Posted on: Fri, 12 Mar 2021
SMEs should not wait until they are heavily leveraged to start thinking about optimizing their capital structure. This has a tendency to destroy value for the business owner over the long term.
As we have time and again observed in the Private Equity space, by the time SMEs are thinking about external equity capital injection, it’s normally under great duress. This pressure comes when the balance sheet is already heavily geared or leveraged, and the resulting impact of high debt service is beginning to affect earnings. The business is now forced to survive on overdrafts or other short-term borrowing facilities. By this time, the entire organisation is moving at a very fast pace, trying to make things happen, mostly fighting to meet various obligations as they fall due. In most cases, meeting working capital needs is already problematic at this stage, so the appetite for short term financing is also very high.
As the business continues to operate this way, it becomes increasingly challenging for the founders to strategically think about how best to optimise the company’s capital structure, leave alone thinking and planning for organic growth. There is no sufficient time to ensure that the right equity partner is identified and brought on board not just to provide the capital injection, but to ensure that they are the best match for the business both in its current phase and in the long term.
The business is forced to partner with any capital provider that comes along and shows interest because the pressure of piling debt burden is high. Chances of high pricing, poor deal structuring, capital providers mismatch and potentially value destruction overtime is very high. The entrepreneur ends up getting the short end of the stick.
It is every business founder’s dream and desire to grow a sustainable business that continues to create value for generations. This is achievable with the right partners providing capital resources at the right price and at the right time in the life of the business.
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NewThu, 26 Jan 2023
When building a business sometimes you have all the ideas and plans in place but you lack only one critical ingredient, funding. That gap can be plugged in by bringing investors on board, but the question is how do you prepare for that process?
With a better understanding of the capital needs of a business, through its various life-cycles, operators will be able to make decisions that maximize the company’s value.