BANK OF AMERICA MERRILL LYNCH ARTICLE

Understanding different sources of capital can help business

owners make the most of “trigger points,” the make-or-break

moments that can determine a company’s growth trajectory.

Acquiring a competitor, expanding into new markets, hiring more

workers and upgrading equipment are examples of trigger points

that represent potential avenues to growth. With access to the right

financing and expertise, business owners can capitalize on these

opportunities and position their companies for ongoing success.

Trigger Points: Financing for Fast-Growth CompaniesConsiderations in reaching out to capital markets

April 2012

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Trigger poinTs: FinAnCing For FAsT-groWTh CompAnies 2

As companies grow, they will encounter various “trigger points” along the way where they need infusions of capital to keep growing and expanding. Acquisition opportunities, market expansion, or the need for additional personnel, technology or equipment upgrades are common situations where companies need to find new capital.

such needs may be met through debt acquisition, often borrowing from a financial institution to fund growth, or may turn to equity funding to raise capital. Understanding the variety of options available to established companies can help them make smart choices that will support both short- and long-term growth, says robert hisrich, author of entrepreneurship and professor of global entrepreneurship at the Thunderbird school of global management in glendale, Arizona.

For fast-growing companies seeking access to expertise and industry contacts as well as capital, equity funding through a venture capital or other private equity firm might be the first option to consider. These investors typically look for accelerated growth and an exit strategy — usually an initial public offering or sale of the company — that will be executed within five to ten years, depending on the industry, says business consultant Kenneth h. marks, managing partner of raleigh, north Carolina-based high rock partners. so, this is usually not an option for companies that are growing slowly or which have limited market potential, he says. equity investors will own a piece of the company in exchange for their investment and may appoint a member of the firm to the company’s board to help protect the firm’s financial interest.

Turning to capital markets to raise money is another option for established, profitable companies, says hisrich. While taking a company public through an initial public offering is probably the first method that comes to mind — and also subject to the most regulation and risk — the securities and exchange Commission (seC) provides for other methods of selling stock in the company without registering with the seC. intrastate offerings, in which companies operate primarily within one state; private offerings, where knowledgeable investors can purchase shares privately and are not permitted to resell them to the public; and rule 506, which allows companies to raise an unlimited amount

of capital from up to 35 “sophisticated investors” who have enough knowledge of such investments to be able to evaluate their risk. The seC offers other exemptions, as well, and each state has different securities laws that need to be considered, says marks.

To make the right choices in raising funds, companies need to evaluate the most appropriate type of financing for the type of company and its capital needs, says marks. often, that’s determined by the market conditions; the sales volume, valuation, and potential of the business; and the goals of the existing shareholders. Typically, venture capital firms specialize in specific types of deals, such as early stage, expansion, or late-stage deals.

The national Venture Capital Association reports that second-quarter 2011 venture capital investments rose 19 percent to $7.5 billion invested in 966 deals. The average Q2 expansion deal was $9.3 million, while the average later-stage deal was $11.5 million. however, Q3 commitments are down to their lowest levels since 2003. hoover’s reported that third-quarter ipos dropped to 18 from 44 in Q2, with an average size of $170.2 million.

Whether a company chooses to raise funds through debt, private equity, or capital markets, it is critical to work with a reputable accounting firm with experience dealing with these choices in companies of similar size, says hisrich. Before seeking any type of additional capital, the firm will likely need to prepare financial statements that show a history of profitability or, at least, increasing sales and significant market potential, he says. in addition, owners need to be clear about their long-term goals for the business, including how much equity they wish to relinquish in the company. marks says that these factors, combined, will often dictate the best form of financing for most businesses.