Debt to a business owner can conjure up images of corporate raiders who coax a little unsuspecting firm into taking on way too much leverage, watch the company crumble, and then swoop in to take the assets at pennies on the dollar. While I am pretty sure that this makes for a good movie plot, it rarely happens this way in real life. In fact, of all the debt providers I know, not one of them wants to run your business.
I know - we ALL know - that too much debt can cripple a business, but let's just take a moment to look at what debt can do for your business if you get a "just right" amount.
1. Lets start with your senior debt.
If you've had the same bank forever, it may make sense to make sure that their lending limits still "fit" you. If you have grown substantially, your need for capital may be more than your current bank is willing to lend. It is OK to outgrow your bank, it is not OK to stay with a bank that cannot provide you with the correct capital for your business.
Way worse than keeping your mattress for more than 10 years, is keeping a bank in place when you are at the very limit of their borrowing capacity.
When you start bumping up against lending limits, it's time to start looking for bigger banks. That's OK. This is a good reason to make a move.
2. Now let's talk about other things you can do with debt.
If you have a business that cash flows well, isn't terribly cyclical, and is looking to do big things, sometimes the best place to look first is to add debt. As investment bankers we get called into situations where a company:
- wants to acquire another (sizable) company
- owners want to do some estate planning
- wants to provide liquidity for its shareholders (take some cash off the table)
- wants to buyout a brother or sister who needs to leave the business
- wants to fund leisure activities or a charitable foundation or contribution
Too often, the investment banking answer is "You should sell equity and bring in a financial partner". And while bringing in a financial partner can help you with all of the above, and it is sometimes a great answer, a business owner can often accomplish these same things with a slug of new debt. And let's not forget that debt, even these secondary layers, are often much less expensive parts of the capital structure to use.
If you add debt to perform some of these functions listed above, you have certainly added to the company's cash flow demands, but you haven't sold any of your business. Therefore - you can do things like buyout your sister, or give all family members a one time dividend, all while retaining 100% of the business.
The financial aspects of this new debt depend greatly on the market at the time, but we are seeing leveraged dividends that are non-amortizing, with coupons between 11% - 14%, and some that include warrants.
Even if you have traditionally been afraid of the "debt" word, your business may a size where it makes sense to engage an investment banker to think through a leveraged dividend. This can often be easier than selling all or part of a family business, which may require consensus among many different family members, or may not be in your best interest at the moment. Too much debt can spell trouble, but if you use the right advisors to assist you, you can often achieve many of the benefits of selling equity, all while retaining control of your business.