TD Williamson Chairman Cris Gaut has been involved in growing companies for his entire career — not just organically, but through acquisitions. He says because of the many acquisitions he's been part of, he's also experienced in how to finance deals, and determining the right capital structure as the company moves through its lifecycle.

In finding a good financial partner, Gaut told attendees at the Houston Smart Business Dealmakers Conference that among the key characteristics is a partner that is going to grow with the business and adapt as it changes through cycles.

"If you're dealing with a capital provider who's not familiar with your industry and the cycles it can go through, that's going to be a painful experience," Gaut says. "You want to have a relationship with your capital provider so you can build trust because there are going to be some good days and there are going to be some tougher times, too, through economic cycle cycles, or what we went through from 2020 to 2022, and other situations."

It's also important to know the capital provider and their objectives. That can mean understanding the kind of returns they're looking for, how they are to work with, etc. That means doing diligence, talking with others who have worked with that group to learn about their experiences.

"There are all kinds of private capital providers out there, and they come in all shapes and flavors," he says. "If you're not matched up with someone who shares your objectives and you understand what they're like to work with, that can be a difficult relationship."

When he was bringing together five private equity-owned companies into one company he was running, then financing that going forward and thinking about the right capital structure, he says he knew that the strategic plan was to continue to build from that base of those five companies. For that, he says they needed acquisition financing.

"So, in that case, we raised $300 million bank financing, and also $100 million of new equity for the new company as our long-term capital structure, with the guiding principle that we needed to understand what our cash flow profile was going to look like, and we did not want to get the company in a situation where it was over leveraged," he says. "So, looking at what the business cycles could be, only drawing as much debt as we could handle in a down cycle and being careful that, in the acquisitions we did, we weren't enticed to use more cash, more debt financing than we knew we could pay back within a reasonable time, and stay within that overall long-term capital structure that we had set for ourselves. And then the follow-on financing was, we took the company public and did follow-on equity offerings, and then a public debt offering and grew the company substantially in that manner. Guiding posts: know what your cash flow is, stick to your long-term capital structure and use that bank financing as a modulator."

To plan optimal liquidity, he says it's important to understand what the cash flow is going to be. A key thing for a growing smaller company is being able to forecast in the near term what their cash flow profile is going to look like.

"Growth is expensive. Growth takes more cash than most entrepreneurs think it will," Gaut says. "And so, they tend to under provide for that. And sometimes that forces them to bring in a partner or sell the company or do something. So, understanding what the liquidity cost — the cash cost — of growth will be is important."

Looking at the downside, he says business leaders need to consider how bad things have been and how bad it could get, then plan for that. That could mean having a minimum cash balance of a certain amount of revenue to cover a few months so that if things stop, the company can still make payroll. Then longer term, it's about the plan for running the company.

"Are you going to run it so that you're paying a lot of returns to your shareholders, and dividends, and how important is that to you?" he says. "It's quite important these days. But that requires you to structure your financing in a certain way to have that flexibility."

Having a good diligence plan and showing through past actions that it can be done well will give the financing partners a lot more confidence in the company.

"What I have found works well is having an acquisitions diligence playbook, where you're teaming up your functions with the target's functional groups and they are working with each other early on right through closing so there's nothing that your folks don't know," he says.

There are a lot of elements to that approach, but he says some of the more important aspects to focus on include the financial diligence, which could be handled by outside service providers, and the operational diligence, which he says the acquirer should do on their own.

"You need to understand that business very well," Gaut says. "And I think something that's often overlooked is the people side. How well is this team going to mesh with your team? And how are you going to retain the key people? And you need to have that retention plan and the organization set out before you close the deal. I think that's the way that things come off the tracks very easily after the fact, when so many acquisitions fail, is the people side isn't handled well. They're two different teams from the two different companies and they're not on the same page, and that's when things begin to fall apart."