Volume 9 | Issue 5 | Year 2006

In an ideal universe, companies grow and achieve vital corporate initiatives through ever-increasing cash flow. But the reality for most manufacturers, public or private, is that expansions and capital expenditures require an infusion of cash.

Aside from a multitude of microeconomic considerations specific to each enterprise, a constellation of macroeconomic factors enters into the decision-making process. Here are a few common-sense guidelines that may sound obvious, but are quite frequently overlooked.

• Create a comprehensive document that demonstrates how the initiative that requires funding is aligned with the company’s overall strategic plan. How exactly will the money be used and which strategic objective will it help to meet? This document serves three purposes. One, it shows investors, venture capitalists and lenders that the company has done its homework and has thoroughly researched its growth potential, industry and competition. Two, the plan will be the primary tool and map for orderly growth. Three, relating the current short-term objective to long-term strategy may show which type of financing is optimum in the long run.

• Establish precisely how much money is needed to accomplish the endeavor. Any attempt to raise a more or less arbitrary amount will always end in failure.

• Determine which type of financing works best – debt or sale of equity. If quick growth is necessary, raising money through the sale of stock may provide the best opportunity for fast action. However, wider equity participation implies a dilution of ownership, which may not be acceptable to some business owners.

• Provide accurate, timely and complete information to investors, including an honest expectation of return on investment.

Remember, timing is everything for investors. Their strategy is to make a large return by being the first in on a new venture. For this purpose, they want reliable, timely information so they can act before the crowds move in.

Never proceed with the planned venture until the full amount of necessary capital is in the bank. Becoming undercapitalized is a common and dangerous mistake. Many companies procure a portion of the capital needed and then rush into implementation in the hopes of raising the remainder along the way. In almost every case, the economy works against them, and the shortfall turns the entire project into an unrecoverable investment.

Also, never raise more money than needed to meet the objective. Selling more equity than necessary only serves to dilute the ownership position at a lower valuation. And in the case of debt, why pay interest on unneeded funds? As tempting as it may seem, don’t take all the cookies at once.

Jeff Stone is Managing Director, Crescent Fund, a Wall Street private equity consulting and promotional firm that provides corporate capitalization and investor relations consulting services. Crescent Fund manages a private equity fund and invests in private equity investments. For further information, visit www.crescentfund.com or call 212 509-3060.

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