Due to regulatory requirements banks must be conservative and generally do not lend to companies with consecutive years losses, capital deficiencies and those that are too highly leveraged. The good news is that there are many non-traditional financing sources that are very creative and flexible and specialize in distressed and special situations. These Beholders see beauty in a Company’s collateral. These lenders include asset-based lenders, real estate lenders, inventory lenders and leasing companies. Other Beholders see beauty in the credit worthiness of a Company’s customers. These lenders include factors, and companies that specialize in purchase order financing, trade finance and inventory financing. There are even finance companies that will advance funds against streams of periodic and balloon payments one expects to receive over time or in the distant future. Examples of these payment streams include; lottery winnings, tax refunds, structured court or insurance settlements, inheritances, annuities and royalty payments.
There are also many Beholders that will make equity investments in a company. Venture Capitalists (VC’s) like to invest in start-up companies with a new proven product or service that has demonstrated customer acceptance. VC’s look for unique products/services with huge market potential. They frown on “me too” products that lack barriers of entry and protection of intellectual property. There is a group of Beholders often referred to as “Angel Investors”. These Angels tend to be very wealthy individuals who seek to invest seed money in start-up companies often overlooked by VC’s. Angels often like to invest in companies that are in industries in which they have experience. Angels will generally invest less money than VC’s.
Other Beholders that make equity investments are groups that specialize in buying or investing in “troubled companies”. To these Beholders or “Opportunistic Investors”, the more troubled and the more problems the better, as a small investment can result in a significant ownership percentage in this scenario. A troubled company with few remaining problems may not be as attractive as a company that still has numerous problems as there is less upside potential after fixing the few problems that may still remain.
While Opportunistic Investors take risks with troubled companies, there are still other types of Beholders that prefer successful companies that require additional assistance to get to the next level. These Beholders are referred to as either “Equity” or “Buy-Out” groups. These Groups seek companies that operate under constraints that often hamper their growth. These constraints may include, lack of adequate capital for expansion and growth, limitations on managerial or operating resources, excessive financial leverage or poor capital structures, or neglect from parent companies that no longer deem a division or subsidiary important.
This Beholder’s goal is to identify these constraints, alleviate them, and fund the opportunity to unlock its potential value. Thus, the goals of these Groups is to take an already "good" company, limited by financial or operational constraints, and make it a "great" company.
There is another group of Beholders called “Mezzanine” lenders. Mezzanine lenders are riskier than commercial banks and asset based lenders as they are not the “senior” lender and therefore are not in the first position with respect to a company’s collateral. In the case of a liquidation, a Mezzanine lender would only be entitled to collateral after the senior lender is made whole. To compensate for this risk, these Beholders charge very high interest rates and are often given warrants to purchase equity in the companies they invest in. Mezzanine lenders will give a company the right to buy back equity at a hefty price. These Beholders are expensive due to the additional risks they take.
The process of raising capital is very complex and time consuming. When company personnel devote too much time to this process they often take their eyes off of running the business. Companies should consider using financial consultants to assist in managing this process for their company from start to finish. Remember, Beauty is in the eyes of the Beholder! An experienced financial consultant will know where to find the appropriate Beholders for the appropriate situation.
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Kensington Company & Affiliates would like to thank Neil A. Seiden for contributing this informative article.
Neil A. Seiden, Managing Director, Asset Enhancement Solutions, LLC
neil.seiden@assetenhancement.com - 516-767-0100 – www.assetenhancement.com
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