The need for an increase in capital to stay competitive is very common. It is possible that the business owner, especially when he or she is already in an advanced stage of life, will not be willing to reinvest capital that has already been extracted from the company and, before this, he prefers to exit the company.
The need for capital
If there has been, for example, a deterioration of capital from losses or because the company’s assets are arriving to the limit of their useful life there is a need for investment in modernization. Other times the company doesn’t generate enough free cash flow to undertake the investments. It needs to be competitive in an evolving business environment.
We had a client that owned a factory specializing in the manufacturing of machinery for food preservation. The company competed against large Swedish and American companies that, thanks to their investments in R&D, were constantly improving the productivity and sophistication of their machines. Our client was losing competitiveness and was destined to start seeing lower prices, yet he had a limited capacity for reinvestment. Fortunately he decided to sell before it was too late.
The company may need to invest money into soon to be obsolete technology in order to be viable, something that the owner doesn’t want or can’t do.
In some cases, slowly a snowball of debt is formed without you noticing. Equipment leases, operating capital lines of credit, equity lines and credit card bills now take up most of your free cash flow and you feel like you are working for the banks.
A third-generation business owner client of ours used to tell us, “if the interest rates go up, I am losing it all”. He ran the business that his Grandfather had started 45 years earlier, in early 2007 they decided to build a new manufacturing facility and leveraged the business to do it. Then the crash came, and interest rates skyrocketed while sales went down. They were able to survive the crisis and they continued to grow at double digit rates but their profits disappeared to service debt. We helped him refinance at better rates and then brought in a financial investor that made an equity investment which allowed him to keep growing his family’s legacy.
The time to get capital is now
If you have not been able to receive a dividend in years, a downturn in the economy can wipe out everything you worked for. We are today in a specially good moment to sell due to high prices, high liquidity and low interest rates. Do not miss this M&A wave because the next one might not come in decades – at least a wave as huge as this one.
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