"Finding Capital - Company Tips"

You know that I titled my book “Capital Can’t Fund What it Can’t Find.” There’s a reason for that. As important as putting your numbers together, there’s your getting known. That is how your value as a company will rise.

Throughout my career I’ve lived these realities—whether it was a company that was sold on a cash flow multiple or one that was valued at $1.2 billion by the global financial community. In every case, it’s been all the CEOs generating credibility for the company and exposing it to the widest possible audience, both within its industry and throughout the financial community.

So here are a few tips on how to generate credibility: 

Tip #1:

Expose yourself

One of my earliest transactions involved unloading a money-losing division.  In that case a drive northward was required to shut it down, yet on the way the manager asked to buy it. Here was a deal that had no tangible value—and yet, it was valued by another. Certainly, this was a case of having a captive audience, but it was my first lesson in creating value from credibility and exposure.

Subsequently, we took a small contracting company from $100,000 to more than $10,000,000 in only a couple of years. In this case, I was an entrepreneur who was learning how to operate and manage a growing company (as opposed to “hire and lead,” a common mistake I see entrepreneurs making). When it came time to consider selling, I was focused on cash-flow versus opportunity. I thought that letting others know

we were on the market would amount to spilling the ingredients of our “secret sexy sauce.” The lesson I learned was that innovators probably were not looking for us.  Big companies have the “not invented here” syndrome, while nimble competitors don’t have access to the street and exposure to the circulation of financial deals.

At some point, you have to recognize that by telling your story you’ll create more value and opportunity for yourself and your company. And selling the company is key.  Whether it’s “Selling the Value” or actually selling stock!  All too often I’ve participated in Private Business Channel events where CEOs go on the air and sell their product. What they don’t realize is that the financial community is mostly interested in their company. After all, a company sells a product—but products themselves don’t make a company. 

Just think about the “Buggy Whip Manufacturer” from the 1920s. At that point, if the Buggy Whip CEO had tried to sell his audience on his whips, the financial community would have discounted the company’s value—because they knew the automobile was about to make the buggy obsolete. However, if the CEO had stepped up to talk about “Transportation Accessories”—today buggy whips, tomorrow driving gloves—the financial community would have seen a company with a vision of the future – and future cash flows and sales models.

Credibility on the street is key—whether it’s Wall Street or Main Street. I had a great conversation with a start-up entrepreneur recently who said, “We’ve applied for a patent, not because we see this innovation as having a long-term impact, but because the cost of the patent is insignificant compared to its effect on the value of the business.”

Tip # 2:

Don’t hire cheap. 

Another common mistake occurs when entrepreneurs get cheap with their outside professionals. This almost always results in a significant loss of value. Obviously, you want to be smart with your outside professionals, but you have to see the bigger picture. If an audit of your business costs $75,000, but it results in an increase of more than $75,000 to your company’s value, then it’s a sound business decision. Even if you’re operating a company with a bank line, it’s a good idea to see how your interest rate might decrease if you have an audit rather than just a compilation or review.

The quality of your professionals has a quantifiable impact on your company’s credibility. My first business had a local independent legal team and a corner accounting firm. When it came time to sell, institutional investors discounted these professionals by 100%. That’s not to say you shouldn’t utilize local and/or smaller firms. It just means that you should have the right team for your aspirations. If you anticipate an IPO, then you are expected to have a Big Four audit. If you aspire to a regional sale of your company, pick the

best talent with expertise and a strong reputation in the region. I believe you get what you pay for.

Tip #3:

Get known beyond your 50-mile radius.

My mantra of “Capital can’t fund what it can’t find” is true across the country. An interesting statistic is that 80% of transactions are done within a 50-mile radius of the venture. It makes sense to use your Rolodex to extend your network and create a sphere of influence beyond the 50-mile radius.  

Today, if nobody knows you on Wall Street, and you haven’t had lunch with your local investment bankers, then assume you need to increase your exposure. Capital transactions aren’t likely to just come your way.

Of course, I sometimes hear about companies who are approached by investors simply because they’re “hot, hot, hot.” But just think how many more offers they’d get if they took a credible deal to investment bankers and broker/dealers across the country. Imagine if you are making $1 million on the bottom line and someone offered you a multiple of earnings. My bet is that by selling a credible story about your company, you’ll raise awareness and get multiple bidders. And all you need is 1x more than the previous offer to be a happy seller!  Even if you are “hot, hot, hot”, an extra 1x on your Price/Earnings or Sales ratios can make shareholders much appreciative.

Tip #4:

Use public relations. It works!

Here’s another thing I believe private companies neglect: public relations. In my business, we work with PR Newswire and Private Business Channel. These are easy ways to distribute your messages—either about your products and services or about your company as a whole. I’m amazed that more companies don’t do this. Just think how much your sales people would love to see product news picked up so they can show your clients. Just think how great it would be for your CFO to have positive press to use for credibility with banks or investors. All media breeds exposure, which breeds credibility and cultivates clients and potential investors. But so few companies take advantage of PR—go figure!

In short, to gain the most value for your company, create as much credibility and exposure as you can. Put the best people on your team, and use professionals to help get the word out. You don’t have to spill the “secret sexy sauce.” Just let the world know how you’re doing and how well you’ve laid the foundation. Sell your company, not just your product. And as you create awareness, you’ll become a force to be reckoned with.

As you can see here, there’s no big mystery to the process. Have the vision to create credibility and exposure, and watch it all turn into value for your company.