Sometimes, businesses fail or find themselves on the brink of failure. Fahn Kanne Consulting understands this fact and will find the proper strategy for your business.

In the current economic climate, raising finance can prove a major challenge for your organisation. As a result, businesses are looking for increasingly innovative ways of raising finance.

We are experienced in helping management teams, corporates and private shareholders raise private equity and/or debt finance to support growth, release value or refinance.

We help you explore the numerous options open to you in terms of raising finance, along with the advantages and disadvantages of each method.

 

How Grant Thornton can help

Raising funds to help support your business's growth is fundamental to financing a company, in all stages of the company's life cycle, from pre-seed funding/investment to IPO’s, and in the unprecedented economic environment, this is an ever-increasing challenge for Israeli businesses.

Grant Thornton is experienced in helping management teams, corporates and private shareholders raise finance. Our teams will help guide you throughout the whole process, from identifying the most appropriate forms of finance, through to the final negotiations. We will:

  • Consider your requirements against our knowledge of the market
  • Test the strategy and business plan, including an analysis of the funding requirement
  • Assist with the presentation of the opportunity to potential funders
  • Help with the preparation and presentation of the financial model for submission to funders including carrying out robust sensitivity analysis on the banking covenants
  • Leverage our relationships with funders to gauge appetite and terms
  • Benchmark terms and pricing

Types of finance available

For those looking to raise finance, whether it be to enable growth, to release value, to refinance or for any other reason, it is often advisable to explore alternative sources of funding beyond simply traditional bank debt.

With many finance options available, understanding which are right for your business can be difficult and assistance in identifying the most appropriate forms of finance can be helpful.

Explore the options available to you in terms of raising finance, along with the advantages and disadvantages of each vehicle;

Asset-based lending

Asset-based lending (ABL) is a way for a company to raise funds from its existing assets, largely its debtors. If your company has capital tied up in property, inventory, equipment, plant, machinery or debtors, these assets can be used as support for an ABL facility.

This financing route is an option when unsecured loans from a traditional lender, such as a bank, or funding via capital markets, aren’t possible. Businesses may consider ABL to finance immediate capital needs, such as stock and equipment purchases, expansion plans or restructuring – as well as to free up money for strategic business needs, such as acquisitions.

Advantages and disadvantages

ABL is a fast, cost-effective way for a company to raise working capital while still maintaining growth in the core business. Generally, asset-based credit is flexible and allows a business to bridge any cash flow gaps that come about because of the timing of accounts receivables. A further advantage of ABL is that as the business grows, the finance possibilities also grow.

The main disadvantage of ABL like most forms of bank debt is that if the company defaults the ABL facility is removed and shareholder value lost. Another consideration for borrowers is that the amount of any loan is based on the value given to the collateral. If the initial valuation is low, or the value of the asset decreases over time, the lender will look to reduce its exposure.

 

Mezzanine debt

Mezzanine debt refers to a hybrid form of debt and equity financing which is long term in nature and sits between bank debt and equity finance. Mezzanine financing incorporates preferred equity securities such as warrants or stock options and although secured, is normally subordinated to the bank. Since this type of finance is higher risk for lenders, a mezzanine provider will seek a relatively high return on their investment but this will be less than an equity investor.

Likely providers of this type of finance comprise institutional investors such as pension funds, private investors and banks often through specialist mezzanine funds.

Advantages and disadvantages

Mezzanine debt provides a flexible way in which companies can raise capital without giving up a full equity stake in the business. This is useful if a company needs capital for a buyout or a large-scale expansion. It is often used by smaller companies who can’t access the capital they need through bank loans or other traditional sources.

It is important to check that taking on mezzanine debt does not restrict the ability of a company to take on other loans in the future. Most lenders will include restrictive covenants in the loan agreement.

 

 

Grant Thornton’s credentials

Grant Thornton has expertise in a range of financial restructuring solutions for companies including mezzanine debt. It works with directors, shareholders and other interested stakeholders to create solutions for business turnaround and stable growth. Grant Thornton has a strong track record of evaluating complex, multi-jurisdictional, highly leveraged and time-critical situations and acting for parties at all levels of the capital structure.

 

Leasing

Leasing or asset finance is a popular way for companies to raise additional cash or for reinvestment for future growth and expansion. A lessee pays a regular fee to a leasing company to use or own an asset such as equipment or machinery. Under finance leasing agreements companies generally lease the asset for the majority of its useful life. With operating leasing or contract hire agreements the asset eventually returns to the leasing company (the lessor).

Advantages and disadvantages

Raising capital in the leasing sector is a way a business can fund future growth or expansion plans or refinance all or part of the existing capital structure.

Leaseback is also a convenient way to free up capital by releasing the value of an asset. Leasing allows a company to budget over several years, manage its cash flow and do away with the need for an up-front capital outlay. Leases are often available on longer-term contracts than bank loans and the fee can be paid for out of revenue earned. However, it is important to think carefully about the type of lease agreement as this will determine who owns the asset at the end of the lease.

Grant Thornton’s credentials

Grant Thornton's expertise ranges from consumer finance, on a secured and unsecured basis, up to complex large ticket structured leases. This includes rental, vehicle contract hire and fleet management, vendor leasing and captive finance houses. We can give sector-specific advice and help through every stage of the process as well as project management of the transaction:

  • Strategy
  • The introduction finance providers
  • The business plan
  • Financial modelling and scenario planning
  • Negotiations with funders
  • Deal structure
  • Tax advice
  • Shareholder structure and incentives

 

Bank debt

Banks are often the first place a business turns to for advice or a loan when it needs capital. But there are different ways to borrow money from a bank, whether running a temporary overdraft to smooth over peaks and troughs in your cash flow or taking out a short or long-term loan. A loan may be unsecured, or secured against collateral such as property, equipment or another asset. As with all types of debt financing, you will need to pay interest on the debt and repay the principal.

Many companies use bank debt as their main source of external funding, but for bigger businesses it is generally just one of many sources of funding.

Advantages and disadvantages

A major advantage of bank debt is that it is available to most companies as long as you can offer some security for the loan, and have a solid business plan.

Once you have agreed the amount that can be borrowed you can get on with the day-to-day management of your business.

There is also often a taxation advantage in taking on debt, as the payments on your business loan are counted as business expenses. Therefore, your effective interest rate may well be substantially lower than the paper rate to the bank.

Nevertheless, the company may still be faced with high rates on bank loans, especially in a small business with a poor credit rating, and this will impact on cash flow.

What’s more, if your business runs into trouble and fails, then the bank often has the right to claim repayment from the company ahead of any shareholders. Therefore, it is important to seek professional help for the taxation and business implications of taking on bank debt.

Grant Thornton’s credentials

Grant Thornton offers a range of services around immediate and longer-term funding requirements. These include:

  • Introductions to active funders
  • Assessments of the qualitative and quantitative merits of funders’ offerings
  • Running the sensitivities required by banks
  • Assistance with business plans
  • Tax and accounting advice
  • Dealing with funders’ queries and preliminary due diligence
  • Operational modelling for annual operational reviews for larger funding packages.

 

High net worth investors

When a small business starts up, the owners often turn to friends and family for cash to help them to grow their business. As a company grows, this source is unlikely to be sufficient to finance its growth strategy, but an external investor who can put in more substantial funds, may be a good additional source of finance.

A high net worth investor may be interested in your company for two reasons: to grow their financial stake based on the strength of your business plan and profit potential, or if they are in a related business, for the synergies offered by your company.

Advantages and disadvantages

A private investor can be a source of either short- or long-term finance. Getting a high net worth on board can be particularly helpful to a private company that is at the early-stage of its development, or needs a large injection of cash to expand rapidly.

However, this type of finance can come at a cost to you if you want to maintain the independence of your board. A large investor will want to get value in return for their investment and may demand a substantial stake in your business. Of course, there are positive arguments too in having the right high net worth on board. Many businesses have benefitted from partnership with an investor who not only injects cash, but also can contribute knowledge or skills to the management team.

Some high net worth’s invest in companies via institutional vehicles, such as funds, in which case they will have a more arm’s length relationship with the company, similar to an institutional investor.

Grant Thornton’s credentials

At Grant Thornton we have expertise in advising companies who want to find the appropriate investment. We also advise high net worth investors on the best tax and financial vehicles for their growth strategy.

 

Government grants/incentives

A grant is one of the ways the government funds ideas and projects to provide public services and stimulate the economy. Grants support critical recovery initiatives, innovative research, and many other programs.

 

Advantages and disadvantages

One of the most significant, if not the most significant, advantages to government grants is the fact that the funding received can be non-repayable. Government agencies are often more willing to take the risk on start-ups and small businesses that banks/investors are not.

Whether you are involved with healthcare, science, education, etc. there are many resources available to companies looking to acquire financing. Depending on the grant, there can often be an unlimited amount of applications a company can submit to acquire the desired benefits.

Grant Thornton’s credentials

Grant Thornton Israel has a specialized Innovation & Incentives Department which assists companies in obtaining R&D grants from a variety of governmental sources, such as the Israel Innovation Authority, Horizon, International Cooperative Arrangements, Eureka, etc. The department has extensive experience in corporate financing in all phases of a company’s life cycle, in a broad range of technological areas and in a variety of industries, such as: cyber, medical equipment device, agriculture, information technologies and communications, energy, aviation, transportation, control systems, etc.

 

Private equity and venture capital

Private equity is a form of funding where investors provide long-term equity capital investment in a company in return for shares, a percentage stake in the business and sometimes a seat on the Board.

Private Equity can be used to finance MBO transactions or provide equity capital to support a company's growth plans.

Private equity investors are typically funds looking to invest in high-potential businesses, typically funds for long term capital growth. The investor expects to make a high profit in return for the risk of an investment that is not listed on a stock exchange.

Advantages and disadvantages

Many companies are reluctant to dilute their ownership of the business through this form of finance. However, it is important to bear in mind that a reduced share may still be worth more money in absolute terms over the long term if a business grows as the result of investment.

If a company needs to raise capital, but is not ready to list on the stock exchange, private equity can be a good option. Private equity finance is often focused on a 5-year time horizon until an exit for shareholders is sought. The company can use the funds raised immediately for development or replacement capital.

Another advantage of private equity is that the right investors can bring contacts, commercial and strategic expertise at a key growth point for a business. They will have a vested interest in helping the business to grow as they will only realise their investment on sale of the stake. The borrower therefore benefits from shared financial responsibility without increased personal debt risk.

However, bear in mind that raising equity finance can be a time-consuming business. Before investing, an investor will want to look in detail at the company’s results and forecasts as well as the skills and experience of the management team. There will be up-front legal issues to deal with and on-going reporting requirements to the investor.

Grant Thornton’s credentials

Grant Thornton can help companies with all aspects of private equity deals, from process, introduction of funders, business plan and financial modelling, project management, negotiation, tax advice and deal structure.

Equity capital markets

Equity capital markets (ECM) in Israel includes The Tel Aviv Stock Exchange (TASE) only. The TASE is the sole stock exchange in Israel. The TASE fulfils a major role in the Israeli economy and is a key player in the nation's economic growth. ECMs are platforms that allow companies to go public and to raise new equity capital from financial institutions, such as pension funds, insurance companies and private individuals.

In addition to local ECM, Israeli companies can look for opportunities to raise capital outside of Israel. Common destinations include, the AIM market of the London Stock Exchange and The Nasdaq Stock Market.

Advantages and disadvantages

Raising money from the public markets offers a way for companies to grow and more broadly enhance their business. Key benefits from going public include gaining access to capital to facilitate growth, creating a market for the company's shares, to provide the company with quoted paper to use as a currency to make acquisitions, to raise the company's profile, to enhance the company's status with customers and suppliers and to provide an objective value on the company's business.

The benefits of being public does however come with the need for greater transparency and accountability to external shareholders.

 

Grant Thornton's credentials

Grant Thornton’s advisory team can help companies consider the question of whether going public is the right financing solution, and if so, which ECM would best suit the company. Our Capital Markets team help prepare Israeli companies for the flotation process and to then execute the transaction.

We can help with:

  • Analysing flotation as a financing solution
  • Undertaking a pre flotation grooming process
  • Selecting the appropriate professional advisors
  • Project-managing the entire float process.

What do you need to finance?

Businesses may need to raise finance for a number of different reasons such as to, fund growth through an acquisition or joint venture, improve cash flow, refinance current term debt or fund a change in business strategy or operations.

What you are looking to raise finance for will impact on the types of finance you may wish to explore. What you will need to consider is:

  • Is the financing requirement long or short term?
  • How secure or risky is the financing proposition?
  • What relationship are you looking for with your potential funder?
  • What are the expected costs and benefits of your financing requirement?

 

Recovery & reorganisation Shlomi Bartov

Partner, CEO of Fahn Kanne Consulting Ltd.

Find out more about Shlomi Bartov

Recovery and restructuring of companies

  • Analyzing the business activity and breaking it up into profit centers
  • Compiling recovery and efficiency plans
  • Reorganizing the business and operational areas of a company on the basis of a recovery plan
  • Preparing a forecasted cash flow statement (monthly and daily)
  • Debt restructuring arrangements with vendors and banks

Management of receiverships and liquidations

  • Management of receiverships and liquidations
  • Appointment as special executive
  • Management of company under bankruptcy proceedings
  • Checking repayment capability and ability to meet liabilities
  • Accounting supervision, ongoing monitoring and control