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The Handbook of Financing Growth

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The Handbook of Financing Growth ffirs.qxd 2/15/05 12:30 PM Page iii The Handbook of Financing Growth Strategies and Capital Structure KENNETH H. MARKS LARRY E. ROBBINS GONZALO FERNÁNDEZ JOHN P. FUNKHOUSER John Wiley & Sons, Inc. ffirs.qxd 2/15/05 12:30 PM Page b ffirs.qxd 2/15/05 12:30 PM Page a Additional Praise For The Handbook of Financing Growth “The authors have compiled a practical guide addressing capital formation of emerging growth and middle-market companies. This handbook is a valuable resource for bankers, accountants, lawyers, and other advisers serving entrepreneurs.” Alfred R. Berkeley Former President, Nasdaq Stock Market “Not sleeping nights worrying about where the capital needed to finance your ambitious growth opportunities is going to come from? Well, here is your answer. This is an outstanding guide to the essential planning, analy- sis, and execution to get the job done successfully. Marks et al. have cre- ated a valuable addition to the literature by laying out the process and providing practical real-world examples. This book is destined to find its way onto the shelves of many businesspeople and should be a valuable ad- dition for students and faculty within the curricula of MBA programs. Read it! It just might save your company’s life.” Dr. William K. Harper President, Arthur D. Little School of Management (Retired) Director, Harper Brush Works and TxF Products “Full of good, realistic, practical advice on the art of raising money and on the unusual people who inhabit the American financial landscape. It is also full of information, gives appropriate warnings, and arises from a strong ethical sense. If you’re trying to find funds for your company, go buy this book.” Edward F. Tuck Principal, Falcon Fund ffirs.qxd 2/15/05 12:30 PM Page b ffirs.qxd 2/15/05 12:30 PM Page i The Handbook of Financing Growth ffirs.qxd 2/15/05 12:30 PM Page ii Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offices in North America, Europe, Aus- tralia, and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers’ professional and personal knowledge and understanding. The Wiley Finance series contains books written specifically for finance and investment professionals as well as sophisticated individual investors and their financial advisors. Book topics range from portfolio management to e-commerce, risk management, financial engineering, valuation, and financial instrument analysis, as well as much more. For a list of available titles, visit our Web site at www.WileyFinance.com. ffirs.qxd 2/15/05 12:30 PM Page iii The Handbook of Financing Growth Strategies and Capital Structure KENNETH H. MARKS LARRY E. ROBBINS GONZALO FERNÁNDEZ JOHN P. FUNKHOUSER John Wiley & Sons, Inc. ffirs.qxd 2/15/05 12:30 PM Page iv Copyright © 2005 by Kenneth H. Marks, Larry E. Robbins, Gonzalo Fernández, and John P. Funkhouser. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax 978-646-8600, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, 201-748-6011, fax 201-748-6008. Limit of Liability/Disclaimer of Warranty: While the publisher and the author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor the author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. For general information about our other products and services, please contact our Customer Care Department within the United States at 800-762-2974, outside the United States at 317-572-3993 or fax 317-572-4002. Designations used by companies to distinguish their products are often claimed by trademarks. In all instances where the author or publisher is aware of a claim, the product names appear in Initial Capital letters. Readers, however, should contact the appropriate companies for more complete information regarding trademarks and registration. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our web site at www.wiley.com. Library of Congress Cataloging-in-Publication Data: The handbook of financing growth : strategies and capital structure / Kenneth H. Marks . [et al.]. p. cm. — (Wiley finance series) Includes bibliographical references and index. ISBN 0-471-42957-0 (CLOTH) 1. Small business—Finance—Handbooks, manuals, etc. 2. Business enterprises—Finance—Handbooks, manuals, etc. 3. Corporations—Finance—Handbooks, manuals, etc. I. Marks, Kenneth H. II. Series. HG4027.7.H355 2005 658.15—dc22 2004024107 Printed in the United States of America. 10987654321 ffirs.qxd 2/15/05 12:30 PM Page v To Kathy, Lauren, Lilly, and Jenna, in support of doing God’s will ffirs.qxd 2/15/05 12:30 PM Page vi ftoc.qxd 2/15/05 12:30 PM Page vii Contents Foreword xi Preface xiii Acknowledgments xix About the Authors xxi PART ONE The Financing Process 1 CHAPTER 1 Introduction 3 CHAPTER 2 Business Performance and Strategy 6 The Business Plan and Strategic Initiatives 6 Shareholder Goals and Objectives 8 Current Financial Position 9 Forecasted Performance 10 Scenarios 10 Strategy 11 Updated Forecast 14 CHAPTER 3 Valuation 15 Why Value? 15 Approaches to Valuation 16 CHAPTER 4 Capital Structure 22 Assimilating the Drivers 26 Developing Liability Limits 40 vii ftoc.qxd 2/15/05 12:30 PM Page viii viii CONTENTS CHAPTER 5 Sources of Capital and What to Expect 44 Bootstrapping Sources and Techniques 46 Individual Investors (Private Placements Not from Angels or Institutions) 57 Angel Investors 58 Commercial Banks 69 Asset-Based Lenders 74 Commercial Finance Companies 86 Leasing Companies 87 Private Equity 92 Venture Capital Funds 94 Mezzanine Funds 124 Buyout Funds 128 Strategic or Industry Investors—Corporate Venture Capital 135 Merchant Banks 137 Community Development Initiatives and Government Agencies 138 Micro-Cap Public Entities 153 Royalty Financing 155 CHAPTER 6 Equity and Debt Financings: Documentation and Regulatory Compliance with Securities Laws 161 Basic Definition of Debt and Equity 161 Debt Instruments 164 Loan Documentation 170 Equity Instruments 218 Equity Investment Documentation 222 Compliance with Securities Laws 251 CHAPTER 7 Expert Support—The Players and Their Roles 262 Counsel 262 Board of Directors 264 Investment Bankers 267 Accountants 272 Consultants/Advisers 276 Summary 277 CHAPTER 8 Closing the Deal 279 Process Check-in 279 Final Perspective 286 ftoc.qxd 2/15/05 12:30 PM Page ix Contents ix PART TWO Case Studies 287 Case Study 1: High-Risk Asset-Based Loan/Refinancing 289 Case Study 2: Asset-Based Lender, Assignment for Benefit of Creditors 292 Case Study 3: Angel Investors 297 Case Study 4: Royalty Financing 300 Case Study 5: Commercial Finance—Trade Financing 302 Case Study 6: Mezzanine Investment 304 Case Study 7: Private Equity—Acquisition to Exit 305 Case Study 8: Private Equity—Restructuring 307 Case Study 9: Private Equity—Acquisition with Management Participation 309 Case Study 10: Private Equity—Public-to-Private Acquisition 312 Case Study 11: Merchant Bank Implements Buy-and-Build Strategy 316 Case Study 12: Strategic Investment 319 Case Study 13: Community Development Financing 322 Case Study 14: Debt with Revenue Sharing 326 PART THREE Financing Source Directory 329 Suggested Use of the Directory Section 331 Appendixes A Corporate Finance Primer 377 B Financial Statements 404 C Discount Rates 415 D How Fast Can Your Company Afford to Grow? 417 E Notes about Start-Ups 433 Glossary 437 Notes 467 Index 475 ftoc.qxd 2/15/05 12:30 PM Page x fbetw.qxd 4/15/05 12:36 PM Page xi Foreword rowth consumes cash! It’s what I refer to as the “First Law of Entrepre- Gneurial Gravity.” You run out of cash and the game is over. Each year, hundreds of companies fail because of insufficient funding. Others fail to thrive because of a lack of funding. The Handbook of Fi- nancing Growth will prove invaluable to those CEOs and CFOs searching for the right formula to fund their company’s growth. After all, optimal growth isn’t possible without the underlying capital structure to support it. The authors have put together a comprehensive sourcebook with a wealth of information on the funding process itself and sources of capital. Far from being simply a textbook, this book is a complete operator’s manual on the funding process. I know of few other books on corporate funding that are as comprehensive as this one. Every pertinent subject has been cov- ered here. The book begins with several chapters that describe the financing process, and then details sources of capital.
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