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Alternate funding: raising money through private placement.

Maybe you've heard the story about the business owner whose firm was growing at a strong and steady pace, but needed additional capital to reach the next level. The owner visited a few banks, and was told that his company needed additional equity to meet their equity-to-debt ratio requirement.

This all-too-common situation can be minimized if not avoided altogether. How? By making the search for capital an ongoing and primary function of doing business. No one will have the comfort level required to pledge a large sum of money to a company that is in a desperate need of capital. While most business owners look to secure venture capital to rescue their fledgling enterprises, private placement memorandums are another viable option.

Venture capital firms provide funding for investment by outside investors. Because of an obligation to their investors, venture capital firms are driven by two things: return on investment (ROI) and the ability to control the source of that return.

Here's a common occurrence when working with a venture capital firm. A computer software company needed a cash infusion in order to expand the business and meet demand. The owners found a venture capitalist to provide the desired funding. In exchange, they would gain 55% ownership in the company, two positions on the board of directors and a planned ROI of approximately 45%. Within 18 months, the founder elected to leave the company. He left primarily because the venture capital firm had a growth agenda for the company that he was not comfortable with could do nothing prevent it from occurring. He received funding, but was his long-term goal or desire achieved?

On the other hand, private placement memorandums (PPM) arc stock offering documents that a company utilizes to sell its md. The stock must be sold to pen= who have an C" relationship with the selling agents. In most cases, a company will sell an ownership percentage from 20% to 35% and offer a 15% to 20% ROI. Recently, a Texas-based business that provides a specialized type of cellular phone service for rural communities sold 22% of the company for $625,000 with a planned ROI of 15% every six months. The owners did not have to put any of the investors on the board of directors. Nor did they face direct influence from their investors regarding the operations of the company. Now, they are in a position to sell another 10% of their company for $1.5 million.

Before attempting to raise money from any source, you must ask yourself some basic questions.

* What do I hope to gain monetarily from company operations?

* What percentage of my company am I willing to sell to achieve my long-term goals?

* What method of funding will best serve me in my efforts to attain long-term goals?

Business owners should learn as much as possible about available funding options, and strive to make the search for funding a standard part of operations.
COPYRIGHT 1996 Earl G. Graves Publishing Co., Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1996, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:stock offerings to increase capital
Author:Gay, Kenneth
Publication:Black Enterprise
Date:Jul 1, 1996
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