By Richard Sexton
Owners of small-to-medium-sized businesses (SMBs) are constantly focused on growing their top line revenues while maximizing bottom line earnings. At some point in the lifecycle of an SMB, there is a need for additional capital to take advantage of opportunities and create strategic enhancements – whether that is reigniting declining revenues, expanding into adjacent markets, identifying new verticals for growth, or energizing core operations through sales and marketing initiatives, product development, and research and development.
Many business owners seek additional capital to source opportunities that are unattainable with existing funding sources, while others are simply seeking a buyer to facilitate a sale and retirement. My business is a capital provider that prides itself on strong core values focused on growing and building sound business relationships. Business owners choosing a capital provider should consider private investment partners focused on long-term profitability and returns for all stakeholders of the business, not those who fail to provide the guidance necessary or alternatively seek short-term returns.
Business owners are often looking to partner with capital providers who are specifically focused on the SMB universe with a mandate of driving long-term profitability. Capital partners in this segment are frequently on the lookout for businesses that have exhibited a strong history of generating stable cash flow from operations, have a durable business model, and operate in growing sectors of the economy. These capital partners are not just on the hunt for a “quick buck,” but rather hope to identify entrepreneurs and companies that are diamonds in the rough and have visions similar to their own, where there are opportunities to create a long-lasting partnership. The end result is maintaining core operations that have successfully shown profitability throughout the years while maximizing returns for all of an SMB’s stakeholders.
A traditional bank can provide capital, though oftentimes on a much smaller scale. However, banks don't provide the business owner strategic advice on maximizing earnings from operations. A traditional bank also lacks the ability to understand and quantify a complex business story that could otherwise result in providing sufficient capital to the entrepreneur and a realistic strategic plan. Additionally, and perhaps most importantly, a traditional bank will not purchase your company. Exiting a company or transitioning to retirement is a common path for lifetime entrepreneurs and traditional banks can't facilitate this movement.
The right financial partner should exhibit:
- A deep understanding of your sector, product, company, and capabilities;
- The experience to provide insights on a strategy to grow profitability, whether by expanding geographically, identifying acquisition opportunities, or focusing on operations;
- The ability to provide capital where needed to help your company maximize earnings from operations; and
- The ability to provide technical expertise and access to a corporate network that is beneficial to growth.
Finding the correct financial partnership for your business is a process. It is critical to look at this entity/person as a partner and someone that you respect professionally. They should demonstrate values that you find important. Don't go after the easy dollar and focus too much on the short-term economics of the relationship. Look for a partner inside of your industry or your professional social media platforms.
The more synergies that can be found between an entrepreneur and a capital partner, the greater success the business owner and its stakeholders will achieve.
Currently, approximately 18 percent of companies in the U.S. are backed by private capital, and that pool is only expected to grow over time as more baby boomers reach retirement age. As business owners explore options, capital partners focused on SMBs and those sensitive to profitability over the long run should provide valuable insights to organizations looking to achieve the next level of growth while providing the guidance necessary for future stakeholders.
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Richard Sexton is a principal at LDR Investments. He is currently building the deal infrastructure of LDR and consulting on senior executive projects.