Bruce Werner, a specialist in governance, strategy, finance, and M&A, who is also an author and experienced outside director at Kona Advisors LLC, discusses the challenges and solutions for growing businesses that need capital to fund their growth. He notes that while some businesses generate enough cash to fund their growth, others need to finance inventory and accounts receivable, which can be particularly challenging with Asian sources where the order-to-cash cycle can be lengthy.
Werner explains that businesses can finance their growth with profits, debt, or equity. When capital needs exceed cash flow, a combination of debt and equity is necessary, along with the right sources aligned with growth strategies. He provides case studies of three businesses that reshaped their capital structures for growth, including a service provider, distributor, and manufacturer, each facing unique challenges and finding innovative solutions.
The service provider example involved two partners who grew their business through acquisitions and struggled with mounting debt guarantees. After partnering with a private equity fund, they were able to rebuild their capital structure and receive the growth capital needed to maintain their revenue curve. The distributor example focused on two partners who secured financing from a bank to facilitate a buyout and support future growth due to their highly profitable business model.
The manufacturer case study highlighted a third-generation family business that needed to finance rapid growth as new distribution channels accelerated their growth rate. Recognizing the need for a capital partner, the business was recapitalized with debt and equity through a leveraged buyout structure, allowing them to keep up with demand and avoid losing market share.
Werner emphasizes the importance of finding the right solution for each business, based on its industry, growth rate, profitability, and capital-intensive nature. He suggests that business owners may need to slow growth, eliminate underperforming aspects of their business, or consider accepting a capital partner to overcome constraints to growth. Ultimately, picking the right people to partner with is crucial, as it can significantly impact the success and future growth of the business.
In conclusion, Werner advises business owners to carefully consider their options for financing growth, addressing profitability, capital structure, and the talent needed for success. He highlights the importance of strategic decision-making and finding the right partners to support business growth and development. It is essential for business owners to seek advice from licensed professionals when making financial decisions to ensure the best outcome for their specific situation.
