Many entrepreneurs and business owners manage a business in the present, but often neglect to plan the end of the journey. They may follow the road until they come to a stop and then realize the consequences of prior decisions.
One of those decisions is whether to fund growth through debt or equity. Personal feelings regarding ownership, estate planning, taxes, succession, and attitudes about indebtedness should determine, to some degree, the path chosen to fund growth.
Funding growth through debt obligates a portion of future revenue, making it unavailable to reinvest in the company and could create hardships when making payments in a down economic cycle. On a positive note, the interest is deductible and management/control of the company generally remains in the hands of the business owner. Ownership, once you pay the debt, is 100% and the decision of when and how to exit is yours.
Equity financing is often used at the startup of a company to avoid the additional burden of loan repayment. It is commonly used in mature businesses to provide liquidity to the owner and diversify his or her risk. It can be used to retain employees that are critical to the continuation of the business or to acquire the expertise and resources of the equity partner. All of these are important and can be excellent reasons to utilize this type of funding. However, depending upon the percentage of the equity used, the business owner may give up control and management authority. He will, undoubtedly, lose his autonomy. If he sells a majority, he will lose the right to choose when and to whom the business sells, but his equity share may very well be worth more than he could have attained on his own.
Both avenues of funding growth can be effective. but consideration should be given as to how they will affect succession and exit from the business. If you’re unsure of what may the best option for your small business, contact a professional at CRI Capital Advisors to help you walk through the process of understanding how these decisions will affect you and your company.