Bruce Werner, the founder of Kona Advisors LLC, specializes in governance, strategy, finance, and M&A. With a background as an author and experienced outside director, Werner has extensive experience in helping businesses navigate their growth and financial needs. He notes that growing businesses typically consume capital, with some generating enough cash internally to fund their growth, especially in the service sector. However, most businesses require external financing to support inventory and accounts receivable.
Financing growth can be achieved through profits, debt, or equity. Once a business’s capital needs exceed its cash flow, a combination of debt and equity may be necessary to align with growth strategies. Werner provides case studies of how owners reshaped their capital structures to support growth. For example, one business partnered with a private equity (PE) fund to replace guaranteed debt and provide necessary capital for expansion. Another distributor obtained a bank loan to finance a buyout without needing a financial partner.
In another example, a manufacturer faced the challenge of financing rapid growth after new distribution channels led to a significant increase in demand. With profits reinvested in the business and traditional lenders hesitant to provide more funding, the family-owned company ultimately brought in a PE fund to provide debt and equity capital. This decision allowed the business to continue growing and remain competitive in the market.
Werner highlights the importance of finding the right solution for financing growth. Private companies often struggle with a lack of capital and hiring top talent, impacting their ability to expand. Industry choice, growth rate, and profitability are key factors that drive a business’s capital structure, along with its order-to-cash cycle. Slowing growth or focusing on high-margin customers can improve profitability and make the business more attractive to potential investors.
For businesses in capital-intensive industries, access to capital may be the biggest constraint to growth. Without wanting an equity partner, options may be limited unless a new technology can reduce the capital intensity of the business. Werner emphasizes the importance of selecting the right people to work with, using the “airplane test” to determine compatibility before selling equity. Ultimately, success in financing growth comes down to the people involved in the business and their ability to make strategic decisions.
