Growing family companies need to be adequately capitalized to fund their current operating needs, future growth and development, and the periodic liquidity requirements of their shareholders. But after nearly two decades of historically low cost of capital and abundant capital market liquidity, family-owned businesses are finding that company capitalization decisions have become more complex as we approach 2024.
There are many challenges. Amid the broader landscape, rate tightening by the Fed has increased the cost of borrowing in the range of 300 to more than 500 basis points for most businesses¹, the M2 money supply has contracted in a similar manner to what occurred during the Great Depression in the 1930s², and the biggest bond market rout in almost 250 years has occurred.³
On the lending side, balance sheet asset risk exposure, stemming from commercial real estate loan write-downs and deposit withdrawals, has impacted bank liquidity, tightened credit acceptance and curtailed lending activities. In turn, many alternative lenders face challenges with existing portfolio companies.
Businesses are facing internal capital challenges as well. Inflation and other supply chain factors have impacted gross margins and operating income, capital budgets have been slashed in the B2B market, and cap rates for real estate valuations have deteriorated. The fear of recession has also limited capital market access for many businesses.
It’s clear that the rules of the game have shifted in today’s capital markets, so many family businesses are looking at how to re-evaluate their company capitalization plans. As part of that process, they need to better understand how the capital markets have changed, as well as how their business would be assessed by participants in the capital markets. In this way, they can better quantify their capital availability and more accurately calculate the cost of capital.
Here are some tools to consider before developing your capitalization plan:
- Business Value Range Analysis (VRA) calculation tools
- Credit Quality & Capacity Assessment data and analysis
- Capital Market/Credit Placement Assessment research
- Capital Market Qualification (CMQ) Scoring data and tools
- Capital Markets Trends (CMT) Assessment data
- Weighted Average Cost of Capital (WACC) Recalculation data
- Upgraded Financial Planning & Analysis (FP&A) Modeling tools
- Business Reinvestment & Capex ROIC Analysis Prioritization tools and processes
- Liquidity Profile & Enterprise Risk Forecasting data and tools
Key questions on assessing the capital needs and funding requirements
The capital strategy of business-owning families and their companies has always been a critical component of the long-term growth trajectory of successful family enterprises. Given today’s economic environment of higher interest rates and greater cost of capital, even the most efficient capital plans should be reexamined and assessed. Today’s economy requires effective capital planning to be informed, resilient and efficient while mitigating risk to effectively develop capital alternatives to fund business growth and shareholder liquidity needs with a focus on continued family control of the enterprise.
