The capital market plays a pivotal role in determining the economic growth and development of a country. Access to capital and the evolution of the capital market are closely intertwined with a nation's economic progress, as evidenced by numerous theoretical and empirical studies. While financial discussions often emphasize the role of banks in state capitalism within emerging markets, it is crucial to recognize the significance of stock markets, particularly in advanced economies, where publicly traded companies strive to make profitable decisions to enhance shareholder value. Below, we address some of the most commonly asked questions regarding the capital market, with insights provided by experts from Grant Thornton. Below, some of the most commonly asked questions regarding the capital market are addressed, with insights provided by experts from Grant Thornton.
When is the right time to raise capital?
There is no definitive answer to this question. Businesses may seek capital to facilitate growth, while others do so to sustain operations. Ideally, companies should consider raising capital when they anticipate that the infusion of funds will substantially enhance their value and expansion prospects. Continuously raising capital without commensurate value appreciation can lead to dilution of ownership for founders and existing stakeholders, potentially resulting in loss of control over the company.
How should we determine our company's value?
Company valuation primarily relies on the income approach, focusing on cash flows and comparable companies. When using the comparable companies method, similar transactions from the past are examined, and revenues and EBITDA from those transactions are utilized. One approach involves researching publicly traded competitors and assessing companies' worth based on their revenues and income. It is crucial to recognize that privately owned companies typically carry a valuation 'discount' compared to their public counterparts. Factors such as growth rate, profitability, and debt levels influence valuation. Ultimately, the most critical valuation is the one that secures financing for the specific company.
How much capital do we need to raise?
The straightforward answer is: as much as necessary. It is essential to strike a balance between securing adequate capital and avoiding unnecessary debt. Overcapitalization can burden the company, while insufficient funds can impede full operational potential.
What kind of investors should we look for?
Different investor types offer distinct benefits and opportunities to businesses. Risk capital investors, such as venture capital and private equity firms, often play an active role in a company's growth. For businesses seeking substantial support alongside capital, these investors can be valuable partners, albeit with increased control over operations. Conversely, family office investors, typically managing diverse portfolios and often running their own enterprises, tend to prefer a more passive role. They are less inclined to engage in day-to-day operations but may provide stable investment. It is essential to align investor preferences and goals with the company's needs and size.
How many investors should we approach?
It is advisable to approach multiple investors as deals are not final until fully resolved. Engaging with several investors can yield varied terms, some more favorable than others. Even if your company has preferred investors in mind, it is prudent to keep options open until funds are secured.
Should we opt for debt or equity financing?
The decision between debt and equity financing depends on various factors. If additional funds significantly enhance company growth or income, servicing debt may not pose a challenge. Debt financing is suitable for various purposes, like accounts receivable, equipment procurement, or business acquisitions. Equity financing, however, does not necessitate repayment to investors but involves relinquishing control and diluting ownership. It is a preferred route when avoiding increased debt or maintaining control is crucial, especially before an acquisition or IPO. Some investors may offer hybrid structures like convertible equity, providing protection in failure while offering benefits in success.
What value does Grant Thornton provide to companies raising capital?
We bring extensive domestic and global experience to capital raising endeavors. Acting as advisors, we assist clients by leveraging our expertise in the following ways:
- We conduct financial and business analyses to eliminate potential problems before meeting with investors
- We present companies to potential investors
- We structure transactions in favor of the client
- We advise on the terms of the transaction
- We prepare documentation related to the transaction
- We participate and advise in negotiations with investors until the successful conclusion of the transaction.
Do we need an audit?
While some investors may require an audit, it is not always a universal necessity. Venture capital and strategic investors often mandate audits, whereas family office investors typically do not.
Should we prepare a data room?
Nearly all investors will expect a comprehensive data room containing all corporate documents. It is advisable to compile and organize this data room before commencing the capital-raising process.
How long does the process take?
The duration of the capital-raising process varies, primarily dependent on the company. To expedite the fundraising process, you should:
- Prepare the company thoroughly before engaging with investors,
- Establish and populate the data room in advance, and
- Responsively address investors' inquiries and document requests.
Typically, the capital-raising process spans over four to six months for most companies.
In an upcoming article, we will delve deeper into the various sources of capital frequently accessible to companies. Should you have any inquiries or seek further information on this topic, please feel free to reach out to the Grant Thornton experts.