Highlights of the Capital Raising Seminar 2019
Raising capital and lack of access to affordable financing is one of the key challenges SMEs and specifically family businesses cite as a hindrance to scaling their businesses. Most SME owners opt for conventional bank loans which significantly increase cash flow needs for their business and reduce profitability as a result of interest payments. ISBI Institute @ Strathmore and I&M Burbidge Capital (IMBC) therefore organized a 2-day Capital Raising Seminar to enlighten entrepreneurs on alternative sources of funding. The main objective of the seminar was to offer leading industry and academic experts a platform to share their knowledge and expertise in the field and from which, participants were able to learn how to prepare their business for capital raising.
The seminar kicked off with running through scenarios when raising capital is meaningful which was followed by a step-by-step process of how capital is raised. “The first thing a business owner oughts’ to comprehend from the capital raising process is whether they need additional capital or not” Edward Burbidge (MD I&M Burbidge Capital). Entrepreneurs should have proper understanding of the business cash flow needs as it is detrimental to use short-term funding for long-term projects and there exist several sources of funding available for businesses i.e. debt, mezzanine financing and equity. Debt requires regular repayments, it’s cheaper than equity and mezzanine financing but on the down side, almost always requires collateral. Mezzanine financing is long-term; the cost of capital is however usually higher than debt but lower than equity. Equity financing is the most expensive, ownership is diluted. The capital raising process includes: transaction structuring, transaction marketing, due diligence and commercial negotiation and finally completion. Businesses should plan ahead because this process is long and normally takes about 12–14 months. Don’t go shopping while you are hungry.
When it comes to equity financing, business owners ought to put a price tag on their businesses. Valuation is an art. Valuation is not an exact science; it is a constantly evolving field of study. However, it is important to employ tested methods designed to produce a sufficiently accurate valuation model, to provide a guide or sense check on the value of an entity, after having incorporated various risks. Market approach, income approach and replacement cost approach can all be used to value your business. Each approach normally yields different results and therefore a combination of these would normally give a more precise estimate on the company value. Investors appreciate good corporate governance, strong company growth and steady financial performance. Such companies attract a higher valuation on the other hand, investors however tend to shy away from highly levered businesses.
After a rough valuation range of the company is concluded, entrepreneurs can now approach investors in search of funding. This is the transaction marketing process; core focus should be in presenting the business in the most attractive way without giving out any confidential information. Business owners should carry out due diligence on the investor so as not to be shocked further in the process. When negotiating with investors, most entrepreneurs focus solely on money; getting the highest amount for the least shares. An experienced investor can however be a very useful partner who brings in more than just money.
It is important to understand what the vision of the investor is. As this may be a starting point to a long-term relationship, it is crucial that both drivers have the same destination in mind. It is also important, while at the negotiation table, to work towards achieving a win — win outcome for both parties. The drive should not be towards simply to attain a position, but rather get to understand the reasons behind that position. If you get to understand the other party’s needs, you are able to reach a better agreement that favors both negotiating parties. Asking questions and seeking clarifications where need be enhances a better understanding of both parties and what their needs are. Having this understanding will make a win — win outcome easier to arrive at.
Other considerations after negotiations would be due diligence which involves tax requirements and concerns. The tax session done by PKF touched upon the fiscal aspect of structuring a deal. Transfer of tax losses or investment deductions, VAT requirements on transfer of assets and goodwill, capital gains tax on sale of shares, stamp duty and all other regional tax implications were adequately covered. Tax issues play a critical role, such that if not taken into consideration an otherwise successful transaction may be sentenced to failure from the start.
Succession planning and structuring is a key element in ensuring the sustainability of any business. The company must run, with or without the founder. This is the only way family businesses in Kenya can move from success to significance. Other insights from Ascent Capital when it comes to family businesses include: separate finances as early as possible, distinguish ownership, directorship and management, balance family and non-family views and empower the next generation. This will improve the efficiency of the relationship between investors and family business owners. Structuring & governance within family businesses was also emphasized by Michael Kontos (MD Walker Kontos).
Completion is the last step; when the deal is finally signed and the transaction documents are executed. It is advisable that entrepreneurs use allocated funding towards their intended purpose.
The seminar concluded with a panel discussion done by investors and investees. The widespread message during the discussion was that like any other relationship, the investor — investee relationship is dependent on honesty and communication. The relationship can also come to an end and it is therefore vital that proper exit structures are included in the deal.
The event was crowned with a graduation ceremony followed by a cocktail hosted by the ISBI and I&M Burbidge Capital. Networking between the participants during the two intensive days formed just as an invaluable and informative part of the event as the sessions themselves.