Volume 14, Issue 1 - January/February 2013

TrendTracker

Perfect Timing
The Right Moment to Invest in Your Company
by Michael Collins
mcollins@jordanknauff.com

Small Businesses Make Big Contributions
• Companies with 20 to 100 employees account for 3 percent of all businesses in the United States. Those 3 percent of businesses generated roughly 30 percent of the new jobs created between 2006 and 2010.
• They added jobs eight times faster than the average of all U.S. companies and they grew four times faster.
• They also expanded three times more often than the average U.S. company.

The majority of door and window companies are small- and medium-sized businesses. Companies with 20 to 100 employees are the “tweeners” of the business growth cycle. They are typically able to discount the possibility of near-term business failure, although the past few years have represented a challenge to everyone. One of the drawbacks of achieving this larger scale, though, is that the business has undoubtedly outstripped the founding entrepreneur’s ability to permeate the organization and influence or make all of the important decisions. Companies in this size range typically hit a point where they need additional capital for growth before the revenues that constitute that growth have materialized. There is truth in the old adage that you can only get capital if your financials are so strong you don’t need it, which can make it difficult for companies like this to attract investments.

Big Contributions
Some would say that if a few small businesses are unable to attract growth capital, the world will go on spinning. After all, companies with 20 to 100 employees only account for 3 percent of all businesses in the United States. According to a recent study by Evolution Capital Partners, those 3 percent of businesses generated roughly 30 percent of the new jobs created between 2006 and 2010. They added jobs eight times faster than the average of all U.S. companies and they grew four times faster. They also expanded three times more often than the average U.S. company. As consistent job creators, these small businesses are an absolutely vital engine of economic growth in this country.

It’s no surprise, then, that a new category of professional investors has arisen, specializing in investing in small- to medium-sized companies that are poised for strong growth in the future. These growth investors provide badly needed capital and advice in order to help propel a company to the next level and maintain success while growing to 500 or more employees. Such investors are particularly active right now, in light of the economic environment. There is a shadow of doubt over the economy, but it is increasingly easy to see that most of it is behind us. Funds that invest now are likely to achieve outsize returns in the future. A recent analysis by US Venture Economics showed that the best private equity returns from 1986 to 2004 were earned by funds that started investing in 1992 and 2003, just after recessions had ended. Since funds typically invest for five to seven years, the funds formed after 2004 have not exited enough of their investments to close the books on their returns.

Investing Within
What if your company is not large or profitable enough right now to attract private equity investment or a strategic partner? Then you must find ways to invest in yourself. If the company is cash flow positive, that will provide the first source of capital. Otherwise, finding ways to reduce the inventory will free up working capital that can be used for growth. Cost cutting is another obvious way to free up capital for a business, but it is important to cut fat and not bone or muscle. Reductions in advertising or R&D, for example, will drop straight to the bottom line in the short run. In the long run, though, they can lead to lower market share or an outdated product line. Look to lean and other strategies for sustainable, long-term cost cuts that are beneficial to the business.

Once you have identified a source of capital for your door or window company, whether it is internal or external, it is important to review all areas in which you could make investments with a completely open mind. If you have shunned acquisitions in the past because of the added complexity, consider buying a company that is small enough and close enough geographically to fold it completely into your existing operation.

All signals point to the fact that now is the right time to invest in door and window companies, regardless of the form of investment.

Michael Collins is an investment banker and a partner of Building Industry Advisors. He specializes in mergers and acquisitions in the door and window industry.


DWM

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