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Raising equity capital for private businesses

Francois Otto, Head of Corporate Finance, Sasfin Capital and Bongani Ntuli, Corporate Finance Transactor, Sasfin Capital

Introduction

If you were to ask any South African business owner what their biggest challenge is, the majority will likely tell you that it is attracting funding for their business. This is, however, not necessarily due to a lack of available capital. According to the KPMG/SAVCA 2016 private equity industry survey, at least R40.6 billion in committed but undrawn capital could be deployed in the next few years as private equity fund managers implement their ongoing investment strategies. According to the survey, around half of this capital is earmarked specifically for South African investments. 

The truth is that any business will require cash injection during different stages of its business cycle and the raising of equity capital for your private business may be a strategic opportunity worth exploring in order to realise value of your business. 

Finding a strategic investor

A strategic investor cannot be selected without thoroughly analysing the bidder’s track record as a partner, their financial offer and other salient bid terms. This decision is crucial to you as a business owner, and requires you to choose an investor who matches your particular needs and circumstances. Often this needs a well-designed process to ensure that your business attracts the right investor whether that is a function of price paid, strategic value, speed of execution or a combination of these factors.

Unfortunately, we often come across deals with businesses that are in a high growth phase and 

where shareholders and management raise equity from potential investors without having explored the alternatives available to them. This, more often than not, results in shoddy partner selection. In reality, most businesses earning in excess of R15 million profit after tax per annum have numerous avenues available to them, including raising money from private equity firms, high-net-worth private investors, trade investors, foreign investors (in various guises) and, in certain circumstances, even pursuing listings. 

Doing the deal - considerations in raising equity for your business

Look out for these key features in any offer of equity finance to ensure that you are getting the right partner and the right deal for your business:

  1. Did we explore all the alternatives available to us?
  2. Does the overall structure of the deal align with the ultimate objectives of both management and existing shareholders?
  3. Is any equity stake dependent on a specific level of performance being achieved by the business, for example, performance targets, and do we fully understand these and have we contemplated the consequences of a downside scenario?

4. Do we fully appreciate the non-financial terms such as any constraints over the operation of the business and for example, the amendments to shareholders’ agreements?

5. What are the intentions of the potential partners and would they support the vision and the growth aspirations of the business?

6. What is the strategic value a potential investor would add to your business – if a potential investor is promising synergy value; are they committing to it? How do we keep them accountable?

7. What is the dividend policy and capital structure of the business going forward – are we compromising the long-term sustainability of the business with the wrong capital structure or a dividend policy that is too aggressive?

 

Sasfin Capital has advised numerous businesses and business owners to assist them in raising equity capital that matches their particular circumstances by considering the various funding structures available to them. In this regard, partnering with the right adviser to determine the best source of external funding will benefit the business in its critical growth phase.