If the owners are not planning to sell business in the near future, they need to initiate active steps to develop business further – otherwise, its value will soon begin to deteriorate. The market doesn’t stay put: you keep the foot on the gas pedal or else you slow down and risk falling behind the competitors.
Many entrepreneurs understand this concept and invest – they reinvest profits and use bank loans when needed. This approach makes sense when a company is growing gradually and is not facing intense competition – ownership is satisfied with the status quo, and the company top management is focused on stability, not leadership.
Slow and cautious growth may seem safe, but in a dynamic market it leads to losing ground in competition.
While some companies embrace new technologies, enter promising markets, and take the lead, others – those choosing a “comfortable pace” – quietly fall behind. The effects keep piling up, and over time, company’s products and services become outdated, customers switch to better appealing competitors, and profits and shareholder value shrink.
This pitfall can be avoided – but only through the implementation of
As market competition intensifies, the need for
Active growth strategy requires substantial financial resources. Operating cash flows are usually not enough to finance this strategy. That’s why companies raise long-term financing from external sources, and this allows them to make a qualitative leap in development.
For most business owners, a bank loan is the most familiar source of financing. But debt has its limitations: debt has to be serviced, it reduces flexibility, and puts pressure on operating cash flows. When implementing
The goal of an
For an overview of ROIC, WACC, capital structure, their practical applications and related concepts see ink Advisory publication: ROIC > WACC: The Formula for Creating Shareholder Value»
Companies that choose an active strategy and build an optimal financing structure become market leaders in the long run. If the market is growing faster than your business, that’s a strong signal to act: raise capital, strengthen your team, and scale your business.
When considering external financing options, it is crucial for a business owner not to dismiss outright the option of raising equity – and to clearly understand its essence, not in abstract terms, but through the lens of business logic.
Equity financing means attracting external capital in exchange for company share. Unlike debt, this instrument does not involve collaterals or guarantees of repayment of principal and interest on a fixed schedule.
An investor becomes a co-owner of the company, assumes a share in its risks and rewards, and is explicitly interested in seeing the value of his or her share grow along with valuation of the business as a whole. The investor’s key source of return is the growth in company valuation, which aligns with the founder’s interests. Dividends may also be a source of income, but the company is not legally obliged to pay them.
By raising equity financing, the company gains several advantages:
From the founder’s perspective, equity financing offers several advantages over debt financing:
On the flipside, equity financing also comes with certain drawbacks for the founder:
If the company has reached the limits of growth using internal funds and debt, equity financing can become the next stage growth driver. It is essential for the founder to understand: this path requires maturity in management and a willingness to enter into a partnership.
Bank loans are a familiar and straightforward financing tool for businesses. However, when pursuing active growth strategy, debt can become a constraint rather than a solution.
Financial debt is a reasonable and effective tool – as long as it doesn’t undermine the company’s financial stability. Loans and similar debt instruments help cover corporate needs: maintaining working capital and investing in production assets. However, the potential of debt capital is limited by fundamental factors.
It makes sense to raise debt for a new development project when the company already has a stable and predictable cash flow, and when revenue and margin volatility are low. In such conditions, the Debt/EBITDA ratio (debt relative to operating profit before depreciation) can remain within a safe range of up to 3.0x, without threatening financial health of the company.
But as debt levels rise – once the ratio reaches 3.5x or higher, the situation changes dramatically: leverage starts to work against the business.
The owner has to recognize when the debt ceiling has been reached. If Debt/EBITDA > 3.0x, then equity financing is no longer just an alternative – it becomes the primary source of funding
| Parameter | Financial Debt | Equity |
|---|---|---|
| Repayment | Mandatory, with interest, on a strict schedule | No repayment or regular payments required |
| Impact on Company’s Cash Flows | Creates pressure via mandatory interest and principal payments | Minimal impact |
| Debt/EBITDA | Optimal up to 3.0x | Does not increase leverage |
| Financial Flexibility | Low | High – adaptable to situation |
| Suitable for Financing | Working capital, equipment or Capex | Business scaling, entering new markets, R&D, M&A deals |
| Effect on ROE1 | Increases ROE with stable profits | Reduces ROE in the short term, increases capitalization |
| Investor Participation | – | Through shareholder meetings or the Board of Directors |
The Debt/EBITDA ratio is widely used in capital markets to assess level of company’s leverage. From an investor’s perspective, this metric should remain below 3.0 – meaning the company’s financial debt should not exceed its three-year EBITDA. Any excess over this threshold significantly increases the financial risk.
The maximum acceptable leverage level has been determined by international rating agencies based on long-term statistics on corporate debt and debt-servicing capacity.
For example, S&P assigns credit ratings and default probabilities based on a company’s financial risk profile: minimal, modest, intermediate, significant, aggressive, or highly leveraged.
According to 2024 data, the 3-year default risk by Debt/EBITDA level was:
If a company’s financial debt exceeds 3.0x EBITDA, banks and other lenders begin imposing additional restrictions: dividend limits, bans on new loans, and requirements to maintain financial covenants. These measures are meant to protect lenders against default risk – but they also limit business freedom and raise the cost of capital. Moreover, the business becomes increasingly dependent on banks.
| Level of financial risk & possible S&P Rating |
FFO1 / Debt | Debt / EBITDA | EBITDA / Interest | CFO2 / Debt | 1-Year Default Risk | 3-Year Default Risk | Comment |
|---|---|---|---|---|---|---|---|
| Minimal (AAA, AA+, AA, AA−, A+) |
> 60% | < 1.5x | > 15x | > 50% | 0,0% | 0,0% | Maximum stability, lowest interest rates |
| Modest (A, A−) |
45-60% | 1.5-2.0x | 10-15x | 35-50% | 0,1% | 0,3% | Strong structure, low risk, high predictability |
| Intermediate (BBB+, BBB, BBB−) |
30-45% | 2.0-3.0x | 6-10x | 25-35% | 0,1-0,3% | 0,3% | Moderate leverage, minimal risk |
| Significant (BB+, BB) |
20-30% | 3.0-4.0x | 3-6x | 15-25% | 0.2% | 1.3% | Loss of investment-grade rating, higher cost of debt |
| Aggressive (B+, B) |
12-20% | 4.0-5.0x | 2-3x | 10-15% | 1.7% | 6.7% | Low stability, high debt cost |
| Highly Leveraged (CCC+, CCC, CCC−, C) |
< 12% | > 5.0x | < 2x | < 10% | 28.4% | 35.2% | Pre-default state, high risk of debt servicing failure |
Preparing a company for raising equity capital typically involves two complementary tracks:
Developing long-term growth plans and a solid investment case, essential for investor negotiations. The goal is to provide the investor with:
Undertaking measures to enhance transparency and improve manageability:
It is recommended to launch both strategic and operational tracks 12–18 months before the planned capital raise. This significantly increases the chances of successfully raising new equity at the best possible terms.
When the strategy is clear and the metrics are convincing, investors move on to the question: Is the Founder prepared to take the next step? Is he or she ready for institutional development of the company and a true partnership?
Investors assess the Founder’s maturity based on three key factors:
It can be difficult to independently assess the prospects of raising equity financing – that’s why it’s important to turn to external experts who can professionally manage the entire process.
With proper assistance, you will be able to:
Once the company is ready to engage an investor and the investment offer is formulated, your advisor will:
ink Advisory team provides end-to-end support in equity raising transactions for business owners and executives.
Our approach:
We speak the language of business and understand what matters to owners. Our mission is to make the process as smooth and effective as possible.
