Volume 8, Issue 5 - May 2007

Trend Tracker

Preparing for a Capital Event 
by Michael Collins

When operating a door or window company, there are numerous forks in the road at which a capital decision, often critical to the future of the company, must be made. In the early stages of a company’s growth, capital may be needed to equip the company’s first true manufacturing facility. In later stages of growth, additional capital may be required to build a new facility or to undertake a major expansion of the existing one. Other possible uses for capital include acquiring another company or allowing an owner to achieve partial liquidity of their investment. Finally, owners wishing to exit their business can achieve total liquidity by finding a capital provider or industry participant that wishes to acquire their company.

Prepare Early for Possible Sale 
In any of these examples, the recipe for ensuring that a company will succeed in finding the best capital provider or buyer for its needs starts with the same critical step– preparation. It is almost impossible to begin the process of preparation for a capital event too early. Even when a new company is being formed, entrepreneurs should ask themselves if they are establishing a company that will be attractive in the future to capital providers and to potential acquirers.

The first step in any capital event is to define exactly what is being sought. How much capital do you need? For what will the capital be used? What impact (financial and otherwise) will the capital event have on the business? It is important to quantify the impact and future expected benefits of a capital event in the form of pro forma financial statements. Another important factor regarding financial statements is the condition of the past financial statements themselves. Most capital providers will require monthly financial statements, so they favor companies that have already adopted that discipline. Also, reviewed financials are viewed more favorably than those simply prepared internally, while preparing audited financials is the best option of all. Companies that do not have audited or reviewed financials run the risk of receiving unfavorable terms from capital providers or buyers because of the perceived additional risk of being given an inaccurate financial picture of the company.

Obstacles to Avoid 
Another aspect of a company that must be assessed when seeking capital or a qualified buyer is the existence of multiple corporate entities within the company. These can create tax and other advantages, but they often represent obstacles to capital providers and buyers. For instance, if one entity owns the plant and most of the equipment and another owns only one production line and the trademark of the company’s hot new product, a capital provider will be concerned regarding the safety of his investment. If the new entity fails to perform, will he have recourse to the assets of the parent company? If a capital provider makes an investment in the parent company, will he participate fully in the profits of the new division? In extreme cases, entities must be combined with one another in order for a capital injection or sale to take place. 

In some cases, working with a single capital provider or buyer can result in a faster capital raising process. However, it is also possible that a single capital provider or buyer, because they lack competitors in the situation, may try to extract last-minute concessions that increase their return or decrease their risk. The cost of these changes, of course, would be borne by the door or window company seeking capital. 

In order to provide more information our company has prepared a report, “Preparing a Window or Door Company for a Capital Event.” This report is available free to DWM readers by e-mailing ttaffera@glass.com

Michael Collins is with Jordan, Knauff and Company, an investment banking firm that specializes in the door and window industry. He may be reached at mcollins@jordanknauff.com. Mr. Collins opinions are solely his own and not necessarily those of this magazine.


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