Don't Do This...

What not to do when going through a change in capital structure.

By Rob Powell, Partner, Cardinal Capital


Recapitalizing, going public, seeking growth capital is a daunting task.  Cardinal Capital deals with these issues daily.  The following are a few “what not to do’s” when going through this process.


1. Don’t combine your personal identity with your business identity. 

You are not your business.  You hopefully have separate goals and aspirations.  While one may enable the other, you do have a life after business.  Keep the two separate.

2. Don’t forget the three P’s

Purpose, people and processes.  Keep your eye on those three and you’ll survive (hopefully thrive) the refi, growth, or capitalization process.  

3. Don’t exit when things are bad

Giving up and selling or leaving when things are down is not always the best strategy.  You should look to exit or get out at your highest valuation – when things are good.  This is counterintuitive to most business owners and CEO’s because they are enjoying the fruits of their labor… but that’s the time to go make something else happen.

4. Don’t get advice from the cool-aide drinkers.

If you’re surrounded by people who buy into your business, no matter how successful they are, you’ll always get the answers you want to hear.  Get an outside opinion from people or groups like Cardinal Capital who can provide objective advice in times of confusion, as well as times of clarity.  An outsiders view may not always be exactly what you want to hear but it’s valuable.

5. Don’t forget tomorrow

Cardinal Capital asks business leaders hard questions.  We challenge them to look in the future – after refinance, sale or merger/acquisition.  Many business leaders don’t think ahead to make the most after they make a move.

6. Forgetting your exec team

If you’ve hired right, you need to lean on your C-suite during a transaction. The business of doing a deal becomes a full-time job. We’ve seen many situations where owners have taken their eye off the ball — their trailing revenue suffers, and company valuation falls.

7. Not holding yourself accountable

Cardinal Capital sometimes tell owners what they don’t want to hear. As they’re going through the process, we help them through the challenges. We always ask them, ‘are you sure you want to do that?’ and we’re always honest through the process. Most of the time they find value because they know they will get the complete truth. Everyone needs to be accountable to someone. Absolute power corrupts.  Cardinal Capital holds them accountable.”  

8. Underestimating stress

The rule of 3’s applies here.  Cardinal Capital has learned that most things are typically three times as expensive, take three times as long and is three times as frustrating.  All of that increases stress on the stakeholders. It’s important to recognize that because during stressful times we overlook things we shouldn’t and it wears you down.  You need to stay strong over the long haul.

9. Letting a good opportunity go

Timing is critical. If you lose an opportunity it may never come again… Market conditions often dictate the time to sell, refinance, borrow or merge.

10. Forgetting about the customer

During a transaction, you’ve always got to keep the customer at the center of whatever you’re doing. The customer is depending on you to add value and so if that’s already built into the way you operate, it’s going to help during any deal.

11. Losing discipline

Structure is crucial. Have regular disciplined check-ins with your management team. The urgency of the deal is important, but it can quickly overcome operational issues of the business. You need to delegate as much as you can. Slowly bring key members into the process. Schedule at least 50% of your time to the deal.

12. Not knowing what you want

“It always gets back to the question of what you want. Do you want a check, do you want a legacy, do you want to go out and acquire before you sell? Cardinal Capital is constantly working with CEOs to help them clarify what their goals are so that they can formulate a strategy for their decision-making process. At the end of the day, many don’t know what they want so it can be hard for them to get there. CEOs and owners are constantly coming from a place of fear. It comes back to security and safety, and sometimes they just need a little bit of reassurance.

13. Forgetting your family

Be real with your family about how hard a process this will be. There are seasons when you are busier than others, and this process may go on for a year or more. You need people to support you in that. If you don’t have that support, it can be very difficult.

14. Not creating a deal team

Selling, merging, or restructuring your business is an exciting and emotional time. Having objective feedback and being challenged will maximize your outcome.  When you decide to sell your business, you will need a team. So many times CEOs focus on the deal and forget to run the business.

15. Trying to keep a secret

If you’re going to share that you’re going through a transaction with your employees, depending on how open your organization is, Cardinal Capital’s advice would be to keep people informed. If you try to keep a secret, it adds another layer of complexity. We strongly encourage you to have a contingency plan in that case, because it will leak. Even when people sign NDAs, it always leaks. Think about whether you want to be on the front end telling people, or the back end reacting.

16. Banking on sweat equity

You don’t get paid on sweat equity. Sure, you built the business, and that sounds really nice. But it’s not worth anything. This goes the same with goodwill.  What is your company worth in terms of assets, A/R and others things.  Sweat equity won’t cut it.

17. Falling in love

Often times the owner gets emotionally involved in a transaction, so as the deal ebbs and flows, we work through the issues. We try to keep the owner from falling in love. You need to be able to step back and understand whether the deal is really a good thing or not. You need to constantly ask yourself, ‘Does this still make sense?’

18. Not having the right network

Oftentimes, CEOs seem to be the most well-connected people — they have a large reach as far as people around them, but they don’t necessarily have people who can help them pressure-test their ideas and expand the way they’re thinking and broaden their perspective. This is hard to do with a board member — they have certain expectations. It’s hard to do with your team — you don’t want to scare them by thinking out loud without full-formed thoughts. It’s hard to take it home to your family. A group like Cardinal Capital has experience and is an objective body who can help pressure-test ideas.

19. Assuming the deal is done

No deal and no promise is done until there’s actually ink on the paper. There are so many things that can go wrong up to the transaction being completed. 

20. Leaning on hope

Hope is not a strategy. You don’t have to have a perfect plan, but you need a strategy with goals. You need a management framework and a cadence to review that framework on a monthly or quarterly basis. Everyone needs to obsess over the strategy, otherwise going through a transition is going to be even more difficult.  


Source:  Axial Forum, Inc. Magazine, Individual interviews. 

Cardinal Capital, LLC, Financial Consultants  No License Required, Baton Rouge, LA