When do you raise capital?

A big decision for business owners is whether to take outside capital. Let's assume you've decided to go ahead and raise outside money. When do you do it?

Here's the short answer, which is written in stone for all private equity people on Bay Street: Raise money when you can, not when you have to.

What does that mean?

It means raise money when economic conditions mean that private equity investors or lenders are pitching you. Raising money means selling a piece of your business (equity) or making a lender confident that you have the cash flow to pay back a loan (debt). You will find the situation much more pleasant in a seller's market rather than a buyer's market.

As with every other kind of market, capital markets go through cycles. At the peak of these cycles, such as 2007, so many investors are trying to put cash to work that money is cheap and terms are good. At the bottom of these cycles, meanwhile, such as from October to last spring, investors can tell you whatever terms they want because you need the cash.

Similarly, the attractiveness of investing in businesses goes through cycles. Nothing is more attractive to an investor than a company that doesn't need money. Then the investor feels privileged to be “allowed” to invest. I hear from prospective clients that they do not need money and that is exactly when to bring in private equity and boost your bottom line while taking risk off the table.

Bob Roy, Roynat, used to say, “Go and ask for money when you have a tan.” Along the same lines, nothing is less attractive than a company that needs money desperately and is talking up a storm to anyone.

So, from the perspective of a business owner, the best time to raise money is in a white-hot capital market when you do not really need it. In these periods, you should raise more money than you think you'll ever need.

The worst time to raise money, meanwhile, is at the bottom of the cycle when you're running low on cash. If you wait until then to start fund-raising, you will be forced into needlessly painful situations. Perhaps you will take debt at a higher rate or you may have to give up part of your business you did not plan to give. This is not a position of strength.

Of course, when times are good, many entrepreneurs make a common mistake: They plan the revenues for the year ahead based on the past few years growth. In doing so, they base their outlook for future cash requirements on this past success, instead of asking what would happen if, say, their revenue got cut in half. So, when the cycle turns, they get shocked and cannot believe their good times have stopped and they suddenly need money just to survive. We saw this unhappy situation with more than a few clients who could have avoided their cash squeeze.

Raising money when you can instead of when you need to means avoiding this mistake.

Never assume that good times will continue forever - because they won't. Instead, when everything is going smoothly, ask yourself how much cash you would need if the economy suddenly collapsed. And if someone is willing to give that money to you on reasonable terms, take it.

With the markets running now and interest rates unlikely to rise, now is a good time to raise capital. Give Loewen & Partners a call to help you raise capital.