Handbook of Financing Growth

KENNETH H. MARKS is the founder and Managing Partner of High Rock Partners, Inc. He has been involved as a manager, advisor, and board member with over two dozen emerging growth and middle-market companies. Marks was a member of the Young Presidents' Organization (YPO) while growing his first company. He teaches in executive programs at Loyola University Chicago and North Carolina State University. LARRY E. ROBBINS is a founding partner of Wyrick Robbins Yates & Ponton LLP, a premier law firm located in North Carolina. He is a leading attorney in North Carolina middle-market financing and M&A transactions. Robbins received his BA, MBA, and JD from the University of North Carolina at Chapel Hill. GONZALO FERNÁNDEZ is a partner with High Rock Partners, Inc. and a retired vice president and controller of ITT's telecom business in Raleigh, North Carolina. He received a BA in accounting from Havana University, Cuba, and wrote the book, Estados Financieros (Financial Statements, Third Edition). JOHN P. FUNKHOUSER has been a partner with two venture capital funds and operated as chief executive officer of four companies in a variety of industries. He worked in commercial banking with Chemical Bank of New York, in investment banking with Wheat First Securities, Inc., and in venture capital with Hillcrest Group. D.L. WILLIAMS is a managing partner of High Rock Partners, Inc. As a CEO for over twenty-five years, he led three global manufacturing/technology companies through major transitions—two of which he led the buyout of, working with private equity firms. As an advisor, he has worked with companies in numerous industries on growth, operational, and turnaround strategies to create value and implement change. Williams obtained his MBA from the Kenan-Flagler Business School at the University of North Carolina in Chapel Hill.

• Preface xvAcknowledgments xxiAbout the Authors xxiiiPART I The Financing Process 1CHAPTER 1 Introduction 3CHAPTER 2 Planning and Alignment (Begin with the End in Mind) 7An Overview of the Planning Process 8Strategic Planning 10Updated Forecast 27Business Valuation 27CHAPTER 3 Acquisitions, Recapitalizations, and Exits 37Acquisitions 37Selling the Company, Creating Shareholder Liquidity 41CHAPTER 4 Capital Structure and Financing Strategy 45Assimilating the Drivers 49Developing Liability Limits 63CHAPTER 5 Sources of Capital and What to Expect 69Bootstrapping Sources and Techniques 72Individual Investors (Private Placements Not from Angels or Institutions) 82Angel Investors 83Commercial Banks 95Asset-Based Lenders 100Commercial Finance Companies 115Leasing Companies 116Private Equity 119Venture Capital Funds 122Mezzanine Funds 152Buyout Funds 157Hedge Funds 164Strategic or Industry Investors—Corporate Venture Capital 166Merchant Banks 168Community Development Initiatives and Government Agencies 169Micro-cap Public Entities 193Royalty Financing 196CHAPTER 6 Equity and Debt Financings: Documentation and Regulatory Sources of Capital and What to Expect 203Basic Definition of Debt and Equity 203Debt Instruments 206Loan Documentation 212Equity Instruments 260Equity Investment Documentation 264Compliance with Securities Laws 292CHAPTER 7 Expert Support—The Players and Their Roles 301Counsel 301Board of Directors 303Investment Bankers 306Accountants 312Consultants/Advisers 315Summary 317CHAPTER 8 Closing the Deal 319Process Check-In 319Final Perspective 326PART TWO Case Studies 329CASE STUDY 1 Asset-Based Lender, Receivables Financing 332CASE STUDY 2 Asset-Based Lender, High-Risk Loan 336CASE STUDY 3 Asset-Based Lender, Assignment for Benefit of Creditors 339CASE STUDY 4 Asset-Based Lender, Acquisition 344CASE STUDY 5 Asset-Based Lender, Turnaround Funding 348CASE STUDY 6 Asset-Based Lender, Growth Financing 352CASE STUDY 7 Commercial Finance, Trade Financing 356CASE STUDY 8 Angel Investor, Initial Funding and Sale of Company 359CASE STUDY 9 Venture Capital, Early Stage Growth Equity 362CASE STUDY 10 Royalty Financing 365CASE STUDY 11 Venture Capital, Growth Equity 367CASE STUDY 12 Community Development Finance, Growth Funding 370CASE STUDY 13 Debt with Revenue Sharing 375CASE STUDY 14 Mezzanine Investment 377CASE STUDY 15 Private Equity, Acquisition through Exit 378CASE STUDY 16 Private Equity, Management Buyout/Partner Exit 380CASE STUDY 17 Private Equity, Restructuring 382CASE STUDY 18 Private Equity, Acquisition with Management Participation 385CASE STUDY 19 Private Equity, Public to Private Transaction 388CASE STUDY 20 Private Equity, Buy-and-Build Strategy 393PART THREE Financing Source Directory 397Suggested Use of the Directory Section 399APPENDIX A Corporate Finance Primer 523APPENDIX B Financial Statements 551APPENDIX C Discount Rates 563APPENDIX D How Fast Can Your Company Afford to Grow? 567APPENDIX E Notes about Start-Ups 583APPENDIX F Accounting Principles—GAAP and IFRS 587Glossary 591Notes 623Index 633

"The Handbook of Financing Growth, Second Edition remains the most important book on financing to be published in far more than a decade. If there is a way to do a business finance deal, it is covered in this book. Not only does the book explain how to do most all types of financing, it tells you why some companies succeed while others fail. The book is a true reference book that you can turn to when you need an answer, or when you need inspiration."—Marilyn J. Holt, Founder of Holt Capital,