Why CEOs Need an Investment Banker When Raising Capital
For many business owners, engaging an investment banker or M&A advisor when selling their business is a no-brainer.
But when raising capital, many CEOs decide to tackle the process alone. We talked to Brooks Crankshaw, founder and CEO of Highland Ridge Capital, about why CEOs should be wary of approaching such a complex process alone.
Q: How far in advance do you recommend CEOs engage a banker before considering raising capital?
A: It depends on the company’s experience with respect to strategic planning and accounting. If the company is on the verge of significant growth, the banker should be consulted at an early stage, as that growth is beginning. Once the growth – and its positive trend – has been established, the banker can be engaged and the capital raise can begin. At a minimum, CEOs should allow 30-60 days to allow the banker to prepare the information memorandum and financial forecast. For companies that have not implemented a comprehensive accounting system, or have not taken time to chart their 3-year business plan, more preparation time should be expected.
Q: What are the most important ways in which bankers or advisors add value during a capital raise?
A: There are five main benefits of engaging a banker.
- Structure. The banker can assess the company’s strategy and financials to determine what capital is necessary, and how much service (interest, amortization, dividends) can be sustained. The structure also depends on market appetite for various tranches of the capital, from debt to equity.
- Presentation. Through the information memorandum, financial forecast, and marketing strategy, the banker can represent the company in the most positive (and accurate) light.
- Strategy. The determination of market acceptance and the selection of potential capital providers is critical.
- Negotiation. Assuming the strategy includes established investors, pricing and terms may vary with each investor’s unique focus. Reaching the optimal transaction depends on a banker’s knowledge of market conditions and ability to communicate the company’s requirements.
- Execution. Clearly, the successful transaction must reach a conclusion with funding the most efficient structure and pricing.
Q: Do you have a specific example of a way in which you helped a business owner prior to raising capital?
A: In a recent transaction, our capital raise strategy included a “staged” approach, securing senior debt first and adding layers to the capital structure as the company’s funding needs increased in parallel with its growth. Although this approach involved more execution time, it avoided initially “over-funding” the company, and allowed lower tranches of financing to work in concert with more senior layers.
Q: Are there any particular considerations a banker can help with for raising debt vs. equity?
“A balance must be found between a company’s ability to service debt, its risk tolerance for leverage, and the dilutive nature of equity.”
A: Of course, a balance must be found between a company’s ability to service debt, its risk tolerance for leverage, and the dilutive nature of equity. It requires a combination of financial and strategic considerations. The nature of each capital provider’s requirements affects the structure as well; for example, some debt terms may be preferable to equity terms, despite risk associated with leverage. A banker can help the CEO find the right balance, and the capital providers that fit with the CEO’s corporate culture.
Q: What are the risks of going it alone during a capital raise?
A: CEOs looking to complete a capital raise on their own may miss important aspects of a good transaction. A capital raise isn’t just about achieving the best price. It’s about achieving the optimal structure and efficient terms, as well as completing a transaction with a financial partner that can provide capital and other support well into the future. Good bankers know how to balance the multiple aspects of a transaction. Finally, CEOs often underestimate the amount of time and effort that goes into a good execution! Having a banker-partner to manage the heavy lifting can be a significant advantage.