Capital Quest - A security company's guide to successfully raising capital

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Monday, July 1, 2002

It's a fact. The world is more security conscious now than ever before. September 11th, integrated systems and a global economy have all played a role in raising the

importance of security in our daily lives. So how does a growing security company capitalize on this trend? In many cases, you need growth capital to fund marketing activities, pursue an acquisition or to recapitalize your company.

Here's some practical advice to make your capital search successful.

The ABC's

Start by making sure your financier understands the security industry, whether they already focus on your industry or you provide the education. Most financiers deal with a variety of industries and in most cases, won't be current on the dynamics of this field. Give the decision-maker solid reasons to say, "yes" to your proposal.

Don't be afraid to address the unique challenges of the security industry with your financier. Demonstrate your understanding of the need to drive down customer creation costs and the inherent negative cash flow that comes with high growth. Also be prepared to discuss the "why," "when" and "how much" of your exit strategy. Be realistic. Your credibility is jeopardized if projections appear to be greatly exaggerated. Just as you would, financiers prefer management that under-promises and over-delivers.

Like the challenges, educate your financier about the unique positive attributes of the security industry. Show how you can be an asset to their portfolio, and how you can offer certainties and opportunities not available elsewhere.

Predictable income

Many financiers, still suffering whiplash from the dot.com crash, are wary of New Economy companies that have unpredictable income.

By contrast, security companies can offer relatively steady cash flow or "recurring revenue." In most security companies, there's little seasonality to revenue cycles; supply costs don't fluctuate wildly; and if the business is run efficiently, every incremental new customer adds directly to the bottom line.

Easy come, easy go
Investments in the growth of the business, such as marketing costs, tend to be closely followed by increases in cash flow. Long lead times are not as prevalent for security companies as is the case in manufacturing, construction, and some other service sectors. Be sure to point this out in discussions with financiers. Having a low level of fixed overhead means you can rapidly expand (or contract) at management's discretion.

The management team

Your management team may be the deciding factor to a financier. Highlight your team's strengths and let them demonstrate their expertise in-person. Great business plans can, and do fail. Likewise, a mediocre plan can be successful with solid blocking and tackling from a good management team.

Information technology

To be able to bill and collect from your customers accurately, efficiently and quickly, excellent IT systems and strong operations procedures are necessary. You need to be able to quantify and manage your customer creation costs, supply costs, and to manage changes.

A few words about timing

Be sure to get your financing in place before you need it. The time to talk to financial sources is when your company shows healthy revenues. You have a much better chance of success and more latitude to negotiate your terms when this is the case. The old saying that bankers sell umbrellas only when the sun shines has some basis in fact.

Dealing with these issues is your start to an excellent relationship with your financial provider, who can become a key partner in the success of your business.

Clint Mitchell is a Director -- Business Development at Textron Financial -- Growth Capital Division, specializing in financing for telecommunications, security alarm monitoring, energy and related sectors.

He can be reached at 614-229-7979 or via email at cmitchell@textronfinancial.com.