Whether expanding an existing business or establishing a new project, financing can be an enormous challenge. The funding requirements forces decisions to be taken on the ownership structure, succession plans, debt funding, management incentives, employee share ownership participation and most importantly, an exit strategy, to guide success.The ownership structure can be a mix of common (by class) or preference shares, with different powers (voting rights) and rewards (returns options) and requires a skilled financial negotiator to get the best mix. The best arrangement to the ownership structure of any business or project is determined by the entity (individual or group) that intent to provide the most valued capital (the key component that the business or project needs the most). Hence the golden rule, the one with the gold makes the rules. So the ownership structure is decided by the one with the most to lose.
Succession Plans help decide on who will next own controlling interest and who will be the key face of the business or project. Having controlling interest in a business or project allows one to appoint loyal people in key positions among other responsibilities, so with that in mind, planning for a smooth handing over must be considered at the very beginning. The public face of the business or project is not necessarily and very unlikely to be the person with controlling interest, the two roles require different skill sets, but the same succession planning is required to maintain the business or project public reputation.
Debt Funding is probably the easiest issue to deal with because of the financial institutions’ lending guidelines. Once public or depositors’ funds are borrowed, regulators are involved with the measuring sticks and calculators to monitor risk. Debt financing techniques can be very useful firstly as short-term bridging finance or bond underwriting, to start the business or project while equity or bonds are being raised. Secondly, as long-term mortgage finance or multiyear bonds, to give the business or project time to win loyal customers or complete infrastructural works. The best usage of debt funds is to expand crucial revenue generating centers and to lower interest expenses.
Management incentives, yes those bonuses in one form or another, are necessary to motivate performance. This dedication and loyalty grows the business, increasing the value of the shares and paying dividends to shareholders or in the case of a project, completes the project to design specifications, before time and within budget.
Employee Share Ownership Participation (ESOP) is one of many tools used to motivate workers to give their best. In-house training, annual family day, external sporting events, employee of the month rewards, are some other performance enhancement strategies the human resource department uses. The ESOP however, allocates a batch of shares to be administered by a trustee on behalf of the employees, which can include management, to be distributed to individuals based on their personal performance, their level within the organization and the overall performance of the business or project. The ESOP makes the employees owners with the same powers and rewards as any common shareholder. The ESOP may also offer protection against hostile takeover bids because the unallocated shares in the ESOP would probably votes with the incumbent.
Exit Strategies include the sale of shares back to the business or project at current book value or the sale of shares to private investors with synergies; such as suppliers, customers or even competitors, or to the public via the stock market.
Rationale
T.A.J & Associates Company Limited uses this occasion to comment on topics that have been covered, both academically and by the mainstream media, to add its opinion and point out investment opportunity, not to invoke any social action.
