"If you have a large organic growth story, you might want to look at having private equity partnerships, having bank partnerships, to fund each growth level that you have because by the time you're in the growth level, it's too late to actually find the partners to grow that," says FreightWise CEO Chris Cochran.
Speaking at this year's Nashville Smart Business Dealmakers Conference about how businesses can explore the current capital market landscape for growth financing, Cochran says the moment that a company's growth strategy plans outpace either its pocketbook or ability to take risks on what's in that pocketbook, it's the right time for those partnerships.
"Those partnerships give you more than just that. There's a lot of levels. We sit here in a forum like this and talk about exits and all those things. But there's a lot of growth stages in a company as processes mature, as people mature, as product development matures and as you go to market that these partners help you throughout each one of those stages," he says. "So, I look at it from a capital standpoint, but I also look at it from an advice standpoint, from a people standpoint. What can PE bring? What can the bank bring?"
Companies, he says, need to stay one stage ahead of their growth strategy in order to execute it. However, "growth plans destroy EBITDA temporarily," he says, which is something banks don't love. But they do understand if a business goes into growth in a calculated way. It's the same, he says, on the private equity side — they know it has to be done, but they don't love it.
"Everybody wants to see up and to the right. That's not really market reality for most of us unless you have some great business and then you don't even have to worry about the capital too much because you have such a quick return that you probably don't need tons of debt or tons of equity behind it," he says. "But ultimately, having that banking relationship where they understand, we're going to invest this, and then here's our fail points to it, here's what we're going to abandon, here's what's going to happen to EBITDA, if it works this is where we're going to end up. And then you can go through it in a calculated way, talk about your successes and failures. That's the only way that I know to properly manage it."
When founders are open and honest with themselves about what they want for the future, Cochran says they can find an equity partner essentially for any method that they want to operate their business.
"Even if you really want it to be more of a lifestyle business and maintain the level that you're at now, you can find that," he says. "If you really want a high-growth business and you want to take it to the next level, you can absolutely find that."
With PE, he says something business leaders should be aware of is the PE investment timeline and how that matches up with any new product or growth strategy the company is undertaking.
"That matters a lot to make sure that you're really simpatico on where this is going and the realities of how long it takes," he says.
It's important to recognize, however, that the company is likely to go bankrupt if the company leadership focuses all their time on PE and investments and returns.
"I've got to think about my customer," Cochran says. "That's really, I think, what the bank wants me doing, and what the PE wants me doing. I don't want to think about all this capital money all the time. I want to think about what the customer needs, how the products face them, how we make money on it, how we operate in an excellent way."
With a bank relationship, he says it's important to manage through communication on covenants and be upfront with the bank about the strategies for the future, possibly by sending them pieces of every board deck so that they can see how things are trending.
"If you go into M&A strategies, like we are now, and you know that at some point this is going to hit them in the future, whether it's for the capital or just, frankly, just the approval, letting them know exactly what you're tracing out, what your strategies are, what kind of companies that you're going to target, and then when you're working toward the LOI, they should know about it before you sign one," Cochran says. "Otherwise, you're going to have a hard time getting through all this cool stuff if you're not communicating with your bank on the backside."
When business leaders start going to commercial investment routes, he says he looks at it as assistance.
"Have you taken it as far as you can take it with the challenges that you have to where you need assistance and different people around you to take it to that next step?" he says. "And no one is more efficient than private equity. So, it helps you through that and then we both win. Yeah, they get a slice of the pie. You also get to de-risk, by the way."
