Financing Your Business:  Friends and Family

Last week I talked a bit about the SBA loan.  This week I want to talk about one of the other early stage funding options – Friends and Family.  It is exactly what it says.  You get money from either Friends or Family or both.  Sometimes this can be Debt, but I want to talk about it as Equity.  This will give us a view into one of the biggest issues in Equity transactions:  Valuation.

Valuation is pretty simple.  How much is the company worth?  The younger the company is the less likely there are lots of good ways of determining Valuation.  But to start with there are 2 numbers that you need to understand: Pre-Money and Post-Money.  This is pretty simple.  A Pre-Money Valuation is the worth of the company before their is an investment.  A Post-Money Valuation is the value after the investment.  Think of it this way.  If you created a company with 1,000 shares of stock and had invested $1,000.  You then sell 100 shares of stock at $1 per share to a friend.  The Pre-Money Valuation is $1,000 and Post-Money is $1,100.  The Friend now own 100 out of 1,100 shares or about 9% of the company.

I hope you are beginning to see why Valuation is such a big deal.  How much a company is worth is subjective, especially early on.  That is because of what would be both Intangible Assets and Sweat Equity.  Intangible Assets are the Intellectual Property that the Founders have.  In other words, their brains.  Sweat Equity is the effort that they put into the company without compensation.  So a Founder will want to get value for all the work they have put in and the value of their Business ideas.  Most investors will not be so generous about what that is and thus there is a significant amount of conflict about this topic.  So, have your ducks in a row about Comparable Companies or Comps.  This helps set the market for businesses.

I have one last thing to say about this.  Put it in writing.  I can not tell you how many people have broken relationships over business disagreements.  It is not worth it.  Put things down in writing and make sure everybody is clear.

Have a great day!

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

Change Your Business – Change Your Life!

Hodgepodge

So, there is not one overriding theme to this week’s post.  I am going to write about some things that interest me around the topics I cover.

Well, as hot as it is we know that it is now Summer.  One thing I have noticed in the North Bay is that we end up with a week or so every June of very hot weather.  I think this is our “natural air conditioner” starting up.  As you know we are cooled by air coming from the Pacific to take the place of the rising air over the Central Valley.  It is almost like this week is a pre-requisite to getting that machine started.  Enough latent heat and enough temperature differential.

The fact that it is now summer means that the SMART Train will miss its opening schedule.  There is currently no defined date for starting the regular schedule while a safety review at the Federal level proceeds.  I wonder how long we will continue to support the train after it comes on.  I am a skeptic for ridership.  Riders will need to secure transport at both ends of their commute and it does not extend into SF nor connect to BART.  Given the widely dispersed places that we have employment, I am not sure the right way for a commuter to use this today.  If it continues to exist, maybe a generation from now business will have moved.  Will it be open still?  I don’t know.

The Net Neutrality writing I have done was in response to the massive outcry over a Notice of Proposed Rulemaking (NRPM) at the FCC, which asked many questions about what it should implement for residential Broadband Service.  This resulted in the “Title II Light” that we have today.  I want to note that there are many NRPMs that go on so this was not a unique thing.  For example the FCC just announced one about changing how Payphone Service payments are audited.  I doubt this one will receive much public interest.  It should be noted that the FCC is likely to change a number of rules that you care about.  As things evolve, I will try to keep you informed.

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: The SBA Loan

SBA Loans are a form of debt that is very common in the small business world.  SBA stands for the Small Business Administration and is an agency of the US Federal Government.  The SBA Loan is, in the most common form, a standard Business Loan from a Bank or similar Financial Institution.  What the SBA does is provide some level of risk reduction to the lender.  I don’t want to provide an exhaustive detail on getting an SBA Loan.  What I will do is provide some thoughts about why this is important and when to use it.

Just so we are clear, SBA support is not free.  Think of it like when you first purchase a house and have to have Mortgage Insurance on your home.  Once you can, refinance the loan (or point out to your lender that you no longer meet the criteria for needing Mortgate Insurance) to eliminate the charge.  SBA loans like Mortgage Insurance provide value directly to the lender not to the borrower.  These programs provide indirect support for borrowers.

So, what is this indirect support.  Well, I will be blunt.  You can’t get a business loan in so many cases, that the SBA guarantee is very important.  If you recall in last week’s post, I talked about Underwriting at a Bank.  The basics with Banks that I talk to is that they want to loan money to a firm that has had a stable organization for 3 years and can show a profit over that same period.  That is BEFORE we talk about the loan and what it might be used for and how it is intended to build the business.  By stable organization, I mean that it is in the same corporate structure over that time.  So, right now if you are reading this to head to your bank to get a loan to start your business…just turn around.  You won’t get a loan that way.

What the SBA does is provide air cover for the lender.  If they see that there is a good business plan with people to support it, they want to issue the loan.  The SBA guarantee allows them to get around those pesky Underwriting Guidelines to do so.  I want to be clear that I put the words “good business plan” in that sentence.  That means a narrative and 3 years of proposed financials.  If you are thinking you won’t need to know your numbers, you are not thinking about this properly.  The Bank wants to make sure that you understand how the operation of your business will end up paying the bills – including them.  So, they are likely to have questions about both the numbers and the business that you will need to answer.  Saying, “I don’t understand the numbers” will not be comforting to them and help you secure the loan.

An SBA loan is where many businesses have started.  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

Today I will go over the next company in my usual list to analyze for quarterly results:  Keysight.  The raw numbers are that Revenue was $753M up from $731M a year ago.  Non-GaaP Net Income was $0.64 compared to $0.61 a year ago.  These are reasonably level results on a year over year basis, given that a tiny amount of Ixia is included in these numbers.

I want to point out what looks to be the strategy here, based up on the acquisition of Anite and now Ixia.  This looks to be a form of a roll-up.  Keysight is acquiring some smaller companies that are specialists in technologies that are adjacent to markets that Keysight is strong in.  To be clear, these markets are sub-markets of larger market segments.  So think of this as Keysight buying much of its future product development.  Anite has replaced the revenue of some of the more troubled parts of Keysight’s business.  Ixia will bolster Keysight in other markets.

The question for you:  “What does this mean for the future of Keysight?”.  That is hard to say.  Remember both Ixia and Anite were bought with cash.  That means that the value of this cash was removed from the shareholders and given to the shareholders of Anite and Ixia.  In the case of Ixia, the cash given to them was 45% above the closing price at the time of the deal.  When the deal was announced there was a bit of run in the stock.  This culminated in the announcement of the results.  The stock did really well in after hours the night of the quarterly conference call.  If you ignore this bump, the stock has been on a flat to slightly downward trend for a few days.

The company itself is large and profitable.  What we are discussing is how the company uses the cash that it makes.  There are 2 basic alternatives.  First, the company can keep the cash.  At the level that Keysight has it (or Google or Apple or Microsoft for example), it is not a service to shareholders.  Keeps more cash than is required means that your investment is in a CD or a Checking account under the control of the company.  The second alternative is to return the cash to the shareholder as a dividend.  This allows the shareholder to invest this cash in other, hopefully successful, places.  I favor this last, because the market that Keysight is addressing is slow growth but high technology.  It means there will be struggles in increasing share price until there is some rationalization in Product Development.  If you need to “buy” your future, then that means your current R&D is not being productive.  The right thing to do is to cut back on older products and focus on the growth areas.  The problem with is that you likely will be laying off current employees and replacing them with those from the company that you just bought.

I hope this helps you and 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 I want to talk a bit about the results of the election in Santa Rosa last week.  As you probably know by now, Measure C was rejected.  This was the implementation of Rent Control.  I was quite surprised that it was rejected and I had seen polls before the voting that said that Measure C was going to pass handily.  My guess is that a lot of this could have been turnout based.  Older voters (property owners) tend to vote.  Younger voters (renters) tend not to vote.  I don’t think that Measure C would do much to alleviate our housing crunch here in Sonoma County.  I am hopeful that we can get a plan in place to expand housing options soon.

The second thing that I note is that the SMART Train did a “soft launch” on June 7th and they are awaiting approval by the Federal Railroad Administration.  Well, they have less than 1 week to meet their last published schedule of a “late Spring” launch.  There is a schedule posted with 17 trips a day.  The first train leaves Sonoma County Airport at 4:19AM and arrives in San Rafael at 5:26AM.  The last train leaves San Rafael at 8:35PM and arrives at Sonoma County Airport at 9:42PM.  There are 17 round trips on weekdays and 5 on weekends.  So, it looks like things are ready to go for later this year.

While Measure C failed, Measure D passed.  The City of Santa Rosa now has a Pot Tax.  I think the bigger issue here is that the city is now having a space crunch for warehouse type buildings.  3 of my friends in the Automotive Business have lost their location so that it can be turned into a grow house.  I have heard outrageous pricing for space and I expect that this will cause a significant amount of disruption as well.  Looking forward, I wonder how these places will be constructed and staffed.  I suspect that there will be a great deal of money wasted in all of this and that 3 years from now there will be bargains to be had in space that failed.

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:  Debt or Equity

This is such a wide ranging topic that it makes it hard to find a great starting point.  So I am going to begin by making sure that we are clear on Debt and Equity.  I am going to use an example later to show how they compare in a real situation.  In some businesses, it may be difficult to get one or the other or both.  And we will get to that.

Debt is pretty simple.  It is borrowing money.  Many people are clear on this today as Credit Cards, Auto Loans, Student Loans and Home Mortgages are commonly used and widely available.  Business Debt is available in a variety of forms such as Corporate Bonds, Business Loans, SBA Loans, and Lines of Credit.  Each of these has their different place in the life cycle and size of company.  But the basics are still the same.  The borrower gets an amount of money that will be paid back over time with interest.  Terms and Conditions on these loans vary widely and so have a lot to do with who can get what kind of loan.  In the Banking world, the process of evaluating the loan request is called Underwriting.  So when you hear of a Bank talk about their Underwriting Guidelines, they are talking about what they will need to have from the company to be able to give it a loan.  You should talk to a Banker before you apply for a loan and they will give you an idea of what they want.  This may be a lot more than you think it is.

Equity is also simple.  You are selling a portion of your Business to someone (or many someones).  You will know Equity transactions from the Stock Market where Public Companies are bought and sold (or at least parts of them are) every week.  But Private Companies have equity investments of many forms as well, where firms sell part or all of themselves.  The difference between a Public Company and Private Company is the availability of Stock for sale on the Public Markets.  There are some forms that need to be filed and a whole mechanism to distribute that Initial Public Offering (IPO) happens.  But at the time of an IPO, there is already Equity in the company and shareholders who own it.  All that is happening is that some percentage of the ownership is for sale in a public marketplace and average people can buy or sell that stock in a marketplace.

There are also mixed Debt and Equity Instruments like Convertible Debt that I will cover in the future.

My example is a company that has $250,000 ($250K) in profit and has an opportunity to expand by spending $500K to buy a competitor.  There are plenty of middle grounds here (and I will cover this a lot more in another post) but we are going to examine both scenarios at a very top level.  For a Loan, the company takes in the $500K and pays off the loan with the profit that it generates in the future.  For Equity, somebody gives the company $500K.  If we assume the company was worth $1M at the time (aka pre-money), then the company (after the Equity Sale) is now worth $1.5M (aka post-money).  This is shown on the Balance Sheet first with an increase in cash and then an increased Liability in Shareholder Equity.

The value of each of these is different as we have to look at how the Investment gets its Return.  For Debt, it is pretty simple.  It is the payback of the Principal ($500K) plus the value of all the Interest.  For Equity, it is more complex.  The Investor may want to be paid a percentage of the profits.  The reason is that the Investor will want to “get liquid” or get his money back from the Investment at some point.  So will the owner buy out this minority partner or will the investor sell his/her stock to a 3rd person?  You can see how this can make the Equity more expensive than the Debt.  But we will examine this throughout our series.

Have a great day!

Jim Sackman
FocalPoint Business Coaching
Business Coaching, Leadership Training, Sales Training, Strategic Planning

Change Your Business – Change Your Life!

Sonoma County: News and Notes

Today I will go over the next company in my usual list to analyze for quarterly results:  Keysight.  The raw numbers are that Revenue was $753M up from $731M a year ago.  Non-GaaP Net Income was $0.64 compared to $0.61 a year ago.  These are reasonably level results on a year over year basis, given that a tiny amount of Ixia is included in these numbers.

I want to point out what looks to be the strategy here, based up on the acquisition of Anite and now Ixia.  This looks to be a form of a roll-up.  Keysight is acquiring some smaller companies that are specialists in technologies that are adjacent to markets that Keysight is strong in.  To be clear, these markets are sub-markets of larger market segments.  So think of this as Keysight buying much of its future product development.  Anite has replaced the revenue of some of the more troubled parts of Keysight’s business.  Ixia will bolster Keysight in other markets.

The question for you:  “What does this mean for the future of Keysight?”.  That is hard to say.  Remember both Ixia and Anite were bought with cash.  That means that the value of this cash was removed from the shareholders and given to the shareholders of Anite and Ixia.  In the case of Ixia, the cash given to them was 45% above the closing price at the time of the deal.  When the deal was announced there was a bit of run in the stock.  This culminated in the announcement of the results.  The stock did really well in after hours the night of the quarterly conference call.  If you ignore this bump, the stock has been on a flat to slightly downward trend for a few days.

The company itself is large and profitable.  What we are discussing is how the company uses the cash that it makes.  There are 2 basic alternatives.  First, the company can keep the cash.  At the level that Keysight has it (or Google or Apple or Microsoft for example), it is not a service to shareholders.  Keeps more cash than is required means that your investment is in a CD or a Checking account under the control of the company.  The second alternative is to return the cash to the shareholder as a dividend.  This allows the shareholder to invest this cash in other, hopefully successful, places.  I favor this last, because the market that Keysight is addressing is slow growth but high technology.  It means there will be struggles in increasing share price until there is some rationalization in Product Development.  If you need to “buy” your future, then that means your current R&D is not being productive.  The right thing to do is to cut back on older products and focus on the growth areas.  The problem with is that you likely will be laying off current employees and replacing them with those from the company that you just bought.

I hope this helps you and have a great day!

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

Change Your Business – Change Your Life!