organization. So, from preparing your company for sale, having a letter of intent, conducting confirmatory due diligence, preparing the documentation in the management agreements, and closing the sale. That is the process of a M&A transaction.

Episode 8 – Business Life Cycle

Things You will Discover in This Episode:

Business life cycle components

Ranges in business life cycle

Private equity vs. venture capital

Episode Transcript

Just like human beings, businesses have a life cycle as well. There’s birth, there’s growth and then there’s maturity. Same thing with the business. Business has a life cycle as well. Many owners, entrepreneurs actually, really, they know this indistinctively. But academically, we know that businesses have a life cycle as well. There’s startup phase, there’s the growth phase, the maturity phase and then there’s the transfer phase.

The startup phase where you kind of work your way through a business, you understand what the business, you have a vision for the business, you develop the product or service, think about how to manage the business, set up everything, set up the computer, set up the internet, open your website. All of those things starting up a great business idea. Many businesses, perhaps, fail during that. But a lot of businesses, those successful ones, make it on to the growth phase. And that’s really tend to sky rocket their growth.

So, in the growth phase, that’s where you, perhaps, generate a lot of customers, a lot of suppliers, develop more of your products or services, figure out what your business model is and figure out does your business model work. The growth phase is obviously a very important phase. You are developing growth models. You are growing very fast and that’s really the value of your business really takes a shape from there.

And then in maturity phase, you can still continue to grow. But you are not growing as fast as in the growth phase. So, in the growth phase goes in to the maturity phase. In that maturity phase, this is where some owners say well, you know, I’ve proven myself, I’ve proven the businesses as fast as I can take it and now I want to exit out of the business. That’s is the transfer phase.

Now, I want to exit out of the business. Perhaps, some value, monetize the value that I built up into and now I want to transfer or exit out of the business. Usually, entrepreneurs have a level of which of the growth they can get to and they need a financial partner or strategic partner to get them to the next level. And then now they transfer the business and now they are back on to the growth phase of the business.

This is sort of a rule of thumb more than that’s a rule of period. So, the rule of thumb is you got the lower mid-market, you got the middle market, you got the upper middle market, and then you got the large market of the businesses. The large market are perhaps $2 billion in sales and above. And then there’s the upper middle market, which is from $500 million in sales up to $2 billion in sales. Then you have the middle market, which is around $100 million in sales up to about half a billion in sales. And then anything under a $100 million in sales is the lower-mid market. Usually companies in the lower-mid market are in the startups, growth phase, companies sort of in the middle market, upper middle market are in the more mature transfer stage. And then of course if you go on the upper market, you are usually on the transfer phase and not going as fast. And then also you have different advisors set at each stage. There are some advisors, as for bankers or private equity firms that target the different lower middle or upper middle markets and they like targeting lower middle market. There are private equity firms that focus in the middle market and there are some private equity firms that focus in the upper middle market and of course on the large market. And each of private equity firm or investor specializes in those ranges. So, that’s very important at all.

Where as private equity focuses on size of companies, venture capital firms usually focuses on the business life cycle. So, private equity focuses on the mature and transfer stage of a business life cycle. Venture capital more-so on startup and growth phase of the business life cycle.

Episode 9 – Why Debt is Bad

Things You will Discover in This Episode:

Debt accumulation

Debt alternatives

Sources of equity

Episode Transcript

So, you’re driving down the highway, listening on the radio, many company owners, entrepreneurs, and you air an advertisement that basically says, from your local bank it says, “Borrow money from us and grow your business.” Get a line of credit, get an equipment loan, etc., etc. So, borrow money, borrow lots of money and grow your business. Too often, company owners and entrepreneurs think that the easy way out to raise money and sometimes it is if you have a good relationship with the bank and they are willing to loan the money. Sure, that’s a great source of capital to grow your business. However, too often, owners and entrepreneurs borrow the money and then they feel that now they have had a lot of money can pull that money out and be themselves dividends. I have seen this a lot. This is a really wrong way to go.

When you borrow money the bank wants the principal and interest payment. If your cash flow cannot support that principal and interest payment or even it does, you are paying interest on that money. Then you might say why. There’s a lot of interest and I can invest in this project. And if it works out, great! I didn’t give up any ownership in the business. However, if it doesn’t worked out great, you still owe that money. What happens, perhaps, is if project doesn’t work, you sort of get addicted to the debt. And then the debt accumulates and then the bank again still wants their principal and interest and you must pay that back. And if you don’t make the debt payment, then what happens. Then the bank forecloses on you and then closes down your business, ownership business. So, be careful when raising bank debt.

Federal alternative to raising bank debt is to perhaps work with the financial partner, whether it is a private equity investor or high net worth individual or family office, to invest in your business. So, on the equity side, you grow your company not through debt. You actually grow your company through equity. And there are two sources of equity. One is the investor equity which I have just talked about. The other is profits. Too often, your accountant may tell you, “You are making too much profit, you gotta spend it.” Now, what happens is owners choose to spend the profit on something unrelated so that pull the money out of the business and perhaps invest in real estate. Pulling profits out of the business may not be the right avenue for you to take. What you wanna do is to take the profits and invest it right back into your business to grow the business. So, if your accountant says you are making too much money and you need a more tax write-offs, what you need to do is pull the money out, take the profits and think about, strategically think about how you gonna grow your business. Grow your business through equity, either profits, and or an investor, whether it’s a private equity or an angel investor or strategic investor coming in there or family office coming in there, give you equity to grow your business. So, to wrap up, you don’t grow your company through debt. You grow your company through profits. You grow your company through investors. So, equity capital is what you need in order to grow your business to shoot it up faster, grow up faster and then grows it faster than debt will ever grow your business.

Episode 10 – Raising Capital (E.V)

Things You will Discover in This Episode:

Raising capital from the bank

Raising capital from family & friends

Raising capital from the angel investor

Raising capital from the professional investors

Market ranges

Raising capital from the alternative sources

Episode Transcript

If you are an owner or entrepreneur, you are always looking for ways to raise capital. Or maybe, not always but sometimes you are looking for places where you can get a little bit capital or foreign investors to invest in your business.

You might go to a bank to borrow some money to help grow your business. That’s not always the best way to help grow your business because the debt can be a big hindrance upon your growth because you have to pay the bank and you have to pay interest and if you don’t have enough margins or you are not making enough money, the bank is still gonna want to have their principle of interest payment. And if you don’t pay that, that could be even worse. And then they also want you to personally guarantee that loan or that working capital line. So, if you can’t go to the bank or for bank debt isn’t really that you should be getting because it’s a little bit of more risky for the bank at that level or that time in your business.

Then you may wanna go to family and friends or even your own pocket and some institutional investors actually like to see family and friends investing in your business. Because family and friends don’t believe in you, how is someone else going to believe in you?

Angel investors are people or individuals, perhaps some high net worth individuals that actually like to invest in businesses and help businesses grow. Good angel investor also provides not only money but perhaps some networking or connections and some industry resources that might not be able to get. So, angel investors is also the path way to raise money.

Professional investors are gonna want a good return on their investment, not in the range of 10-20 percent. They gonna want some more because their risk is still pretty great. And these professional investors, whether it’s venture capital or private equity, are gonna want to see a return even more so than the angel investors or wanna see a big return on their investment. So, you gotta have some sort of stability in your business and you gonna have growth. Venture capital firms, they are gonna see your great ideas, whether the next Google idea or the next Apple idea. So, if you company is only growing moderately or it’s an idea that’s only gonna make a couple of million dollars, not really be the billion dollar idea, I think you might wanna think of something along with the private equity line. They are in the lower-mid market or middle market. But private equity, if you are mature company, you will have a certain amount of sales, then you have proved the model, then private equity could be a good way to raise money or get some capital for your business.

Your customers could be an avenue for financing. They already have believe in your company. Perhaps, may be not, indirectly into your business, but indirectly the joint ventures or strategic alliance or they may wanna fund some capital into your business to get their project done because you have the expertise. Don’t rule out your customers as an avenue to raise some capital for your business. Also, think about suppliers to raise some capital in your business. So, suppliers, again wanna sale their products or services to you. So, supplier can potentially be an investor into your business or either strategic alliance or joint venture. So, don’t count them out as potential investors in your business.