Transaction events and debt/equity capital raising (which for purposes of this guide we shall roll together and call “transactions”) are critical initiatives that advance businesses along their paths and enable a primary objective of entrepreneurs – the exit. Yet, these processes are often outside of business owners’ skill and experience sets. In many cases, the exit transaction (sale) may be the first and only corporate transaction the owner will traverse, with retirement and perhaps even generational wealth on the line. No pressure!

This guide is for the business owner or leader whose growth objectives necessitate access to debt or equity capital, and for those interested in setting themselves up to get the most efficient execution and the best terms on future transactions.

To make this information applicable to as many businesses and situations as possible, we are focusing on commonalities across capital raising and corporate transactions. We are not covering traditional bank financing or early stage/start-up investments; while the information herein is relevant to those processes, there is significant overlap in the transaction process and due diligence approaches for non-bank lenders, growth equity investors, private equity investors, and corporate acquirors. 

The time to prepare for these transactions is well before the actual event. The best way to be prepared is to be “finance ready.” This means leveraging finance capabilities and experience to pursue and achieve growth, financing and transaction opportunities.  

At First Water, our philosophy on capital and transaction preparation is governed by two mantras:  

The manner in which you manage your business, even years before a transaction, impacts your ability to transact and the value and terms you are able to extract. Transaction success is defined by much more than a multiple of EBITDA or cash flow!  

Additionally, the best ability is availability. In this case, the ability to act on a transaction due to positive or negative catalysts. If you are too busy with constant fire drills to hear the knocking at the door, you may miss a transformative opportunity.

A good transaction is one that fits the bill. In this case, it is capital or a transaction that enables the business to advance toward its potential, efficiently finances the path to that potential, and balances such pursuits against the preferences of stakeholders. This “threading of the needle” spans three roadmaps:

Below is an outline of a typical transaction process with institutional investors. Components and sequence may vary from deal to deal, with some items overlapping with other steps and others being iterative (or repeated). Depending on the type of deal, level of complication, and iteration requirements, launch to close can take anywhere from 4-12 months with outliers on either side.

Simply closing on a capital raise or corporate transaction does not define success. While there are win-win outcomes and we all strive to look back on prior transactions and see that all parties made out well, the reality is that there is significant give and take within the transaction process (and often beyond the close). Here is a list of the key factors upon which to gauge success:

Conversely, there are statements that signal potential pitfalls in transaction readiness: 

Striking a balance between readiness and flexibility ensures businesses are prepared to capitalize on opportunities while mitigating risks inherent in transaction processes. When your transaction runway is three years instead of three weeks, you are in a much better position to negotiate the best terms, streamline the transaction process, and minimize uncertainties like the dreaded re-trade.

You’ve aligned your roadmaps, assessed your options, and have identified the desired path forward. Now it is time to craft the narrative. Step one: write the press release.

Even if the close of a transaction would not result in the issuance of an actual press release, this is an important exercise. If you are unable to explain to the world, in a couple paragraphs, the transaction rationale for you and the counterparty, you need to pump the brakes. Specifically, putting yourself in the position of the counterparty gets you into the proper mindset for crafting your narrative and pitch.

The Right Story for the Right Audience

The next step is to Know Your Story. A walkthrough of the performance to date, the opportunity ahead, and the path to achieve success. The more detail, the more credibility. Planning, and the detail behind it, is the singular counter to a lack of previous experience. Your team need not have done it 10x before to be credible, but if you are heading into uncharted waters the more detail you can provide the better. We will cover this in more depth in the next section.

The following step is to Know Your Audience. Connect that story to the perspective and goals of those to whom you are pitching. Lenders, growth investors, and buyers think about the world very differently in terms of risk and return. Showing that you understand their individual perspectives goes a long way to establishing further credibility for your team.

Capital Likes Your Widget, But Capital Loves Capital

You might have the best product. A sexy widget. So amazing it sells itself. Except when it comes to capital. When you are asking for capital, any kind of capital, that capital isn't looking to be paid in widgets. That capital wants to turn its capital into more capital.

Therefore, when the time comes to present your story, you can't focus solely on widget lingo, you have to also speak capital. Very often this can seem like a completely different language. The solution is to present your business and outlook through the lens of finance.

To that end, here are some specific topics and examples for presenting your narrative through the lens of finance:

Master your narrative and the lens of finance, and you’ll be well on your way to a successful transaction process. Now we will move on to the pillars that underpin business value and ultimately drive successful outcomes in capital and transaction initiatives.

What is value? If an EBITDA multiple falls in the forest, but nobody transacts, has value changed? Here, we'll discuss value as the relative ability to realize, monetize, and maximize. We'll largely avoid other value determinants that sit outside the realm of the business owner’s control, such as interest rates, cost of capital, public equity comparables, etc. This is not intended to be an academic view of valuation, but instead a tactical guide to focus in on the presentation and engagement factors that maximize outcomes.

In the simplest of terms, we are talking about the ability to transact at all, to get something attractive in return (upfront cash is better than being compensated in jelly of the month club certificates), and to get the most of that attractive thing (more cash or jelly certificates, whichever you prefer).

Let's tackle them one by one.

A transaction preparation framework governed by the four value pillars provides a methodical approach to defending your tailored narrative. Regardless of the timing of a potential transaction, ingraining these into your business mindset will keep you focused on driving value creation in your business and monetizing that value when the time comes.

For the majority of small to midsize businesses, particularly those seeking to engage with institutional capital for the first time, the biggest gap to optimal “finance readiness” is a result of missed opportunities in the financial planning and analysis (FP&A) function.

FP&A capabilities, including performance insights, forecasting and budgeting, and process / workflow improvements, get the right information into the right hands, drive the dialogue behind confident decisions, and enable the forward-looking visibility to proactively plot the course, align teams, and hold leaders accountable.

Let's explore how FP&A supports each individual pillar:

First Water is uniquely positioned to drive efficient capital raising and transaction execution, as the only resource combining ongoing FP&A leadership (through First Water Managed FP&A), financing and M&A experience, and a deep capital partner network.

We simply cannot have a conversation about capital raising and transaction execution without talking about EBITDA. The infamous metric – standing for earnings before interest, taxes, depreciation, and amortization – is the gospel for many institutional investors. EBITDA is a proxy for operational cash flow that ignores how a business is financed or structured for tax purposes, providing a standardized way to compare financial performance across different companies and industries.

Capital providers and investors often attach to a multiple of EBITDA for their capital. For equity investors, the EBITDA multiple is used in the determination of enterprise value (the total value of the company available to all stakeholders). For debt providers, it is a function of the target or maximum leverage multiple they are willing to lend against.

If business value is tied to a multiple of EBITDA, the goal is clear: maximize EBITDA and the multiple applied to it. The latter often has ranges based on industry/sector/size, though maximizing within that range (or exceeding it!) is a function of the four value pillars.

To fully understand how EBITDA presentations might apply to your specific transaction and to learn how to present your EBITDA in the most favorable light, refer to our FP&A whitepaper. Mastering EBITDA is crucial to maximizing your business's upside.

Below are multiple definitions of EBITDA. This is not an exhaustive list, and there may be some different interpretations and nuances within each of these definitions, depending on the situation and who you ask. Not confusing at all!

If you made it this far through all the acronyms, you should be pretty well versed on the different views of EBITDA. Now you just need some beholders!