Strategies and Capital Structure
KENNETH H. MARKS
LARRY E. ROBBINS
JOHN P. FUNKHOUSER
John Wiley & Sons, Inc.
Additional Praise For
The Handbook of Financing Growth
“The authors have compiled a practical guide addressing capital formation
of emerging growth and middle-market companies. This handbook is a
valuable resource for bankers, accountants, lawyers, and other advisers
Alfred R. Berkeley
Former President, Nasdaq Stock Market
“Not sleeping nights worrying about where the capital needed to finance
your ambitious growth opportunities is going to come from? Well, here is
your answer. This is an outstanding guide to the essential planning, analysis, and execution to get the job done successfully. Marks et al. have created a valuable addition to the literature by laying out the process and
providing practical real-world examples. This book is destined to find its
way onto the shelves of many businesspeople and should be a valuable addition for students and faculty within the curricula of MBA programs.
Read it! It just might save your company’s life.”
Dr. William K. Harper
President, Arthur D. Little School of
Director, Harper Brush Works and TxF Products
“Full of good, realistic, practical advice on the art of raising money and
on the unusual people who inhabit the American financial landscape. It is
also full of information, gives appropriate warnings, and arises from a
strong ethical sense. If you’re trying to find funds for your company, go
buy this book.”
Edward F. Tuck
Principal, Falcon Fund
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Strategies and Capital Structure
KENNETH H. MARKS
LARRY E. ROBBINS
JOHN P. FUNKHOUSER
John Wiley & Sons, Inc.
Copyright © 2005 by Kenneth H. Marks, Larry E. Robbins, Gonzalo Fernández,
and John P. Funkhouser. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
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Library of Congress Cataloging-in-Publication Data:
The handbook of financing growth : strategies and capital structure /
Kenneth H. Marks . . . [et al.].
p. cm. — (Wiley finance series)
Includes bibliographical references and index.
ISBN 0-471-42957-0 (CLOTH)
1. Small business—Finance—Handbooks, manuals, etc. 2. Business
enterprises—Finance—Handbooks, manuals, etc. 3.
Corporations—Finance—Handbooks, manuals, etc. I. Marks, Kenneth H. II.
Printed in the United States of America.
10 9 8 7 6 5 4 3 2 1
To Kathy, Lauren, Lilly, and Jenna,
in support of doing God’s will
About the Authors
The Financing Process
Business Performance and Strategy
The Business Plan and Strategic Initiatives
Shareholder Goals and Objectives
Current Financial Position
Approaches to Valuation
Assimilating the Drivers
Developing Liability Limits
Sources of Capital and What to Expect
Bootstrapping Sources and Techniques
Individual Investors (Private Placements Not from Angels
Commercial Finance Companies
Venture Capital Funds
Strategic or Industry Investors—Corporate Venture Capital
Community Development Initiatives and Government Agencies
Micro-Cap Public Entities
Equity and Debt Financings: Documentation and Regulatory
Compliance with Securities Laws
Basic Definition of Debt and Equity
Equity Investment Documentation
Compliance with Securities Laws
Expert Support—The Players and Their Roles
Board of Directors
Closing the Deal
Case Study 1: High-Risk Asset-Based Loan/Refinancing
Case Study 2: Asset-Based Lender, Assignment for Benefit
Case Study 3: Angel Investors
Case Study 4: Royalty Financing
Case Study 5: Commercial Finance—Trade Financing
Case Study 6: Mezzanine Investment
Case Study 7: Private Equity—Acquisition to Exit
Case Study 8: Private Equity—Restructuring
Case Study 9: Private Equity—Acquisition with
Case Study 10: Private Equity—Public-to-Private Acquisition
Case Study 11: Merchant Bank Implements
Case Study 12: Strategic Investment
Case Study 13: Community Development Financing
Case Study 14: Debt with Revenue Sharing
Financing Source Directory
Suggested Use of the Directory Section
Corporate Finance Primer
How Fast Can Your Company Afford to Grow?
Notes about Start-Ups
rowth consumes cash! It’s what I refer to as the “First Law of Entrepreneurial Gravity.” You run out of cash and the game is over.
Each year, hundreds of companies fail because of insufficient funding.
Others fail to thrive because of a lack of funding. The Handbook of Financing Growth will prove invaluable to those CEOs and CFOs searching
for the right formula to fund their company’s growth. After all, optimal
growth isn’t possible without the underlying capital structure to support it.
The authors have put together a comprehensive sourcebook with a wealth
of information on the funding process itself and sources of capital. Far
from being simply a textbook, this book is a complete operator’s manual
on the funding process. I know of few other books on corporate funding
that are as comprehensive as this one. Every pertinent subject has been covered here.
The book begins with several chapters that describe the financing
process, and then details sources of capital. An entrepreneur unfamiliar
with the array of funding options available might at first think of only selling stock (equity), or borrowing from a bank (debt). However, whole spectrums of sources of capital exist and are described in detail in eight chapters
and more than a dozen case studies. Not every capital source is right for
every growth situation, so the authors are careful to describe the right application for each of these sources. The reader is shown how to develop a
funding strategy that is right for his or her opportunity.
Most importantly, the book is full of examples and case studies, giving
a practical view to the process. My work at Gazelles and as founder of the
Young Entrepreneurs’ Organization (YEO) has afforded me the opportunity to meet and work with thousands of entrepreneurs of growing firms.
What they need is less theory and more practical applications of the ideas
that can help them grow their business. And we learn best from the experiences of others (the very premise of groups like YEO), which is what the
authors do best through their well-crafted “live” examples.
The handbook’s authors have a wealth of practical experience in the
financing arena. Kenneth Marks has been involved as manager, adviser,
or board member with more than a dozen emerging growth and middlemarket companies ranging from a venture-backed software start-up to a
middle-market insurance services provider. Larry E. Robbins is a founding
partner of Wyrick Robbins Yates Ponton LLP, a premier law firm located
in the Research Triangle Park area of North Carolina. Gonzalo Fernández
is a retired vice president and controller of ITT’s telecom business in
Raleigh, North Carolina. Subsequently he spent 15 years working as a finance executive for emerging growth companies and as an accounting and
business consultant to other companies. 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.
Growing a business quickly and effectively is perhaps the greatest challenge faced by an entrepreneur. The Handbook of Financing Growth is an
effective tool for helping meet that challenge. I heartily recommend this
handbook to you as a resource for improving the success of your company
through effective financing and capital planning.
Founder, Young Entrepreneurs Organization
and CEO, Gazelles, Inc.
e share an enthusiasm and positive outlook for the growth and vitality
of America’s emerging and middle-market companies. This segment of
the economy has unprecedented access to capital and resources relative to
any other time in history. Today there is nearly $150 billion of equity capital available, about $90 billion in private equity funds and another $60 billion in venture capital funds—ready to be deployed.1 These figures do not
include the billions of debt capital available from various lenders ranging
from commercial banks to specialty finance companies.
Within these pages, we introduce the full spectrum of funding alternatives available to emerging and middle-market companies, and we present
practical strategies and techniques as you consider capitalization of your or
your client’s company.
Our approach to funding a company is process based—driven by the
use of funds, the stage and industry of the company, and the investor objectives. We have written this handbook primarily from practical experience
and empirical data; and we have included some basic corporate finance theory that is helpful as a foundation in understanding some of the topics discussed within the body of the book.
The focus is on companies with revenues ranging from zero to about
$500 million, deemed start-up through middle-market. Representative
companies are those in the INC 500 and the Forbes Small Business 100,
venture-funded companies, and those many thousands of companies
funded with friends’ and family money and hard-earned savings and
We find many competent and successful businesspeople commonly
misusing terms and having misconceptions about basic aspects of corporate
finance. Many times we hear the leader of a company discuss the alternatives for funding the next stage of growth in the business and mentioning
venture capital. The fact is that very few companies are a candidate for venture funding and even fewer actually obtain it. Based on anecdotal data, we
estimate the funding rate of business plans submitted to venture capitalists
to be in the 0.2 percent to 0.5 percent range or 1 out of 200 to 1 out of 500
companies.* Even with such a low funding rate, do not give up! We also
hear stories from entrepreneurs who just do not understand why their
bank will not lend them the money they need to hire the next round of employees required to support their growth. If only these folks understood the
role of the bank or the type of companies that venture capitalists actually
invest in; if they only understood the full range of financing alternatives
and how to obtain the right type of funds for their needs at the right time.
This handbook is meant to address these questions and to provide the basics of corporate finance as well as to provide strategies with which to fund
all types of viable operations at the various stages of the company life. In
addition, we will drill down into the details to illustrate how to execute a
financing plan. We desire to provide the reader a solid foundation and perspective from which to address capital structure questions and the financing needs of the company.
You will note a series of recurring themes with regard to financing.
These apply to those who are operating managers reading this handbook
and to those advising and supporting the company; it is a bit of motherhood and apple pie, but is central to successful fund-raising:
1. Establish and follow a process.
2. Start raising capital before you need it.
3. It’s relatively easy to get an audience with investors compared to getting funding. Be prepared for the tough questions and know your business (get your house in order):
■ Know your market and competition (details).
■ Know your weaknesses and have a solution.
■ Define a clear use of funds (this leads to alternative capital structure
and funding sources).
■ Be able to explain your strategy.
■ Identify relationships and levers (this sometimes reveals funding
sources and partners).
■ Prepare the management team and rehearse your presentations.
4. Select only a few prospects; otherwise you waste time and get a reputation for shopping the deal.
5. Know what kind of money you need and how it plays into the overall
capital structure of the company.
*The percentage of business plans funded increases significantly if the basic concept
is reasonable and the entrepreneur finds a fundable formula.
6. Sample the market for acceptance and issues; listen to criticism and
learn. Go to sources where you have relationships for quick and candid feedback. Look for trends.
7. Be realistic regarding valuation, issues, strengths, weaknesses, and
8. Have alternatives and be creative.
9. Follow the operating principles of “do what you say you are going to
do” and “no surprises.”
All of this can be summed up into a single word: credibility. There is
no substitute for solid operational performance. We believe we saw an infrequent occurrence with the Internet bubble where companies (dot-coms)
could raise capital without regard to business execution; those days have
passed! There may be some reading this handbook who think they
would be lucky to obtain financing of any type; we would challenge you
to look at some of these basic issues to determine the root cause of your
struggle. Many times the discipline of an institutional investor (equity or
debt) forces management to address the hard issues and to better operate
the business. If as an operator or leader of a company you can do this
prior to obtaining outside financing, you may be in a stronger position
to choose your financial backers and to defend a more aggressive valuation. Once again, we are talking about the credibility of management
Our target audience is the leaders, managers, investors, and advisers of
and to these companies, and those aspiring to one of the many roles in
building these firms. More specifically and by its title, this work is a handbook, written for entrepreneurs, founders, presidents, CEOs, CFOs, members of a board of advisers and board of directors, lenders, investors,
attorneys, accountants, consultants, investment bankers, commercial
bankers, controllers, and senior management. In addition, we believe this
handbook is a useful resource for students in college and professional education courses focused on entrepreneurial and growth companies. However, unlike either the encyclopedic or the 1-2-3 Home Depot-esque guides
that the term handbook connotes, this document strives to be far more
than that. It’s a combination—part reference guide and part repository of
practical information and applied research. The contents range from comparative financing vehicle tables charted on the risk-return continuum to
detailed capital-instrument definitions to a showcase for real case studies.
In our collective opinion, the theoretical without the practical would potentially skew the reader’s perspective, or worse, offer incomplete information. To further drive key points home, we have continually tried to pepper
the text with comprehensive examples from both successful and unsuccessful companies.
The financing growth portion of the title reinforces our focus on the
growth aspect of a business, and which financing alternatives are most appropriate. Not only will capital structure differ by industry and by life cycle of a firm, but also by the risk tolerance of the executive team and
investors. Peace of mind and security might be more appropriate in the
short run than a perfectly optimized mix of debt and equity, or worse, a
strategy that leverages assets to their greatest extent possible in order to
maximize value. Of course, these same executives must concurrently balance their psychological needs with investors’ requirements, internal rates
of return, and actual shareholder returns.
Part One of this handbook, “The Financing Process,” provides a detailed description of the steps followed in an ideal scenario. We start with an
overview of strategy and the importance of defining the objectives of the
company and the various stakeholders. Then we transition to a discussion of
the use of funds and addressing risk issues. To support this section, we provide a refresher or summary overview of corporate finance in Appendix A.
Much of this content is derived from work by Aswath Damodaran in his text
Applied Corporate Finance.2
Aswath Damodaran is an associate professor of finance at New York
University’s Leonard N. Stern School of Business. He has received several
awards, including the NYU Distinguished Teaching Award in 1990, Stern’s
Outstanding Teacher Award in 1988, and the Professor of the Year Award
in 1988, 1991, and 1992. He also offers training programs in corporate finance and valuation at Deutsche Bank, Swiss Bank, Credit Suisse, J. P.
Morgan, and Smith Barney. A former instructor at the University of California at Berkeley, he has written several articles for many of the nation’s
leading financial journals.
We chose not to reinvent the wheel when it comes to the basics, but to
use Damodaran’s extensive research in this area. We provide a theoretical
and practical discussion surrounding capital structure (the design of the
balance sheet—i.e., the mix of debt and equity used to fund shareholders’
objectives). We place emphasis on the spectrum of funding instruments,
sources, and expected rates of return followed by suggestions on the use of
third party experts. Lastly we address closing the deal, managing the relationship with the investors/lenders, and exiting or repaying the funds.
Part Two, “Case Studies,” provides real examples of transactions with
companies in varied stages and industries; this provides the backdrop for a
Part Three, “Financing Source Directory,” is an extensive list of actual
funding sources. It’s accompanied by access to our online database.
In Appendix B, we provide a short tutorial regarding financial statements and reporting. Appendix C contains a note about calculating the discount rate used in valuing emerging growth and middle-market privately
held companies. Appendix D is a reprint of an article titled “How Fast Can
Your Company Afford to Grow?” illustrating how to determine the maximum rate of growth for a particular company based on internally generated cash flow. In Appendix E we present some observations and thoughts
about financing start-up companies.
Finally, an extensive Glossary provides a guide to the most common
terms used in corporate finance and a practical definition for each.
We want this handbook to be a reference and guide for you as you develop and execute the financing plan for a company. Further, upon completion of reading this handbook, we intend that you will have the basic tools
to structure a company’s balance sheet to meet its objectives, and the direction to find the required funding.
It is worth noting that where applicable we have adapted content from
select writings of specialists in various fields. Though we are knowledgeable in every aspect of the financing process, we want to ensure the reader
is receiving information from the most qualified sources with a contemporary perspective. In addition, we have reached out to the investment and
lending communities as part of our primary research to capture current
data, actual examples, and an industry-based perspective to counter our
own experiences and biases.
We are always receptive to questions and comments, so do not hesitate
to write us at: khmarks@MarksAndCompany.com, lrobbins@Wyrick.com,
gf@MarksAndCompany.com, or jfunk@MarksAndCompany.com.
KENNETH H. MARKS
LARRY E. ROBBINS
JOHN P. FUNKHOUSER
Raleigh, North Carolina
e gratefully acknowledge and thank the many contributors and supporters of this work. In particularly we would like to mention Aswath
Damodaran, Verne Harnish, Peter Pflasterer, Donald Rudnick, Andy Burch,
Tom Holder, Buddy Howard, Chris Mercer, Mark Larson, Ian Cookson,
Don Tyson, Dana Callow, Roy Simerly, Ira Edelson, Robert Winter, Matt
Emerson, Frank Buckless, David Buttolph, Bruce Kasson, Bob Calcaterra,
Linda Knopp, Campbell R. Harvey, and Neil Churchill.
We are most appreciative of the support provided by the Tuck Center for
Private Equity and Entrepreneurship of the Tuck School of Business at Dartmouth, and the works and content by Professors Michael Horvath, Colin
Blaydon, Fred Wainwright and Andrew Waldeck, Jonathan Olsen, and Salvatore Gagliano; Ross Barrett of VC Experts, Inc.; and Patrick O’Rourke of
BizStats.com. Many thanks to the hundreds of industry firms that contributed information to the Financing Source Directory in Part Three.
We are grateful to our case study contributors David MacNaughtan,
Robert Newbold, Robert B. Landis, David Warner, Sabine Zindera,
Franklin Staley, Vito Russo, Donald Rudnick, George M. Richmond, James
Rutherfurd, Leo White, John Hamilton, Valerie Raad, Rick Larson, Mark
Wilson, Meg Barnette, and David D. Buttolph.
We appreciate the guidance, confidence, support, and patience of
Pamela van Giessen, editorial director, and Jennifer MacDonald, editorial
program coordinator, both with our publisher John Wiley & Sons, Inc. Janine Hamlin provided significant support with the creation of graphics. Finally, special thanks to Frank J. Fabozzi for connecting us to Pamela.