Financing Your Business: Seller Financing

We have talked about all types of Financing to help get a Business Started.  I want to talk about one of the very typical methods for buying an existing Business.  This is Seller Financing.  Essentially, the Seller of the Business holds a note for some or all of the value of the Business.  This style of Financing is very typical for Owner/Operator type Businesses.  These can be anything from a Sole Proprietor to relatively small Businesses.  The purchasers of these Businesses tend to have modest resources and can have difficulty obtaining an SBA Loan.  There is an additional type of benefit for the Seller in that they receive their money over time.  This can have significant tax benefits.

There is a downside to this type of Financing.  There is risk that the new Owners may not be successful and may not be able to pay off the Business Loan.  This can put the Seller at Risk.  Even if they take over the Business, they may be unable to restore the viability of the Business.  On top of that, this type of transaction is most often done at the time of Retirement and the Owner may have the desire to re-enter the Business from the Outside.

To compensate for this, Owners often stay as part of the Business for at least a transition period.  Some of them spend some extensive time in the Business in a lower level or part-time role.  In order to Balance the risk, a Seller might consider an Earn-out.  This is essentially balancing the downside with an upside.  The upside being that if the company outperforms an agreed Business Plan that the Seller receives additional compensation.  This provides a balance between Risk and Reward.  If the Seller is still part of the business, then this reduces the Risk even more.

Finally, it is critical that the new Owner (aka the Buyer) have a good Business Plan that they execute properly.  This may require some significant growth of someone that is a Former Employee or comes without previous Ownership experience.  Business Coach can mitigate this risk.
Have a great day!
Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business – Change Your Life!

 

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M&A Thoughts:  Should You Buy A Business?

Many Americans are becoming their own Business Owners for lots of different reasons.  I see many people who look to start their own unique Business.  However, many of them might be better served buying into an existing Business.  This is true whether it is a stand-alone Business or part of a Franchise.  The goal of purchasing the Business is that there will be Systems, Products and Services already in place.  The new Owner can put their mark on the Business, but they do not have to start from Ground Zero.

There are plenty of problems to overcome still with Business Purchase.  One obvious one is that there is money needed to fund the purchase.  You may have noticed my series on “Financing Your Business”.  There are plenty of good tips and paths forward to make such a deal work.  The two most obvious paths are an SBA (Small Business Association) Loan and Seller Financing.  These can be combined to make an effective deal.  An SBA Loan is a Loan with a percentage of Government Guarantee.  Seller Financing is the Business Seller financing the deal and will be paid with the Cash Flow of the Business.

A big part of both Financing Options is the need for an effective Business Plan.  This includes a description of the Business, some Key Elements about the Business, and a Financial Projection.  My experience is that most people can get through the Mission, Vision and Values.  They tend to struggle a bit more when it comes to Market Sizing and Positioning.  They completely lock-up when it comes to creating Financial Projections.  These are all required for a good Business Plan.  One other thing is required.  That the Results of the Business are compared to the Plan Regularly and the Plan is updated periodically.  Without that, the Business Plan is work thrown in a drawer and adds no value to the Business.

One of the other hurdles is Due Diligence.  This is the work to be done to evaluate the Company.  Again, there is a section surrounding the Business and its Operations.  Financials need to be reviewed as well.  Finally, all the Contracts must be looked at and understood.  All of this is true whether this is a Franchise or a Stand-alone Business.

All of these areas are places where I can help.  So if you are thinking about buying a Business, then give me a call!
Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business – Change Your Life!

Financing Your Business: Lines of Credit

I posted last week about Factoring as a Cash Flow solution.  I want to post about another solution to temporary Cash Issues: Lines of Credit.

I want to be very clear about one aspect of these Loans.  Here we are talking about what a Banker/Investor would call Working Capital.  Working Capital is the amount of money that you need in the bank to be able to handle the fluctuations in Cash.  You might need to buy some inventory or pay to start some project.  In any event, you will need some amount of Cash on-hand to deal with these expenses.  You can have analysis done of your Financials to see what your Working Capital should be.  Then you can make sure that this amount is in your Bank.

However, with everything there are always exceptions.  Factoring is one such method of Handling this.  Another is a Line of Credit.  The way a Line of Credit works is that you get pre-approved for a Loan up to a certain amount.  This pre-approval does not require you to use any of the money from the loan.  Instead, this money is available to the Business in an on-demand basis.  This means that there is a buffer for this Business in case there is an extra amount of Working Capital needed.

Lines of Credit generally have fees to both open and maintain them.  These fees are due the Bank whether the Money is used or not.  Interest and Payments start if and when money is drawn from the Line of Credit.  Additional Cash can be taken out of the Line of Credit, if the maximum amount has not been reached.  As with all Loans, their is a payback period for the Loan.

In general, Lines of Credit are lower effective Interest than either a Credit Card or Factoring.  If you have a Business Credit Card and have a Balance, you probably should consider a Line of Credit instead.  And if you are drawing on these Credit Facilities often, then you have to question whether you need to build additional Working Capital into your Business.

Lines of Credit are generally Unsecured Debt, but there are Secured versions as well.  That can help a company with a difficult Credit History qualify for the Line of Credit.  Factoring does not truly evaluate the Credit of the Business but is more concerned with the Credit Worthiness of the Customer.

So, there we have two instruments able to deal with Cash Flow and Working Capital issues within a Business.

Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business – Change Your Life!

Sonoma County: News and Notes

This week I will cover the results for Enphase.  The company reported $74M in Revenue and a loss of $0.14 per share.  The results also included some interesting number changes.  The first is that the company grew total cash by $1M.  This was accomplished by a dramatic draw-down of inventory from $33M at the end of Q1 to almost $21M at the end of Q2.  This allowed for net cash to be positive as the company was selling products that it had paid for previously.

The other large event in the quarter was that the CEO Paul Nahi has resigned effectively immediately.  The company did not appoint a CEO but instead created an Office of the CEO to run things.  Paul’s seat on the Board of Directors was not mentioned.  My assumption is that he will serve out his term and then someone else will replace him.  There is supposed to be an internal and an external candidate for CEO.  The internal candidate seems very likely to be COO Badri Kothandaraman.  He would seem to be the default candidate as he clearly joined Enphase at the behest of investor TJ Rodgers.

What this led to is a very odd conference call and I want to focus this on the guidance for Q3.  This guidance was essentially flat from Q2.  That seems very odd to me because Enphase has been somewhat seasonal with Q3 generally being the best quarter for the year.  I think there are 2 primary factors for this and I do not buy the stated reason on the conference call at all (a component shortage).

Factor 1 is that Quarterly Conference Calls are a big deal.  They are the primary sales call that can be done by a company on a periodic basis for the stock.  I am used to a cycle of a month of script writing, reviewing, updates and practice before the call.  A CEO transition will make this quite complex as Paul was on the call, but out the door at the end of the day.  How they project next quarter’s guidance would be tricky as the voices in the room will still be settling out.

Factor 2 is that Enphase is in a complete product transition.  Not only do we have the transition to newer micro-inverters, we have the potential transition to the AC Modules.  That latter transition is not completely under the control of Enphase.  It has to work with LG and Jinko to try to make this work right.  New Product Introduction is always a sloppy process and there are slips what happens.  Having them both at the same time with a new management team is going to be hard.

I want to point out one more thing.  The Debt from Tennenbaum require that Cash + Inventory + Receivables is more than $75M.  There is also a requirement to have $10M of cash at all times.  At the end of next quarter, both of these will be within reach of not being met.  There should still be room.  But one can easily see a path in Q4 to missing one or both of the loan covenants.  I want to point out that breaching these covenants will be akin to bankruptcy for an equity holder.  So, I would expect yet another capital raise in Q3 after the new CEO is confirmed.

So, where does Enphase stand?  Well, it is on a knife’s edge.  The new products might not turn Enphase into a financial juggernaut.  They have the potential to bring the company to profitability and that would be enough to keep it alive and probably have the share price be somewhat higher.  However, there is the risk that these products fumble on introduction.  Not because they are bad, but because New Product Introduction is hard.

To me the real question for investors is a longer term path forward.  Despite the various fan boys on both sides, both Solar Edge and Enphase have solid working products.  At this time, Solar Edge is about 2x the Revenue of Enphase and has a much larger R&D budget.  This gives the company a big edge going forward.

Finally, I think about my friend Martin Fornage all the time.  This last couple of years can not have been a lot of fun for him and frankly he doesn’t need the money.  If the culture changes, maybe he exits stage left.  I don’t know what Enphase is without him.

Have a great day!

Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business – Change Your Life!

Financing Your Business: Factoring

Factoring is a tool that a minority of Business Owners have heard of.  The ones that have are not enamored with it, but Factoring can be a good tool in a business that has issues with Cash Flow.
In particular, the best use of Factoring is covering the gap between expenses incurred on a project and being paid for a project.  Let me use Construction as an example.  Imagine you are going to do some renovations on a Commercial Office building.  In this case, let us say that the Building requires a new roof.  To get to the point where the job is complete, you need to buy and use materials.  On top of that you have one or more crews that need to get paid for their time.  After the job is complete, you send an invoice (maybe the net is due in 30 days or NET30).  But the business is a bit slow in paying and you get a check between 45 and 60 days.  Expenses for the project are likely to have started 90 – 120 days before you get paid.
Now, you will realize at this point that you are floating the customer a loan. Some industries (for example signage) often have down payments to cover materials but this is rarer than you might think.  Even if the roofing job is wildly profitable, you might run out of cash waiting to get paid.  So, how does factoring work and how does it help?
Well, factoring is a solution that is not a loan.  In fact, it is a form of selling an asset.  In this case, that asset is the Invoice that you are going to provide to the Customer.  A Factor buys that invoice from you at a price less than face value.  The Factor provides the cash to you up front and keeps a fee that represents the equivalent of Interest on the Invoice.  The good news is that the Business’ Credit Rating is not an issue, the customer’s is.  This means that a small company can get financing to deliver to a large customer.
In the long term, Factoring can be expensive.  But it is the lifeblood of many industries and companies and smooths over any Cash Flow gaps that exist.
Have a great day!
Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning
Change Your Business – Change Your Life!

Sonoma County: News and Notes

This week both Calix and Enphase released their earnings.  I need to spend a bit more time on the 10-Q from Enphase (that is the formal report by the company filed every quarter with the SEC).  So, I will be reviewing the numbers and call from Calix.  Revenue came in at $126M with $107M of that being Product Revenue.  Losses were $0.38 per share.  In general, it was a bit more of the same as Q1.  The revenue growth year-over-year was from the service sector.  Unfortunately, this sector had negative gross margin (in other words they lost money on selling the services).  Operating Expenses were up $6M over last year with an $8M increase in Research and Development.  Over the last 6 months the company has burned $13M in cash and is about 9 months away from insolvency on that standpoint.  I don’t think that will be an issue anytime soon, but the company does need to figure out how to become profitable on a regular basis.

The company forecasted Q3 numbers as $126M – $130M in Revenue, 36% to 39% Gross Margin, and Losses of between $0.21 and $0.27 cents a share.  Since that time, the stock has tanked over $1 per share (over 20%) and is as of the moment $5.25 per share.

There is one other thing is that Calix announced the signing of a deal for NG-PON2 at a North American Tier 1 for Trials and Early Deployment.  This can only be at Verizon and there has been much talk about it for a very long time.  This is not going to replace FiOS.  There are too many units of FiOS installed and the pricing on those units were a total of about $100/customer.  It is not reasonable to have NG-PON2 priced that way otherwise there would be massive losses.  However, a deal would Verizon would have to be at much less than corporate gross margins overall.  They might be able to get good margins out of the CO units (and thus early shipments) but not out of a fully deployed system.  On the other hand, this could be a significant Revenue opportunity.

So, I think what investors see is two things.  All the growth of any substantial amount has been at very low gross margins.  There is concern that this will be true with the Verizon deal as well.  At today’s Operating Expense (OPEX) levels Calix will have to have Revenue of $181M per Quarter to break even.  If this is simply an addition of the Verizon deal, this implies that $60M a quarter or $240M per year would come from Verizon.  This is not outlandish at one level.  FiOS was about $600M a year for its equivalent.  But how many endpoints of NG-PON2 will be deployed.  For BPON, we did 3.5M.  If NG-PON2 is significantly smaller (used for Business and Cellular Services), then the Revenue will not be there.  Until we see how Verizon rolls this out we will not know.

And I think it is that uncertainty as well as the ongoing losses that are causing investors to sell Calix stock.  Right now to break even the company would need to reduce OPEX by about 33% and I see no indication of that coming in Q3.  So if you think there is something important going on with Verizon, this stock is a lot cheaper than it used to be.  One thing to point out is that business at Verizon could lead to a sale of Calix, but the number of companies who would be buyers can be counted on less than 1 hand.

Have a great day!

Jim Sackman
Focal Point Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business – Change Your Life!