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Sunday, April 21, 2024

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Innovative Financing Solutions for Energy Businesses

by Marty Kirshner, CPA, MSA, Gray, Gray & Gray, LLP 


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Growth capital doesn’t need to come from a traditional bank loan

As small- to medium-sized businesses (SMBs), energy retailers often face challenges when it comes to securing the necessary capital for growth, expansion, or even day-to-day operations. Traditional financing options, such as bank loans and lines of credit, may not always be readily available or suitable. Fortunately, there are a myriad of innovative financing solutions that cater specifically to the unique needs of mid-size businesses. Let’s look at three alternative financing options: private equity, joint ventures, and crowdfunding, and discuss how an energy business might leverage these solutions to fuel growth and achieve financial goals.

 

Private Equity

Private equity (PE) financing involves investors acquiring a significant stake in established businesses with the goal of driving growth and profitability. While venture capital focuses on early-stage companies, private equity is geared toward mature businesses seeking to take their operations to the next level. The PE process typically looks something like this: 

  • Targeting the Right PE Firm: Small- and mid-size energy companies looking for private equity partners should identify PE firms with expertise in the industry and the resources to support growth.
  • Valuation and Negotiations: The PE firm conducts a thorough evaluation of the business’s financials and operations to determine its value. Negotiations then take place to agree on the terms of the investment.
  • Due Diligence: PE investors conduct due diligence to assess the business’s strengths, weaknesses, and potential for growth.
  • Strategic Growth Planning: After the investment, the PE firm works closely with the company’s management team to develop and execute a strategic growth plan.
  • Exit Strategy: PE investors typically aim to exit their investments within a few years, either through a sale or other means, to realize their returns.

Advantages of private equity financing include access to significant capital to fund growth initiatives, acquisitions, and operational improvements. PE firms often bring additional industry expertise and a proven track record of driving growth in similar businesses. Finally, unlike venture capital, private equity is not focused on rapid growth; it allows for a more measured approach to expansion.

There are some drawbacks to PE investment, including ceding a degree of control to investors, which can be challenging for business owners used to making all decisions. The due diligence process in private equity can be extensive and intrusive, requiring a high level of transparency from the company. Finally, PE investors typically have a set timeline for their investments, which may not align with the business owner’s long-term vision. 

 

Joint Ventures

Joint ventures (JVs) involve two or more businesses coming together to pursue a common objective, such as entering a new market or sharing resources and expertise. JVs are a collaborative financing solution that allows two or more smaller businesses to leverage the strengths of their partners. Here’s how to structure a JV: 

  • Identifying Compatible Partners: Businesses should seek partners whose goals align with their own and who bring complementary strengths to the table.
  • Defining the JV Agreement: A well-structured JV agreement outlines the objectives, responsibilities, and governance of the venture, as well as the allocation of profits and losses.
  • Resource Sharing: Partners pool their resources, which may include capital, expertise, technology, or distribution channels.
  • Operational Execution: The energy company and its JV partner(s) work together to execute the venture’s strategic plan.
  • Exit Strategy: JVs can have predetermined exit strategies, such as selling the venture to one of the partners or spinning it off as a separate entity.

Joint ventures allow businesses to access resources they might not have on their own, such as technology, distribution networks, or capital. Risks and costs are shared among the partners, reducing the financial burden on the individual partner. JVs can facilitate market entry in new regions or industries, leveraging the local knowledge of partners.

However, JVs can be complex to structure and manage, requiring careful planning and ongoing collaboration. Decision-making may involve multiple partners, potentially leading to conflicts and delays. That’s why ensuring alignment of goals and strategies among partners is crucial for the success of a JV.

 

Crowdfunding

Crowdfunding has emerged as a popular alternative financing solution, allowing smaller companies to raise capital from a large number of individuals, often through online platforms. This approach democratizes the capital raising process, particularly for businesses with a compelling story or a strong community following. The crowdfunding process means going direct to individual investors, often sight unseen. Here’s how it might work: 

  • Choosing the Right Platform: The business must select the crowdfunding platform that best aligns with their goals. Popular options include Kickstarter, Indiegogo, and GoFundMe.
  • Creating a Compelling Campaign: The success of a crowdfunding campaign depends on the business’s ability to tell a compelling story, showcase its products or services, and set clear funding goals.
  • Engaging the Crowd: Crowdfunding campaigns require active engagement with supporters and potential backers through social media, email marketing, and other channels.
  • Fulfillment and Rewards: Depending on the type of crowdfunding (e.g., reward-based, equity crowdfunding), businesses must fulfill promises to backers, such as delivering products or providing rewards.

Crowdfunding can provide capital without giving up equity or taking on debt. A successful crowdfunding campaign can also serve as a form of market validation and generate early customer interest. Crowdfunding campaigns can help businesses build a dedicated community of supporters and customers. Various crowdfunding models are available, allowing a business to choose the one that best suits their needs.

Keep in mind that running a successful crowdfunding campaign requires a significant time investment in marketing and engagement. Meeting promises to backers, especially in reward-based crowdfunding, can be logistically challenging. In the end, crowdfunding success is not guaranteed, and campaigns may fail to meet their funding goals. 

Innovative financing solutions offer growth-oriented energy companies a range of options to secure the capital needed for growth and success. Each of these solutions, whether private equity, crowdfunding, or joint ventures, comes with its unique advantages and challenges. Selecting the right financing pathway requires careful consideration of the business’s goals, stage of development, risk tolerance, and the alignment of interests with potential partners or investors.

A business considering alternate financing should assess its specific needs and objectives, conduct thorough due diligence on potential financing sources, and seek professional guidance when necessary. With the right financing solution in place, a heating oil or propane business can unlock their growth potential and navigate the dynamic landscape with confidence.

Marty Kirshner is a Partner who leads the Energy Practice Group at Gray, Gray & Gray, LLP, a business consulting and accounting firm. He can be reached at (781) 407-0300 or mkirshner@gggllp.com.


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