Preparing for Institutional Capital
Early, thoughtful planning is key to a successful transaction.

Your business survived the downturn while many competitors fell by the wayside. Now that the market is recovering, how do you take advantage of financial opportunities that arise? Institutional capital providers, which include non-local lenders, bank syndications, specialty lenders, insurance companies, pension funds, university endowments, private equity funds and family offices, can be a resource for working capital, acquisition capital or a means to harvest value built throughout the years. When preparing to acquire institutional capital, owners and operators should understand capital providers’ goals and target investments and make accounting, operational and organizational changes to maximize the value these professional investors will assign to the business.

As with many aspects of business, timing is as important as process, so begin preparations the moment you consider a transaction. There is no such thing as too soon. If business owners made decisions throughout the growth cycle based on the expectations of an exit, shareholder goals would be realized in a greater number of transactions. Mitigating risks to the business requires thoughtful evaluation and time. If you have already begun to think about growth capital, taking chips off the table or a full exit strategy, follow these steps and related timing for preparing for a successful transaction.

It is never too early to tackle the large structural items like assembling a financial reporting package, estate planning, corporate records and solidifying and defending your company’s intellectual property in the form of copyrights, trademarks and patents. Next, clean up your balance sheet. Transfer any company-owned real estate and non-operating 
assets (cars, boats and planes, etc.) into a separate legal entity.

Finally, build a qualified management team with a compensation structure that incentivizes the team to stay through a transaction. Transfer key responsibilities to the management team, document the business by preparing organizational charts, job descriptions and a business plan, and position yourself as a non-
essential owner.

Twelve to 18 months before your transaction, obtain long-term contracts with customers that will not be voided by a change of control; diversify customer and supplier concentration; bolster backlog; remove shareholder loans and intercompany receivables and payables; and begin assembling a highly skilled transaction team to guide you through the process. The transaction team should focus on three key areas:

  • Legal – Hire an attorney with extensive transaction experience.
  • Financial – Find a skilled, industry-focused investment banker.
  • Tax – Fifteen to 35 percent of your proceeds are dependent on the tax structure.

Why do you need a transaction team? This transaction is likely the result of your life’s work and might be the only transaction you ever complete, so you have one chance to get it right.

An attorney with extensive transaction experience will be vital when negotiating with the experienced legal team sitting across the table. However, keep in mind that the law firm that handles your personal and corporate matters may or may not be the right one to handle a transaction. Similarly, the accounting firm that files your corporate taxes may or may not have the expertise to assist in pre-
transaction tax planning and tax minimization, so investigate and ask questions. An accounting firm that specializes in tax planning and tax minimization in a transaction will ultimately net significant savings for you. But once an offer is received, it is too late to begin tax planning.

Finally, an industry-focused investment banker understands your business and knows what attributes are valued by investors. The right banker has established relationships with industry-specific capital providers and strategic buyers and knows how to capture upside by positioning your company in the most favorable light.

The transaction team is also important to shoulder the additional workload associated with a transaction process so you, the business owner, can focus on driving the business. The transaction process can be a long and onerous one. The worst mistake a business owner can make is to take his or her eye off the ball in the midst of a transaction and miss 
financial targets.

One year before your transaction, begin to compile transaction-
specific documents: an executive summary, confidential information memorandum, investor list and management presentation. You should also perform pre-due diligence, assemble a data room and maintain a business trajectory. At this point, avoid new strategic initiatives, growth capital expenditures or research and development (R&D) spending, and focus on collecting cash and paying down debt. Eliminate all discretionary 
expenses, focus on maximizing the bottom line, and set a budget for the year that you can beat. Research providers such as The Risk Management Association (RMA) offer financial ratio benchmarks by industry that are helpful in evaluating your business from liquidity, profitability, working capital and leverage perspectives. Understand where your construction business ranks, and turn areas of weakness into strengths.

In addition, use the benchmarking information to bring working capital down to industry standards, shrink the balance sheet and distribute excess cash well in advance of a transaction.

The task of preparing for institutional capital can seem daunting, but it is 
essential for success. For many business owners, this process is their final act as the founder or CEO and will greatly 
determine the success and viability of the business for years to come. A business is typically the founder’s or shareholder’s largest and most valuable asset and must be treated as such in order to achieve optimal results. Early, thoughtful preparation is the time-tested key to ensuring a favorable outcome.