Why Prefunding Matters

Corporate growth involves managing multiple projects to coordinate resources against strategic opportunity. Often, realizing future growth assumptions relies on having the funding lined up at the right time to start the sequence of steps required for expansion. This is true with acquisitions, wherein funding is needed to close a deal, as well as in business development, where new staff is hired to push in a new direction.

What often gets lost in the shuffle is the need to have capital on hand in order to initiate the entire sequence of events. Cash on the balance sheet gives a company the ability to see beyond the next payroll or couple of months into the long term. It gives managers the ability to work on their businesses as opposed to in their businesses. When a business is prefunded, its growth potential is more likely to be realized.

Prefunding ensures that a company has the money it needs to both acquire a new business and to operate it flexibly. A common mistake in M&A is underestimating the amount of financing needed to acquire a business. Not only is financing needed to pay the purchase price to the seller, but it is vitally important to have enough extra capital on hard to make changes to the acquired business.

Most acquired businesses, need investment in new products or new sales staff. Or investment may be required for expansion into new regions. Management needs to make sure that this capital is prefunded as part of the closing of the acquisition to ensure strategic changes can be implemented. Often CFO’s believe they can use internal cash flow to invest in the new business but this cash flow is not easily accessed immediately after an acquisition.

Receivables have a tendency to stretch out and cash flow can slow down. When a company prefunds its growth capital, it makes it much more likely that it will be able to make important changes and drive in a new direction. Whether you are bringing in capital early to be able to close and acquisition, or to drive strategic growth, prefunding is always a smart move for a fast growing company.

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