How To Raise Capital To Buy A Business
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Instead of sinking time, money, and energy into the high-risk environment of a startup, acquisition entrepreneurship offers the opportunity to purchase a successful existing business, and utilize your entrepreneurial skills to grow and develop that business.
If they can succeed in raising the finance to pursue their startup idea, you can finance the far less risky move of buying a business. Although brokers typically want to see a few hundred thousand in available cash, the nature of buying an existing business makes it much easier to gain access to capital.
Raising money from a bank also means that you get to own 100 percent of the company yourself. If you require investors or other backing for the initial equity infusion, you have options. You can bring on partners, raise from friends and family, or pitch family offices or angel investors who will be attracted to the better economics of existing companies as opposed to startups.
Babson College statisticians reported through the Wall Street Journal that the average startup in the US kicks off with $65,000 in invested capital. Similarly, the average down payment on a home for the last three years was approximately $57,000, with the twenty-five counties experiencing the biggest increase in millennials averaging $66,174. So, whether people are starting a business from scratch or buying a house, they are investing somewhere around $65,000.
Because companies under about $10 million in revenue tend to sell for lower multiples than middle-market or publicly traded companies, a $65,000 investment, paired with a 90 percent loan backed by the small business administration, could buy a company generating over $1 million in revenue, immediately launching an acquisition entrepreneur into the role of CEO of one of the largest 4 percent of companies in the US.
There are a lot of assumptions in a back-of-the-napkin calculation like this, but the goal is to illustrate that an investment similar in size to starting a business from scratch or buying a house can instead be used to acquire a sustaining business generating profitable revenue with an existing infrastructure. There will be additional costs, but it is absolutely achievable to acquire a company of this size with less than $100,000.
After ten years of hard work and sleepless nights to get the company to $5 million in sales, the founder of Seattle Software (the disguised name of a real company) was convinced he could hit $11 million in the next three years. All he needed was cash. Ten banks refused to extend his credit line and advised him to get more equity. He met a lawyer at a seminar for entrepreneurs who said he would take the company public in Vancouver or London and raise $2.5 million fast. The founder was tempted to sign him on.
Texas Industrial (again, disguised) had grown from an idea to a $50-million-a-year leader in the industrial mowing-equipment business. The company wanted to keep growing and in 1987 decided it was time for an initial public offering. The underwriters agreed. They started the paperwork and scheduled a road show for early November.
Entrepreneurs should not be afraid to seek the money they need. Though they may be setting sail on dark waters and will always be at a disadvantage when negotiating with people who make deals every day, they can take steps to ensure that they get the capital they need, when they need it, on terms that do not sacrifice their future options. The first of those steps is knowing the downside of the fund-raising process.
The lure of money leads founders to grossly underestimate the time, effort, and creative energy required to get the cash in the bank. This is perhaps the least appreciated aspect of raising money. In emerging companies, during the fund-raising cycle, managers commonly devote as much as half their time and most of their creative energy trying to raise outside capital. We have seen founders drop nearly everything else they were working on to find potential money sources and tell their story.
Performance invariably suffers. Customers sense neglect, however subtle and unintended; employees and managers get less attention than they need and are accustomed to; small problems are overlooked. As a result, sales flatten or drop off, cash collections slow, and profits dwindle. And if the fund-raising effort ultimately fails, morale suffers and key people may even leave. The effects can cripple a struggling young business.
The point is not to avoid using outside advisers but to be selective about them. One rule of thumb is to choose individuals who are actively involved in raising money for companies at your stage of growth, in your industry or area of technology, and with similar capital requirements.
How fast the investor can respond is sometimes another crucial variable. One management group had four weeks to raise $150 million to buy a car phone business before it would be auctioned on the open market. It did not have enough time to put together a detailed business plan but presented a summary plan to five top venture capital and LBO firms.
Yet another entrepreneur had a patented, innovative device for use by manufacturers of semiconductors. He was running out of cash from an earlier round of venture capital and needed more to get the product into production. His backers would not invest further since he was nearly two years behind his business plan.
An entrepreneur and one of his vice presidents held simultaneous negotiations with several venture capitalists, three or four strategic partners, and the source of a bridge capital loan. After about six months, the company was down to 60 days of cash, and the prospective backer most interested in the deal knew it. It made a take-it-or-leave-it offer of a $10 million loan of 12% with warrants to acquire 10% of the company. The managers felt that while the deal was not cheap, it was less expensive than conventional venture capital, and they had few alternatives since none of the other negotiations had gotten that serious.
Yet the entrepreneurs were able to hide their bargaining weakness. Each time a round of negotiations was scheduled, the company founder made sure he scheduled another meeting that same afternoon several hours away. He created the effect of more intense discussion elsewhere than in fact existed. By saying that he had to get to Chicago to continue discussions with venture capitalist XYZ, the founder kept the investors wondering just how strong their position was.
Deals are structured many different ways. The legal documentation spells out the terms, covenants, conditions, responsibilities, and rights of the parties in the transaction. The money sources make deals every day, so naturally they are more comfortable with the process than the entrepreneur who is going through it for the first or second time. Covenants can deprive a company of the flexibility it needs to respond to unexpected situations, and lawyers, however competent and conscientious, cannot know for sure what conditions and terms the business is unable to withstand.
They should however, be prepared to invest the time and money to do a thorough and careful search for capital. The very process of raising money is costly and cumbersome. It cannot be done casually, nor can it be delegated. And it has inherent risks.
The question may seem daunting, but there are more ways than ever to raise capital for business ventures. From loans or pitching to investors to discovering money within your own network, this article will lay out the multitude of options available to secure funding for your business.
For entrepreneurs, bootstrapping is a mix of self-funding their venture and ensuring that the initial costs of launching the business stay as low as possible. This allows an entrepreneur to make smart growth decisions in line with what is financially feasible so that their business can maximize its revenue potential.
Bootstrapping is the most cost-efficient way to start a business, but going this route will mean that more of the onus is on you (or you and a small team) to fund the business and get it off the ground.
The beauty of online businesses is that they are perfect for bootstrapping. Monetizations like Amazon Associates, display advertising, dropshipping, info courses, Amazon KDP, and service-based businesses are all scalable with little upfront investment required.
Crowdfunding has hidden benefits for would-be online entrepreneurs. A well-developed campaign could also be used as a soft launch of a product-based business. For example, crowdfunding could be used to launch a new product or design in the eCommerce space. If your campaign is successful, you confirm the demand for the product you want to sell and already have the customers and sales in place for the business to go live.
Venture capital (VC) is sometimes looked at as a step above angel investment, as it is more closely linked to traditional private equity. VC is typically managed by a firm where the money is invested by limited partners and managed by general partners.
If you already have skills and expertise in running a business, you can create a partnership with investors. Your expertise may be in running operations, which would make you the perfect partner for someone with money but no operational expertise. One person funds the business, the other person runs the business.
This kind of investor relationship works well for high-net-worth individuals who would like to get involved in a part of the business they are investing in but are unable to do it alone. On the flip side, entrepreneurs with tangible skills to scale a business can focus on what they do best with the capital they need to run their enterprise.
This same approach could be applied to the search fund model, where you offer your operating expertise to raise capital from investors and then acquire a business that fits the investment and experience criteria. This is slightly different from the previous model but is still a working partnership where the investors can be more of a co-founder in the building of a business. 59ce067264