IDENTIFYING AND OVERCOMING HURDLES WHEN RAISING
EQUITY FOR SMALLER PRIVATE BUSINESSES
ACCORDING TO STATISTICS
Canada, there are over
1.17 mm businesses in
Canada of which
approximately 98% is
comprised of private entities
with 99 employees or less. ;e
remaining 2% typically repre-
sents larger, more established
public and private businesses.
;is ranges from local and
regional entities with employees
of at least 100 to nationwide or
multinational corporations with
employees in the thousands. For
dealers, advisors and investors
within the private markets
sector, one should not discount
the remaining 98% of the
market given the emergence of
new industries, build-out of new
technologies and also the
potential impact from regulatory
changes. However, small to
medium-sized businesses may
often be faced with particular
challenges when trying to raise
capital. Working with their
dealer, advisory and investor
early on and transparently can
help manage these challenges.
Many of these smaller businesses
in Canada have various options
to fund their growth via grants,
government subsidies, various
debt structures and raising
equity via personal funds, family
and friends or ;nding early stage
investors such as incubators,
angels, venture capital or crowd
funding.
According to Statistics Canada,
approximately 51% of all small
and medium-sized businesses
(SMEs) sought external
;nancing. Most private business
A
MARKET INSIGHTS
owners would know to speak
to their bank for debt and
trade ;nancing, however, some
of these businesses may be in
certain industries and sectors in
which the above alternatives
may not be a good ;t, or their
current size limits the available
options. Businesses that are
pre-revenue or generating
EBITDA of less than $1.0
mm, for many dealers, advisors
and investors, may be too small
for initial consideration.
Despite the potential lack of
clear ;nancial metrics to
de;nitively value the business
and its underlying assets,
many of these businesses
could be in an exciting and up
and coming sector which may
represent a great opportunity
for investors focused in the
private markets. More impor-
tantly, it could also represent a
great opportunity for dealers
and advisors willing to work
and grow with the company by
establishing a relationship
during its early stages.
If a great opportunity has been
identi;ed, whether it is backed
by a strong and enthusiastic
management team, a great
idea, a growing industry,
strong intellectual property or
actual purchase orders, there
are some typical hurdles when
raising capital for smaller
businesses which often prove
di;cult for dealers and
advisors to justify investing
too much upfront resources.
;ese include:
1. Due Diligence: early
start-ups or established smaller
entities may have limited
;nancial statements or an
operating history for the
dealer or advisor, and more
importantly, the investor, to
conduct proper due diligence.
2. Limited Assets: many
SMEs may have products or
services deemed to be proprietary or unique but the
products, technology or
solutions are typically patent-pending and they may not
have su;cient intellectual
property or underlying
physical assets.
3. Valuation and Control:
owners/entrepreneurs may have
valuation expectations that do
not coincide with market /
investor expectations. ;e issue
of valuation also ties in with the
issues related to maintaining or
OTTO CHEUNG, MANAGER DEAL ADVISORY, COLLINS BARROW TORONTO
