Raising Finance – Preparation is key
At SA Law we’re not afraid to be honest, and I think we all agree that over the last few years the M&A market has been sluggish. However, we are pleased to report a significant increase in the volume of instructions we’ve received on good sized deals that demonstrate renewed confidence in this previously delicate discipline.
We have also received a noticeable increase in clients requesting advice and assistance on the various ways to raise funds with the intention of growing the business to expand, making strategic acquisitions or maximising potential with a view to a structured exit strategy.
We are fortunate to have links to a number of organisations that offer different types of fund raising opportunities, from banks to business angels to private equity houses. The consistent message from all of these is that raising finance is an exciting opportunity but you need to be focussed and adopt an approach that is going to be complimentary to the business.
Raising finance will normally involve the introduction of a new party to the business and receiving investment may require a change in the share capital of the company and the ability to work within the parameters required of the new party.
A variety of factors will influence a business owner’s decision in terms of how to raise finance and we recommend that all clients work with their accountants to determine the best way forward. If a business is unable to fund its requirements out of existing resources then the main options will be to either borrow the money or issue equity in the form of shares.
Borrowing money from a bank or similar institution has been seen as more difficult given the recent climate but if this is the preferred route then business owners should not be afraid to approach their bank to discuss available options. One thing to consider is that bank debt (or any other type of debt) is likely to include interest payments, which may be higher than expected but the business’ accountant can advise as to whether these may be tax deductible from profits.
Receiving funding from an institution that will require equity (shareholding) is likely to require payment of a dividend and will have an effect on shares and potential dilution of shareholding and capital growth. However, this can be an invaluable way of implementing growth with an injection of funds and direction from investors that are experienced in this area of business.
When looking at the options available for your business, consideration should be given to factors such as:
- current levels of debt;
- existing restrictions in corporate documents that may limit the amount of debt that can be incurred without the consent of a third party;
- the availability and overall cost to the company;
- the response of the shareholders; and
- the impact on the company’s tax considerations.
A company should not jump into any decision without analysing all of the implications with its professional advisers.