Financial advisors offer many of the same services merchant bankers provide yet on a specific, nearer-term consulting basis.
Financial advisors work with management and operating partners to understand and achieve near-term transactions that enhance a company’s enterprise value.
Financial advisors provide near-term strategic assessment, knowledge, and experience that assist firms in identifying, planning, developing, managing, negotiating, and executing optimal capital transactions.
Our focus on advisory services for emerging and underperforming firms provides a more diverse and profound experience delivered in a time-sensitive and cost-effective manner.
The reasons for involving a financial advisor are similar to those for involving a merchant banker. This is because their primary services are very similar.
Their primary differences are that a client company may prefer to obtain strategic capital that can take a longer-term view rather than develop its options for immediate needs through various professionals.
Other than strategic vision, market knowledge, corporate finance expertise, and transaction experience, the primary tool of financial advisors is the ability to assist their clients in obtaining capital through Private Placements.
The primary benefits of Private Placements Regulation D issues are:
- A high degree of subscription flexibility ranging from $100 thousand to $10 million+ with combinations of debt, equity, or debt and equity capital.
- Investors can be more patient than venture capitalists, often seeking 10 to 20% per annum return on investments over a longer term of 5 to 7 years. On the other hand, venture capitalists often require a 25 to 40% per annum return on investment over a 3 to a 5-year term.
- Much lower costs than approaching venture capitalists or selling the stock to the public as an IPO (Initial Public Offering).
- Quicker form of raising money than typical venture capital markets.
The most likely candidates for Private Placements are companies in the third stage of finance (Second Round) that can demonstrate viable growth opportunities.
Private Placements do not work well for early start-up companies. Start-up funding (Seed Round and First Round) is usually associated with angel investors and venture capitalists. The typical phases of funding for new companies are grouped into four primary stages as follows:
Seed round: The company is still in very early start-up mode.
First round: The company has refined its business plan, conducted a market feasibility study, has some of its management team in place, and is starting to develop products and sales. The company’s negative operating cash flow tracks the original business plan.
Second round: The company has made good progress on its plan, product development is complete, sales have increased, and the business is expanding. The company has continuing negative or marginally positive cash flow. Profitability trends are positive.
The business model has been tentatively proven. The company needs time and strong execution to generate strong positive cash flow. The company pursues private placement to optimize growth capital.
Late stage round: The company has done well, attacked its market, refined its product, fine-tuned its business model, and is now gearing up for an initial public offering or other strategic progress.
Private Placements are a tremendous tool for emerging companies in their efforts to fund demonstrated growth from the “Second Round” and after that. Timing and structure are the key variables determining company liquidity, growth sustainability, and start-up team equity dilution.