Australia: Securing the right capital structure is vital to a business’s continued operation and growth, particularly given current market conditions, according to chartered accountants and business advisory firm PKF.
Vince Fayad, Partner and Corporate Advisory practice leader for PKF, said it was vital now more than ever that business owners undertake an objective review of their business and assess the viability of various funding options available to them, in order to maintain and protect their business viability.
"The best advice tends to revolve around the saying 'work with the cards your dealt with', which for business owners means that they need to first understand their capital structure and cash flow strengths and weaknesses and objectively assess the capital options available to them, whether that be debt through a bank or other lender, or private equity of some kind," he said.
Mr Fayad warned that the current increases in business operating costs and overheads will place substantial pressure on the business’s capital structures. He said, "Particularly in the retail, importing, distribution and manufacturing sectors. I'm seeing that many businesses are ill equipped to deal with any increases in operating costs or managing working capital requirements particularly in the area of stock. If the movement of stock slows down for any reason, as has happened already in some sectors, these businesses must be prepared to cover the cost of holding this stock. They need to factor in the cost of any build up in stock having often paid for this many months prior to receiving final payment from the end purchaser."
He also suggested that popular retail schemes such as 100 or 1,000 day interest-free promotions could also expose some businesses to cash-flow issues. "The danger with these schemes for businesses that are ill-prepared is that while they can see that the profitability is there when selling the stock, they have to wait for the money they need to fund that stock and overheads, without the appropriate facilities in place with their bank. This lack of sufficient liquidity will result in businesses finding themselves in hot water," he said.
Tips for businesses
Mr Fayad, who recently advised Pacific Restaurant Group, (the owner of Kingsleys Steak and Crabhouse) through their process of securing equity to fund their business expansion plans, which successfully concluded late August, said that there were several factors to consider when assessing whether debt or equity would be best suited to the business needs.
He said, "The benefit of debt is that it can help fund expansion without diluting your ownership; however, the benefit of equity is that it can often secure greater levels of funding than via the banks, especially for businesses that have higher risk profiles, for example mining."
"The other factor to consider is that equity is usually more expensive than debt, as private investors look for returns of 20-25% compared to current bank loan interest rates of around 10%. In essence, it is about securing the right balance between debt and equity funding that is best suited to the business’s capital needs now and in the future," he said.
Mr Fayad’s tips for reviewing a business’s capital structure include:
- Take an objective assessment of your business;
o Consider where you are now (including capital and cash-flow strengths and weaknesses); and
o Consider plans for the future (ie. consolidation or expansion).
- Assess options constantly and adapt and respond to changes in the market, eg. your cash-flow needs, changing business goals and availability of different types of capital funding
- Consider restructuring your ownership structure if required
- Look for a balance between equity and debt; maximise your debt without putting the business at risk and supplement that with equity. Remember, typically equity is dearer than debt.
Case Study – Kingsleys Steakhouse
Kingsleys Australian Steakhouse is a restaurant business currently operating in three locations around Australia which includes Woolloomooloo.
One of the main owners of the business, Kingsley Smith, plans to expand the brand and sought additional capital to fund other sites for the business. He determined that raising equity, and in turn diluting the existing owners’ stake in the business to 50%, was the most efficient and appropriate course of action to fund his growth strategy. Additionally, options were issued to employees which was considered to be a part of long term staff retention and ultimately growth of the business.
A restructure of the existing corporate and operating structure was completed prior to going to the market to raise funds. PKF Corporate Advisory was involved in the preparation of a prospectus as well as the restructure for the capital raising. Despite the state of the current difficult capital markets, approximately $3 million was raised from the public which should be sufficient to enable the initial expansion plan of existing restaurants to take place.