Starting, growing or selling

Author: Andy Kay, Partner, Corporate Finance

From start-up to exit, a family-owned business often needs to think about its current and future funding requirements.

There are a range of options available. Who to approach for funding will depend on what it is for and should also take into account the past and future financial performance of the business.

Funding is usually required in the following situations:

• start-up funding for new businesses
• growth funding for expansion, either domestically or overseas
• capital expenditure for example investment in plant and machinery
• acquisition opportunities
• shareholder exit and realignment for family members who wish to exit the business
• distribution of dividends where there is insufficient existing cash in the business.

What are the sources of funding?

Family businesses can introduce funding by way of debt or equity.

Start-up funding can be introduced from a number of sources. These include family and friends, high net worth individuals, angel investors or business partners. It is good practice to have a shareholder agreement in place to cover the rights of the respective investors as well as a method of buying out their respective shareholdings. Consideration also needs to be given to the amount of control the respective equity shareholders will have over the business.

High street banks can also provide start-up capital in the form of a loan or overdraft secured over the assets of the business.

An established family business wanting to expand may be willing to offer some of its equity to fund growth - as long as they remain in control of the business. If there is likely to be an exit in the next three to five years, private equity firms should be considered to fund this stage. If no exit is planned, and growth is via acquisition, there are specialist acquisition finance lenders in the market.

If a business is growing organically and needs additional working capital, asset based lending, usually in the form of invoice discounting, may be the ideal solution.

If there is likely to be departing shareholders, the business can borrow on the strength of its asset base and future profitability.

And finally, should the owners decide to exit entirely, taking advice early on and the timing of the sale can make a significant difference on the cash received into the hands of the family.

The process of securing funding for your business whatever stage you’re in can be a challenging one. For more information on the points discussed in this article or to find out more about how we can help your family business, please get in touch with Andy Kay or your usual Crowe contact.