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STRATEGY

It's Time for a Financial Partner When...

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Most successful businesses eventually reach a point where they can no longer make the most of their opportunities on their own. Even those that have financed strong growth internally will eventually come to a juncture where they require additional capital, expertise, strategic guidance or more seasoned management or board members to reach the next level. And surprisingly, the most obvious reason to hire a financial partner -- additional capital -- is not necessarily the most important consideration.

Perhaps your fast-growing company wants to expand through acquisitions. Maybe your company has outgrown the resources and reach of you and your co-founders. Whatever the challenge, seeking outside partners isn't always a clear case of needing capital. Here are six signs that might indicate your business is approaching the point where you should consider bringing on an outside partner.

Sign #1: You need the money to grow your business. Many companies seek outside capital for the simplest of all reasons: They need money to grow their business. For example, one company may need to hire, train, and put new workers in the field, a process that can take weeks or months before any revenues are generated. Another may require expensive machinery or plant facilities. The length of the working capital cycle -- the time between spending money on growth strategies and receiving additional cash collections -- means that many fast-growing companies must take on a financial partner to pursue the opportunities in front of them.

Sign #2: You have the opportunity to make strategic acquisitions. Most companies start by growing internally, eventually reaching critical mass where they can consider acquiring complementary businesses. Many entrepreneurs can benefit from a financial partner's experience in answering such questions as: Should we make this acquisition? How should we structure the investment? How should we finance it?

Sign #3: You want to upgrade your board of directors. As their businesses become more complex, entrepreneurs often seek sophisticated, unbiased advice on strategic issues. It becomes a good idea to extend the board outside the circle of full-time employees and close associates. A financial partner will typically sit on your board, providing an outside perspective on the strategic issues you face. That partner can also recruit other seasoned advisors with relevant experience in your industry to provide additional expertise.

Sign #4: You need to recruit top-level executive talent. Fast-growing businesses often rely on home-grown talent -- hardworking people who have grown up within the company but lack the experience to take it to the next level. A financial partner often has the network to identify high-level candidates for senior positions and can help you structure fair, appropriate compensation for these individuals.

Sign #5: You and other early investors seek liquidity. Entrepreneurs typically have all or most of their personal wealth tied up in their company, exposing them to a high degree of personal portfolio risk. An investment by a financial partner can help them access some of this wealth and diversify it to enhance their financial security. Typically outside investors can provide liquidity to owners and early investors in one of three ways: They may buy stock from the founder, other management, investors or ex-employees; they may invest money that will then be issued as dividends to current shareholders; or finally, if the company's initial capital was structured as a loan from the founder, an outside investor may put money into the company to retire that debt. All three of these mechanisms provide cash to owners and early investors, which can then be spent, saved or reinvested in a diversified portfolio.

Sign #6: You're planning to sell or take your company public in two to five years. If you think you might sell your company within the next two to five years, taking on a financial partner can be a critical first step. Your investor becomes a full partner -- someone who also owns stock and who wants to sell at the highest possible price. Also, this financial partner has probably been through the sale or IPO process many times before and can help you avoid mistakes and maximize your company's market value. For instance, your financial partner can advise you on accounting requirements, how to select an investment banker, how to negotiate an underwriting agreement and what to look for in legal representation.

All of these signs are valid reasons to seek a financial partner. They are critical indications that companies, as well as their founders, employees and investors can benefit from an infusion of capital and strategic advice. They are based on each individual company's business prospects, not market conditions, and that's a final important point. Business owners should seek financial partners when their company needs them, not when market conditions make it easy to obtain funding. Taking on a partner can help increase the value of your business -- through internal growth, acquisitions, stronger board guidance, or more experienced senior management -- regardless of short-term market conditions.

Tom Roberts is a managing partner of Summit Partners, a leading private equity and venture capital firm that invests in growing, profitable, privately held companies with proven business models, records of revenue and earnings growth, and the leadership capable of sustaining that growth. He can be contacted at: 617.824.1050, or troberts@summitpartners.com.




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