"Financing, just like business strategy, requires a long-term plan!"
Key insights of Valerija Liege from a webinar speech on strategic aspects of fundraising
At the end of the last month, Valerija Liege, CFA, Partner at Oaklins Baltics and the Global Executive Committee Member at Oaklins International, took part in a webinar "€1-8 million bond process from A-Z", organized by law firm Sorainen, and talked about the strategic aspects of fundraising and choosing between corporate bond issuance process and other sources of finance.
What questions are business owners usually concerned with?
"For entrepreneurs who want to grow the business, the options available are to either develop the existing business or acquire another company. In both cases the question is about how to finance the process," stated Liege. "If, on the other hand, they wish to "eat the fruit of their labour" the available options are to either fully or partially sell the business, or to reorganize the capital structure and pay dividends. In the first instance the question that arises is to whom they can and should sell, while, in the second instance, the question again is about how to finance the process."
What are the options for financing the development of an existing business?
"One option is to invest in the share capital, and you can do it by either directly investing in the share capital or by listing of shares on the stock exchange - both have advantages and disadvantages, and situations where one is more applicable than the other. The other option is to finance the development of an existing business by a loan - either a direct loan from a bank or from a fund to the company, or, by issuing corporate bonds, often listed on the same stock exchange ecosystem."
The available tools for financing the purchase of another business are the same as those available for the development of an existing business, but the advantages and disadvantages of either of the chosen paths differ.
"For example, if you choose a direct loan from a bank, it's a cheap and easy option, but it's not customized for purchasing another business," states Liege. "In this case a loan from a fund can work better because it's possible to customize it. On the other hand, it is possible to list shares or bonds on the stock exchange on a previously approved program, but, if the purpose is a single purchase, issues potentially can arise with the lack of confidentiality."
What are the available strategies for selling the company?
You can either sell a minority stake or 100% (or majority of 50% plus one voting share) of the company, and in both cases the stake can be either sold directly or via listing the shares on the stock exchange. "When you list the shares on the stock exchange, in both cases it complicates the potential further 100% sale of the company," explains Liege. "Direct selling of shares is basically the only way to quickly sell 100% of the company, while listing the shares on the stock exchange with the goal to sell 100% or majority is in practicality very difficult to achieve. Even in the case of selling the minority stake, a direct seller is "more understandable" to potential buyers, whereas, if you're listing the shares on the stock exchange, a growth component (additional equity injection) can be necessary, and, another disadvantage can be that there's no clear exit deadline for the new co-investors."
What are the options for reorganizing the capital structure and paying dividends?
"Dividends are paid either by using the operational cash flow or loan; however, there is no widespread practice in the Baltics to pay out dividends using a loan. Many organizations still choose to do it, but banks tend to impose restrictions on the amounts paid out to shareholders when loans are used," explains Liege. "It is easier to agree on dividends policy and its changes with a fund than it is with a bank."
Refinancing can be done by a loan or via listing shares or bonds on the stock exchange. "It's not recommended to refinance via listing shares, whereas bonds are an instrument which can help simplify the capital structure. Bond repayment terms can facilitate the company's cash flow."
"Before delving into specifics of each step, it is worth noting that financing, just like business strategy, requires a long-term plan," Lieģe concludes. "Initially, a start-up proves itself in the industry and eventually, ideally, finds a new niche - reaches a break-through, after which public market financing becomes available and eventually the company reaches the desired state for optimal sale."
Contact Valerija Liege to find out more
Tel.: +371 29 178 061
E-mail: v.liege@lv.oaklins.com