Financing Your Business:  Heading to an IPO or Sale

 

Much of what I have posted in this series is about the every day happenings at most small businesses.  However for a minority of them, there is a chance for a large exit.  This would be an IPO (Initial Public Offering) or the Sale of the Business to a Strategic Buyer.  These exits are generally many times the invested value and are a huge source of wealth for those involved.  These are generally Product Companies (those that make something) instead of Service Companies (those that have people do something) or Sales Companies (those that sell goods and services of others).

The reason for this is scalability.  Service Companies will need people to deliver the service and they scale only when you add more people.  Sales Companies scale with space or Sales People.  Product Companies scale on Production Volume, which is something that can be bought with cash one time.  It is not to say that the other kinds of companies can not grow and become large.  It is just that the path to getting there is different.  The kind of returns that a Venture Capitalist wants and the time allotted for these returns are normally not met by these companies.

So if a Product Company is in a rapid growth phase, it will often need additional money past the “A Round” (that first round of external VC financing).  There are companies that have gone through many Rounds (F, G, etc.).  But most go through one or two more before some sort of exit happens.  There are funding sources that the VC companies know that specialize in this.  They are often different than those that will fund an A Round.  The A Round guys have a higher potential outcome.  Those that join later have some more certainty but less return potential.

So, how will this work.  The company will sell shares to raise that money at a pre-money valuation.  Investors will agree (or not) to purchase shares under these terms.  Note, that the founders will own less of the company than they did before.  If the pre-money valuation is above an earlier round, it is called an “Up Round”.  Otherwise it is a “Down Round” and generally the existing shareholders will lose a lot percentage of their ownership.

Once the Round is completed, the company will have a new valuation called the post-money valuation.  That will come with a change in the ownership structure (called a cap table).  The company gets the money it needs to grow and things move on.

Have a great day!

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

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Financing Your Business: Closing Thoughts

As this series comes to a close, I wanted to add a few things.  I left off many of the more odd forms of business finance.  The ones that I have discussed are what I would say are the most typical.  There are more.  In fact, there are so many varieties that it boggles the mind.  Some of these are for rare situations.  Others are for specific industries.  If you are unclear of what you are being offered, drop me a line.  I am happy to talk to you about it.

Some of these financing options come at really high interest rates.  Credit Cards are generally very expensive if they hold a balance.  The better credit that your business has, the more likely you can get a lower rate.  There are business credit counsellors that can help with that as well.

There is a natural tension in the Accounting world between Credit and Taxes. Saving money on Taxes means you are lowering your Profit.  By doing this, you lower your ability to obtain Credit.  There is no way around this except to identify the ways that you have lowered your taxes and keep them separated from other expenses.  This can allow you to show a lender or investor what you have done.

Finally, I want you to think like an investor (and lending is a form of investing).  They want to know how they are going to get their investment back with a rate of return.  A CFO that I worked with said once that they (investors) don’t care if you make dollies or donuts.  What they want is to make money.  The primary vehicle to communicate this is a Business Plan.  If you don’t have one, get one.  Learn to make it a living document and understand your numbers.  Again, feel free to contact me if you don’t know how that works.

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: Crowdfunding

You know some people think that Crowdfunding is really something new.  In a lot of ways, it is not.  Crowdfunding works a lot like raising money for a non-profit.  In a non-profit, donations are given to a cause that someone believes in.  They feel that the particular group will spend the money well.  About the only difference in Crowdfunding is that normally there is a “perk” involved.  I think this is akin to the way that PBS stations raise money when they say that a donation of a specific amount will get you a gift.

The biggest difference with Crowdfunding is that the companies are using specific technology platforms to do this Capital Raise.  This gives better visibility than most non-profits get because they are able to use technology to get the message out.  One other difference is that generally Crowdfunded projects are funded in a binary way.  If they do not get the money requested, then they get nothing.  If you donate to a non-profit, then you hand them cash.

Now, the bigger problem is in the details of the spending.  I am sure we have all heard of abuses in the non-profit business.  You can find examples across the board that the Charity uses very little of its funds to deliver actual services and instead enriches the people that run it.  The same is true with Crowdfunding.  The most obvious example is Oculus.  This was a company that was completely funded through Kickstarter.  Then poof, it sold itself to Facebook for about $1B.  The original funders got no part of the payout.

So there are challenges with this kind of funding and one of the differences is that you do not need to be an accredited investor to participate.  If you remember when I posted about this, it takes a lot of money to invest in startups.  These forms of giving are excempt from those rules and thus have a somewhat higher likelihood of problems.

But if you have a project or a company that is as much cause as it is business, then you should consider Crowdfunding.

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: 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!

 

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!

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!