Tuesday, January 13, 2015
Raising Money In Tough Times: Easier Than You May Think
Turnaround Management Journal published an Article of Interest by John M. Collard, turnaround specialist, interim executive CEO, outside director, and private equity investor and advisor. Turnaround Management Journal is a publication of the Turnaround Management Society serving the International Business and Investing Communities.
www.StrategicMgtPartners.com/tmjmoney.pdf Formatted Version
http://turnaround-society.com/ Turnaround Management Society
Raising Money In Tough Times: Easier Than You May Think
By John M. Collard
Private equity funds use a 'funnel approach' viewing 1,000 deals to find 100 worth a deeper review, which result in one or two worth their investment. To present the company in the most favorable light the business operating plan must describe the opportunity to investors and what is in it for them.
I have yet to enter a turnaround situation that I didn't hear the owner or CEO or the board say that the answer to all of their problems is more money. While in some cases this is a real need, it is seldom the systemic problem within the company. Chances are that they have some work to do. Needing 'dollars' is one thing … being ready to raise 'dollars' is another.
There is an abundance of funding available in the marketplace for good deals. The key wording in this statement is of course "good deals." When a company is in trouble rarely is it considered a good deal without some fixing.
Don't be surprised when you come to the realization that the company isn't attractive to investors or lenders. This means that you have the opportunity to rebuild the company, or parts of it, so that it can be considered a "good deal." Build a company that investors want to invest in.
Buyers and Investors Look For:
- Businesses that create value. Consistency from period to period.
- High probability of future cash flows. History of performance and improvement, or the promise of cash. Lenders want their interest and the repayment of principal. Troubled entities must be on the mend and making progress.
- Market-oriented management team. Focus on producing revenue. Cost cutting is only a temporary fix, you must generate revenue to make growth viable.
- Ability to sell and compete; develop, produce, and distribute products; thrive and grow. Track record or demonstrated changes in the right direction. Make certain that the problems are fixed.
- Fair entry valuation. Realistic return potential is a must to attract investors.
- Exit options. Lenders want their interest and the repayment of principal. Investors want ROI multiples.
Once the company is rebuilding and perhaps restructured you are ready to raise capital. With technology available today the Internet can be a valuable resource to get in front of many interested investors. Approaching one investor at a time can be very time consuming. The risk of finding the right one early in the process is very high. Often the answer lies in casting a wide net to 100s and 100s of investors to solicit interest.
Private equity funds use a 'funnel approach' viewing 1,000 deals to find 100 worth a deeper review, which result in one or two worth their investment. Lenders go through a similar process. Be either #1 or #2.
To present the company in the most favorable light the business operating plan must describe the opportunity to investors and what is in it for them. Why will they invest in you? To finance transition the plan must detail how you are fixing systemic problems and will use the funding for that purpose. Treat the potential investor as your audience where the product is your company.
The Business Operating Plan Includes:
- Executive Summary. Catch the interest of prospective sources of financing. Position the company accurately and distinguish your concept from others competing for money.
- Business History. Who founded the company, when, capital structure, and progress to date. Openly discuss why the company is in trouble and why and how it is being fixed. What sound reasons support a change in performance — for the better.
- Product/Service. Define precisely what you develop and/or market. What customer need does your product satisfy and how? Why will customers buy from you? What distinct competencies do you offer?
- Market. Who are your customers? Why will they buy the product? Trends in customer purchases? How will you sell to the market? What are critical product characteristics?
- Competition. Identify specific competitors' strengths and weaknesses. Principal competitive factors in the marketplace? Where will your market share come from? How will you convince buyers that you are worthy of their trust?
- Marketing. Define strategy and chart the marketing direction for your staff. Give prospective investors confidence that you can convert ideas and assets into a strong marketing position and stream of profits. Be prepared to market why customers should trust your recovery. Discuss distribution channels, pricing strategy, promotion, and sales incentives.
- Manufacturing and Operations. What is the nature, quality, extent, and efficiency of production facilities. What is capacity and utilization?
- Management. Emphasize the experience and competence of the key management team members. What changes have been made, are planned and when. In a troubled company changes are required. How are executives compensated and incentivized?
- Financial Projections and Assumptions. Past, present, and future balance sheet, income statement, cash flow statements. Most importantly, investors want to validate your assumptions.
Your business plan is only as good as the intelligence and work you put into it and the uses that you make of it. The plan must persuade your team and prospective investors that your concept merits their consideration and buy-in.
Think about it, no one wants their investment or loan to pay for past sins. The capital infusion must be used to take the company forward. Address in detail why the company got into trouble, how you are fixing the problems, and how the new capital will be allocated to these efforts. How do you plan to handle, preferably avoid old obligations while rebuilding the company?
Three Step Approach to Get Results and Money:
- Send a personalized letter to solicit interest to many investors and lenders. Include a 2-3 page Overview of the transaction. This letter should go to 100s of potential investors. Email Merge works very well for this task.
- When you receive responses of interest immediately send a 10-12 page Executive Summary to detail the opportunity.
- For those with continued interest present them with a detailed Operating Plan including the assumptions and financial forecasts for use during due diligence investigations. Be prepared for their detailed investigations.
It is very important that the Overview, Executive Summary, Operating Plan, and due diligence all be prepared and ready, subject to revisions, before the Emerge process begins. When you attract an interested investor they will move very quickly. If you are not ready to respond immediately they will move on to the next opportunity in their funnel. Dedicate executives and be prepared to schedule personal meetings to answer questions and close the deal.
Most turnaround specialists will have a list of investors and lenders who are looking for deals, some have longer lists than others. These specialists can help the process of preparing the solicitation documents, perform the Emerge to locate investors, and negotiate the transaction.
Compensation for the money raising process varies by specialist, but there will be fees for preparing the process and a Finder's Fee upon completion of the transaction. Most specialists will use a Modified Lehman Formula geared to the size of the deal. One example of a Modified Lehman Formula might be 7.5% fee for first $1 million involved in the transaction, 6.0% for next $1 million, 4.5% for next $1 million, 3.0% for next $1 million, and 1.5% fee for the remainder of the transaction. Because there is a similar amount of work to locating financing for smaller deals as there is for larger ones expect the percentage fee to be higher for smaller deals.
It is not hard to raise money if you put the right tools in place and the deal is investable. Be the "good deal" and you will raise capital.
About the Author:
John M. Collard is a Certified Turnaround Professional (CTP), and a Certified International Turnaround Manager (CITM), who brings over 35 years senior operating leadership, $85M+ asset and investment recovery, 45+ transactions worth $1.2B, and $80M fund management expertise to run troubled companies, serve on boards, advise company boards, litigators, institutional and private equity investors, and raise capital. John has parachuted in as the Interim CEO or senior executive to turn around troubled entities, and serves as an outside director. John is Chairman of Strategic Management Partners, Inc. (410-263-9100, www.StrategicMgtPartners.com ) in Annapolis, Maryland. John is inducted into the Turnaround Management, Restructuring, and Distressed Investing Industry Hall Of Fame. John is Past Chairman of the Turnaround Management Association (TMA), Chairman of the Association of Interim Executives (AIE), and a Senior Fellow of the Turnaround Management Society. John is a Prince George's Business Leader of the Year. John was honored by the Association of Interim Managers with their Interim Management Lifetime Achievement Award. John was named Most Admired CEO in Maryland by the Daily Record.
About the Firm:
Strategic Management Partners, Inc. (www.StrategicMgtPartners.com 410-263-9100) is a turnaround management firm specializing in interim management and executive CEO leadership, asset and investment recovery, outside director governance, board and private equity advisory, raising money, and investing in and rebuilding underperforming distressed troubled companies. SMP rebuilds small business and mid-cap firms. SMP helps clients restore value to troubled companies, prepare entities for 'cash out' at maximum value, recover assets for fund investors, support litigation, and invest private equity into distressed opportunities. The firm has been advisor to Presidents Bush (41 & 43), Clinton, Reagan, and Yeltsin, World Bank, EBRD, Company Boards, and Equity Capital Investors on leadership, governance, rebuilding troubled companies, investment recovery, turnaround management and equity investing. SMP is celebrating 25 years of service to its clients. SMP was named Maryland's Small Business of the Year, and received the Governor's Citation, Governor Martin J. O'Malley, The State of Maryland as a special tribute to honor work in the areas of turning around troubled companies and saving jobs in Maryland. Turnarounds & Workouts Magazine has twice named SMP among the 'Top Outstanding Turnaround Management Firms'. American and Baltimore Business Journals named SMP among the Most Active Turnaround Management and Consulting Firms in Baltimore, Washington, and the Mid-Atlantic Region. Global M&A Network Turnaround Atlas Awards named SMP as Boutique Turnaround Consulting Firm of the Year. SMP is winner of Corporate Intl Magazine Global Award for Interim Management Specialist Firm of the Year. SMP is recipient of the Turnaround Management Firm of the Year by Acquisition Intl Magazine.
Strategic Management Partners, Inc.: turnaround managers ready to run troubled companies, recover assets from investments gone bad, advise boards of directors raise money, and investors on company viability in distressed situations. We provide strong interim and operational leadership, strategic planning, financial, defense conversion, sales and marketing acumen developed building organizations in large and small companies, including President of public & private middle-market companies providing solutions to Commercial, Federal Government, International markets. Enterprises range from start-up to $100+mil. Industry expertise: Manufacturing; Job Shop; Engineering Services; Computer Processing/Services/Software/Integration; Communications; Defense Electronics; Aerospace; Federal Government Contracting; Systems Integration; High-Tech; Finance; Marine Services; Real Estate Development; Construction; Fabrication; and Printing. Small and Mid-Sized businesses.
When in doubt, call a turnaround professional.
www.StrategicMgtPartners.com Turnaround Managers.
Turnaround Management Society
www.StrategistLibrary.com or Strategic Management Partners, Inc. Library
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Fixer-Uppers: Creating pre-sale company value Fixer-Uppers article
Steering Clear of the Brink. Early Signs Pinpoint Business Troubles Published by Journal of Private Equity
Outside Directors Offer Valuable Guidance, Contacts Published by Baltimore Business Journal
Is Your Company in Trouble? Published by Corporate Board Magazine
Managing Turnarounds in Times of Crisis Published by NACD Directorship Magazine
Managing Turnarounds Phases and Actions Published by RMA Journal
Collard on NewsReleaseWire
John M. Collard on LinkedIn at http://www.linkedin.com/in/JohnMCollard
John M. Collard on Facebook at http://www.facebook.com/JohnMCollard
John M. Collard on Twitter at http://twitter.com/JohnCollard
www.StrategicMgtPartners.com Turnaround Management Experts
John M. Collard
Strategic Management Partners, Inc.