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Perspectives

Assessing Capital Needs

New funding options can help family businesses grow

You’ve crafted a vision for your family enterprise. New funding options for business growth can help you transform that vision into a masterpiece. With the proper planning around family business funding, you can be ready to seize an opportunity when it presents itself. In this installment of our eight-part series, “Pivotal moments for family enterprises,” we’ll take a close look at new capital funding options and what they could mean, from a bigger picture standpoint, for the future of family enterprises.

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While seizing growth opportunities can be exciting, it may introduce some unique complexities for the family enterprise.

 

Family dynamics can have a big influence on what requires additional capital, when it’s needed, and how it’s accessed and deployed. As we discussed in the kickoff to this series, establishing a formalized governance structure prompts the business to align on the ‘what,’ ‘when’ and ‘how’ in advance. Not only can this prepare the business to seize new opportunities with confidence and agility, but it helps ensure the needs of the business are balanced with those of family members.

“Being prepared for the capital needs of your business almost always leads to increased strategic flexibility,” says John Deering, Leader, Deloitte Capital Advisory. “It’s a good way to know an optimal solution can be available when you need it.”

Traditional and nontraditional lenders are expanding the spectrum of funding choices

In the past, family enterprises had few options for accessing capital. As a result, they largely relied on traditional commercial banks. Unfortunately, commercial banks often took a conservative stance and restricted how funds could be used, thereby limiting what a family enterprise could achieve. While the debt markets have since evolved to include new, nontraditional lenders, many family enterprises are not aware of these options.

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The importance of a capital needs assessment

 

The proliferation of capital solutions is certainly good news for family enterprises, as it affords them greater creative license; however, proper timing is an important consideration to take full advantage of these options, as both internal and external factors play a role.

Within the business, leadership transitions, pending distribution requirements, and major initiatives may help determine the optimal time to execute a capital acquisition. Likewise, environmental factors such as economic trends, the political landscape, and workforce issues are also key considerations that can elevate one solution over another at a moment in time. Also, companies should factor in the time it takes to build key relationships with funders.

Just as an owner spent time building a relationship of trust with their original lender, it’s important to build relationships to gain access to the non-bank capital providers. This is where a capital needs assessment can help

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Where to start

Every capital needs assessment begins with a list of questions. “Proper due diligence goes a long way in setting the family enterprise up for success in this process,” Hughes says. To that end, the business should consider thinking through several questions during its normal governance deliberations, including:

 

What are our long-term goals for the business, and are they aligned with the goals of our family?
Is everyone in the family on board with that vision?
Do we need outside capital to achieve these goals? How long do we plan on keeping the business in the family?
Do we fully understand the range of alternatives when thinking about the capital structure of the enterprise? Are we more sensitive to cost of capital or flexibility? What is our appetite for additional leverage? Do we have confidence in our projections on generating ample cash flow to service incremental leverage?
Is there incremental future value to the family and the business to give up some equity in the enterprise? Does a potential partner need to add strategic value?
Have we ruled out potentially transformative transactions in the past because we were worried about being financially constrained by them?   Is our capital structure built to last for the next few years? How about the next 10–20 years?

 

Next up in our series: Building the technology infrastructure—develop a technology strategy to meet business goals, and improve valuation, efficiency, and customer experience.

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