Raising Capital in Extraordinary Times

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On May 19 and 20, Inc. Business Owners Council, a new membership organization for top entrepreneurs and family business owners, held meetings on capital raising for business owners.

The topic of the day? What it takes to raise capital in a de-leveraged, post-economic-meltdown market. It's been more than six months since the fall of Lehman Brothers, Bear Stearns, and AIG. The worldwide credit crunch has begun to loosen up and business owners everywhere have come face-to-face with the role of credit in our increasingly global market. Now that the thaw has started, what do capital markets deals look like for private companies?

These were the topics raised during this first set of meetings. On May 19, business owners from the Long Island, New York, area gathered in a $12 million mansion poised on the tip of one of New York's most exclusive addresses -- Centre Island.

The following day, at Inc.'s sun-filled conference room overlooking New York Harbor, area business owners gathered for an encore performance of this crucial topic.

First up was Michael Laurie, a private banker from Herald National Bank, who shared with us the most common pitfalls of when business owners seek credit.

"If you own a pass-through entity (such as an S-Corp), you can't have an earnings statement that shows zero dollars and expect to borrow money," Laurie told the audience. He was referring to the common practice of business owners minimizing corporate taxes in closely-held private companies. "The problem is that your ability to pay back a loan is calculated partly on your profits. No profits, no credit." Laurie recommended a close relationship with your CPA or other advisers to make sure that your business is well-positioned to show healthy finances when seeking a loan.

In addition, Laurie told the crowd of attendees that lines of credit are harder than ever to come by. Lines of credit made sense when money was cheap, he told us. Now that capital is more scarce, lines of credit were a less attractive model to banks.

Warren Feder, a middle-market adviser shared a different perspective. Hailing from Carl Marks Advisory, a firm that dates back to 1925, Feder speculated that there's nearly $1 trillion in assets on the sidelines, waiting to be invested in growing companies. What's more, Feder shared with the group that private equity firms are less inclined to demand a controlling interest in a company. Instead, minority positions were more common these days. "But," he warned, "you better have an exit strategy in mind because private equity expects returns of more than 20 percent on their investment and they expect it within three to seven years."

Both Feder and Laurie provided a clear picture of the capital markets from the debt side (Laurie) and the equity side (Feder). For every business owner seeking capital, there's capital out there seeking a business.

Last updated: May 29, 2009

LEWIS SCHIFF | Inc. Business Owners Council

Lewis Schiff is the executive director of the Inc. Business Owners Council. His latest book is Business Brilliant: Surprising Lessons From the Greatest Self-Made Business Icons.




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