There are a lot of different things private equity firms do ensuring investments are successful. Thankfully many of those things are things entrepreneurs can mimic for the benefit of their own company without necessarily having to buy another business or take on an outside equity partner. Utilizing the three key tools of corporate financial planning, Lantern Capital Advisors has seen work for a lot of different companies. It’s not just about having great books, but what are you doing with that information?
How do you think financial information can it help you achieve your goals or build more value than you would without it? The three tools of financial planning we will discuss are: Capital, Enterprise Value, and Acquisitions and Buyouts.
The first key tool of corporate financial planning is capital. Lots of companies have limited capital, so they end up with limited growth. There has been other businesses, even companies that have been in existence for quite a while, who’ve been able to turn that around by first thinking to themselves without regard to capital, what’s the best growth strategy for our company? And if we find something that’s really compelling we think we can execute on, can we quickly get the capital necessary to implement our growth plan?
Ask your team: What would you do if you had all the capital you needed to grow your company to its full potential?
It is also important to understand and be familiar with other forms of financing outside the personal bank. There is other sources of capital out there that are available that allow business owners to access more capital than they might get from the bank, and at the same time still keep control and ownership of their business. Lantern has relationship with those different capital sources and works with our clients to access their investment pools. We help our clients get the most out of the financing options for their business.
The second key tool of corporate financial planning is something called enterprise value. Enterprise value is a particular way of valuing a company, and it’s the most common one that’s used by buyers and sellers. It is important to understand the variables that go into enterprise value. There’s actually a way that you can use enterprise value in your strategic planning processes to help you think deeper about strategies focusing on things that don’t just drive revenue growth, but really are driving the value of the company. Companies that are intentional about enterprise value really can increase the value of their company even far greater than their revenue growth during that same period of time.
And then the third key tool of corporate financial planning is acquisitions and buyouts. That’s a pretty broad topic, however one particular metric private equity firms use all the time when they’re sizing up companies to buy is financing capacity. Financing capacity is driven by your own numbers.
Private equity firms use that information to determine if they’re going to buy a company, how much of their own capital they need to use versus what they can go out and borrow themselves. Why is that important to you? Well, if you’re interested to do an acquisition, or buy out a partner and you don’t want another partner, the metric of financing capacity is hugely valuable in being able to do that.
If you’re interested in doing an acquisition or a buyout and you don’t necessarily want to have an equity partner to be able to have to do that, it’s important for you to self assess what capacity you may have in your own business, and how that could be used to finance your acquisition or buyout.