Demystifying Corporate Finance: the key concepts explained
If you look up corporate finance on Wikipedia, it will tell you that it is “the area of finance dealing with the sources of funding and the capital structure of corporations”. The term apparently originated in the 17th Century when the idea of stock exchanges first came about.
In its purest sense, corporate finance is really a quoted-company thing. It’s about capital structure, raising investment through share issues or debt through bonds. And as Old Mill is a firm specialising in owner-managed businesses, needless to say, we don’t do any of that!
But like many words and phrases, the use of the term has evolved over time and now encompasses a broader spectrum of activities. The things which come under the banner of corporate finance are all related to the activities quoted companies might undertake – namely, doing deals and raising money. What all of these activities have in common is that they are transactional.
Registry Offices are sometimes said to ‘hatch, match & dispatch’, or more formally, register births, marriages and deaths. Corporate finance is less romantic, and hopefully without the death. But to stretch the analogy, we:
Hatch – raise finance for new ventures and growth
Match – acquisitions or mergers
Dispatch – succession planning or exit.
Trying to launch a new business idea? Pushing on to the next stage or growing rapidly? In almost all businesses, start-up or growth needs capital – for the development phase, for premises and equipment, and to manage stock and debtors. If you’re preparing a forecast model to work out how much cash you need and where the ‘pinch points’ are, that’s corporate finance.
Writing the business plan to convince the bank to give you the facilities you need? That’s still corporate finance.
Putting together a prospectus for potential (traditional) investors, or a pitch for crowdfunding? Yes, that’s corporate finance too.
Sometimes, businesses come together – perhaps to provide a step-change in growth, or to bring in complementary offerings to enable them to move forward. It may be a deliberate strategy, where you initiate a search for a partner, or a reactive move, where someone approaches you with a business for sale.
Corporate finance activities are involved here too:
- evaluating the target and negotiating a deal and structure
- raising the finance to be able to do the deal (through the same forecast and business plan techniques as above)
- investigating the target (known as financial due diligence) to help you understand its true profitability and where the risks lie
- project management and liaising with all of the parties to the deal.
At some point, most people will want to leave their business – whether by passing it on through family, succession planning through a management buy-out or employee ownership trust, or selling it on to someone else in the trade. Structuring and financing a succession plan or buyout is classic corporate finance territory. So too is packaging a business for sale, although this is almost a discipline in its own right where finding and attracting a buyer is key.
As advisers to owner-managed businesses, our ‘ideological preference’ is for succession planning rather than sales, but we recognise that this isn’t right for everyone. Where a trade sale is the best option, we have relationships with one or two specialists who are better placed to find the best deal.
If you think this sounds glamorous and exciting, the reality is that it involves a lot of playing with spreadsheets and writing reports and advice letters – so not really glamorous at all. As it happens, we love a good spreadsheet, but even then we wouldn’t describe it as exciting.
What is exciting is that whatever type of corporate finance you’re involved in, you are part of helping someone to achieve a dream – whether that is a new venture, expansion or passing on the baton.
It can be stressful, and it’s always intense. In many cases, the transaction we’re involved with will be the biggest thing yet to have happened in a business. The intensity of the project has its upside though; clients and their Old Mill advisory team go through it together and tend to build great and lasting relationships as a result.
When it comes down to it, all business is about people and relationships. Corporate finance is no different.