The biggest could be finding capital, which is a necessary resource to continue developing the venture, or to be in shape to sell the business or buy another.
Second-stage business owners are those who have reached $1 million to $49 million in annual revenue and 10-99 employees.
To reach the next step – however it is defined – requires planning and timing. And a good reason.
"'I need to borrow money to make payroll.' That's generally a bad idea," says banker Robert Mason of BB&T.
Mason joined Asok Chaudhuri of Heritage Capital Group and Jeff McNeill of Palmetto Capital to headline "A Capital Conversation: Gaining Access to Capital for Growth in Northeast Florida."
The three financial executives met with about 40 second-stage business representatives and others this month at Jacksonville University, which hosted the JAX Chamber's GrowJAX event.
Jim Zsebok of Stache Investments Corp. was scheduled to join the panel, but was unable to attend. Stache Investments is owned by Jacksonville Jaguars owner Shad Khan.
Carlton Robinson, senior director of the JAX Chamber Entrepreneurial Growth Division, emphasized that second-stage businesses are one of the group's four pillars of focus. The others are large and small businesses and workforce development.
JU Davis School of Business Dean Don Capener started the event by urging the business owners to "package your business early" for an eventual sale.
"It's important to have potential strategic buyers at any stage," he said.
Chaudhuri, a principal with Heritage Capital Group, said that overall, the market has picked up, from Main Street to Wall Street. He said Florida is among the top five states in capital activity along with California, Texas, New York and Illinois.
While energy deals are dominant outside Florida, the Sunshine State is active in business transactions in the consumer, health care, industrial/logistics, technical and financial industries.
He said the real estate industry was returning.
There's money to be had, too. Chaudhuri said 72 percent of Florida deals are less than $100 million.
Considering that U.S. corporations have $1.2 trillion in cash available and private equity groups have more than $400 billion, second-stage businesses seeking capital have sources to tap.
He also said that 88 percent of transactions were completed in four to 18 months, with the median being 7.2 months.
"Due diligence is longer, but the right thing is happening," Chaudhuri said.
Why do second-stage businesses need capital?
He provided a list: Financial distress; working capital; shareholder distribution; recapitalization; debt consolidation; fixed plant and equipment funds; financial leverage and the cost of capital; organic growth; and acquisition.
Jacksonville-based Heritage Capital Group has been advising sellers and buyers of mid-sized, privately held companies since 1977. It provides transactional experience for companies valued between $10 million and $100 million.
Chaudhuri said $30 million to $50 million is the "sweet spot," but that Heritage Capital also works with deals as low as $3 million to $5 million.
Chaudhuri said he was working with a $75 million business whose two owners are splitting. One wants to buy out the other. The buyer is looking for $25 million in capital to package with existing equity. It's one example of the types of capital deals Heritage handles.
Sources of capital depend on the need. For example, a business owner doesn't assume long-term debt for short-term needs.
Chaudhuri said Heritage Capital provides analysis to determine the value of a business; a strategy and assistance to improve the value; a way to secure capital for the growth; and assistance to sell the business "when you are ready, and that day will come."
Chaudhuri also provided the pitfalls that second-stage owners should avoid. Among them: Insufficient homework about the business; weakness in the depth of management; and unrealistic expectations, among others.
McNeill, a partner in Palmetto Capital Advisors Inc., based in Ponte Vedra Beach, said the organization focuses on the $5 million to $75 million market in the Southeast, including management buyouts, recapitalizations, ownership transitions, corporate divestitures and growth capitalizations.
Palmetto Capital makes equity investments in lower middle-market private companies and advises individuals, family offices and institutions on private equity investing.
It says on palmettoca.com that its partners have been actively investing in private equity for more than 25 years and have committed more than $1 billion of capital into about 85 companies and 60 private equity fund managers.
McNeill told the second-stage business owners that private-equity investors are many, including committed funds; family offices; specialty financial companies, institutions; and individuals.
Most focus on a specific type of deal by size; stage; geography; business attributes; industry; or excluded types, such as specifically not focusing on certain types of deals.
"Be realistic," McNeill advised the business owners regarding the search for capital.
McNeill said private-equity investors look at a company's return on investment; management strengths, weaknesses, voids and track record; governance; valuation; exit strategy; industry attributes; regulatory environment; debt and borrowing capacity; competition; cost structure; customers; environmental and other potential liabilities; and much more.
"Be prepared to provide lots of information — more than you thought possible," he said.
Mason, BB&T market president, told the second-stage business owners that they need a trio of advisers.
"Your three greatest partners are your attorney, your CPA and your banking partner," he said. The bank can be a source of information as well as capital.
One business owner said he and his partners were first-time entrepreneurs and he wanted to know how to avoid mistakes, which are expensive and waste time.
Mason suggested that entrepreneurs manage their client base for seasonality, meaning that clients are needed to fill gaps in business. "As you grow, you might not have what you need," he said. "Find a way to normalize cash flow."
Some equity investors will provide management to companies, taking active day-to-day roles in correcting or growing the organization.
A second-stage business owner in the $1 million to $3 million range asked where to find coaching to reach the $5 million stage.
Chaudhuri recommended finding a mentor in the industry. "Find someone who has traveled your path," he said.
Robinson said GrowJAX focuses on second-stage businesses in the seven counties of Baker, Clay, Duval, Flagler, Nassau, Putnam and St. Johns counties because of the role they play in the region's economic growth.
"This group, we know you're the most important to that," he said.
Entrepreneurs who survive the early years of operation and develop their ideas into what's considered a second-stage business will find new sets of challenges.