Raising capital to accelerate manufacturing growth

Living and breathing finance has been the reality for RSM Australia’s director of corporate finance, Oliver Gaunt, for the past decade. With experience in banking, insolvency and mergers and acquisitions across a variety of industries, Gaunt delivers outcomes for clients through capital advisory, raising both debt and equity, one of RSM’ key offerings.

Gaunt expressed his enthusiasm going into 2025 and urged manufacturers to keep a keen eye on developing market dynamics. These dynamics surround the Reserve Bank of Australia’s (RBA) interest rate cuts that provide a great backdrop for raising capital.

“There are more opportunities for business at the moment to seek more debt as it is becoming cheaper, and more accessible,” said Gaunt. “ It’s been helped by the rise in private debt providers over the last five years that provide debt funding where banks will not.”

Gaunt said this growth of private debt has ultimately made it easier to raise debt for businesses in a market that has traditionally been dominated by the four major players.

The growth in debt providers has emerged in two forms. One of these is challenger banks, like Judo Bank, who entered the market to support small and medium-sized businesses. The most growth in this space, however, has been private credit funds.

“Where debt takes lower risk and equity takes higher risk, private credit funds take the middle ground. Taking on more risk than banks but charging more in interest, ranging from low to mid double digits,” said Gaunt.

Despite being more expensive, Gaunt said they fill a gap where banks don’t operate.

“They are short term lenders and typically look at providing debt facilities that they expect to get refinanced within 12 to 24 months,” he said. “Banks don’t generally deal with businesses that don’t have a trading history of more than 24 months, a private credit fund wouldn’t have that issue.”

Considerations when seeking capital 

 To paint the picture for businesses wishing to pursue external capital in this potentially beneficial market, Gaunt identified growth as a common trend that has historically led businesses to doing so.

“We’ve seen a lot of growth in the manufacturing industry. The discussion begins to be about how to then fund that growth because with that growth comes funding requirements, to scale production, acquire machinery, grow inventory,” he said.

“For manufacturing businesses there’s quite a high level of investment that needs to go into facilitating growth.”

Born from a need to raise capital due to factors like growth, Gaunt said manufacturers are often confused in deciding between taking on debt or seeking equity investment. He said that there are numerous factors that should be considered when making this decision, including the fact that despite debt being cheaper than equity, it’s not necessarily catered for your requirements.

“For one, you won’t be able to raise the same amount of debt as you would equity,” said Gaunt.

Because of these variabilities, Gaunt believes that ultimately it comes down to a business and what its objectives are.

“For debt, you’re looking at more specific objectives. This may include the purchasing of a machine or building,” he said. “An equity investor is looking at the broader picture. They’re going to be looking at what your long-term growth plans are. Is it geographical expansion, investing in innovation and R&D or looking at entering new markets?”

To raise equity for growth the business must issue new shares to the investor and as a result the business needs to be valued to determine the share price. Gaunt advises that there are a number of factors that drive valuation and suggests seeking an independent valuation from an experienced valuer, a service offered by RSM. A major factor impacting valuation is the market that the business operates in, and what position it holds within this market?

“This comes down to a business’s market share, geographical coverage and the market outlook for that industry. Is it just in Australia, is it in the Asian- Pacific, is it worldwide?” he said. “The wider the coverage and the larger the market share, the more valuable you’re going to be.”

Another question that Gaunt emphasised was whether a business is what he refers to as a ‘price maker’ or a ‘price taker.’

“This can be influenced by the businesses intellectual property,” he said. “If you have a unique product that only you can manufacture you are more likely to be able to influence price and be a price maker.”

Gaunt also noted numerous other factors that impact the value of your business. 

These included:

• Brand value: The better-known the brand is, the more valuable it is.
• Customer and supply diversity: Investors don’t like customer concentration or only having one supplier and no alternate supply sources.
• Keyman risk: This is where one individual holds all the things of value such as IP and relationships with customers and suppliers.
• Housekeeping: Ensuring a well-maintained plant and equipment, and good inventory and debtor management is important.
• Market outlook and regulation: While you can’t control these aspects, it’s benefits to have a positive market outlook and a less regulated marketplace.

Gaunt said that in addition to these factors investors also look for a compelling growth story and businesses that are ready for investment.

To attract investors and enable them to make an informed investment decision, businesses must prepare and provide an investor proposal or memorandum. “That’s a document that sets out the history of the business, and its model, operations, facilities, customers, and suppliers,” he said.

Additionally, Gaunt noted that the investors find value in a forecast model, which looks at the future financial performance of the business – how it’s going to increase profitability and how the proposed investment will be spent. Gaunt said it is essential that the forecast is input driven, and shows profit and loss, cash flow as well as a balance sheet.

“The reason for this is because investors look toward the future, and they will want to run various scenarios and sensitivities using the input drivers that impact growth and profitability,” he said.

Gaunt also sees the development of these documents as useful decision-making tools for the businesses themselves.

Simplifying a challenging process

In what seems to be a complex process, RSM Australia has services available to help businesses in understanding the best options available to them to ensure they reach their objectives. Its services help clients develop and implement growth strategies to achieve financial outcomes and acquire the funding they need to execute these strategies.

“We prioritise getting business investment ready by preparing high quality investor proposals, financial forecast models and devising a compelling growth story,” said Gaunt.

Past this, the company has a broad network of debt and equity providers – including private credit funds and family offices – that a lot of businesses aren’t typically aware of or don’t have access to, that want to invest in growing and successful manufacturing businesses.

Putting these services into practice, RSM helped a timber business to raise capital at different stages of its business cycle. The first growth phase involved scaling production and raising debt to acquire plant and equipment. The second phase was focused on the long-term growth strategy of the business and involved raising equity to acquire businesses and diversifying into new markets and growing their geographical footprint.

RSM Australia’s corporate advisory in this case – and many others – has helped businesses execute on their growth strategies and accelerate the growth of their businesses by raising external capital.

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This article was first published by Manufacturing Monthly.