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!

Sonoma County: News and Notes

I want to cover Keysight's Q3 results this week and finish our quarterly calls with Autodesk's next week.  Love to go out on a positive note.  For Keysight, Q3 saw Revenue of $832M and a Loss of $0.10 per share.  This latter was greatly impacted by some accounting changes associated with the Ixia Acquisition and without that this would have been a Profit of $0.61 per share.  Last year the Revenue was $718M and $0.63 per share.  This means there was growth in Revenue but not in Profit.  The Revenue Growth is associated with the Ixia Acquisition, which did just over $120M/quarter at the time of the purchase by Keysight.  The Q3-2017 Revenue was also impacted by some adjustments to the Deferred Revenue that Ixia had. 

So, all of this makes it hard to give one an accurate picture of what is going on.  The company declared a great quarter with good year over year growth.  However, I can not see how this is really a gain of 3% in Revenue year over year and slightly down in profitability.  The next quarter looks to be a bit better year over year, but we will need to see it in practice.  This more favorable Q4 guidance is what looks to have moved the stock from something in the $36-$38 range to the $39 - $41 range.

I want to talk about some of the things that are going on with why there are these changes in Deferred Revenue and Amortization.  Companies often have policies around how things are accounted for.  Though you would think accounting would have very strict rules, there are many places where their are rules that are really handled through policies.  For example, when does a significant purchase count as an Expense and when as Capital Equipment.  In that latter case, the Equipment is depreciated on a schedule.  That schedule itself can be varied based on policy.  All of this is well within the bounds of legal accounting practices.  Often times companies have different policies and if they combine there are adjustments that need to be made to have their finances run under a single policy.  That is one reason you might hear about "1 Time Charges".  These adjustments often flow through the Income Statement, but have little or nothing to do with the actual Cash or Profitability of a Company.

The other thing here is that the Company is clear that it is going to attempt to return the profit to the shareholders through acquisition.  That can be a challenge for shareholders as many acquisitions don't work over the long haul.  The jury is still out on Anite and Ixia.  The company has spent around $2B in these acquisitions.  At the moment, the best I can say is that they definitely fill in gaps in the company.  The question is whether they will be worth it over just giving the money back through a dividend.  I suggested about 2 years ago that the company start a $0.25/quarter dividend.  If that had been pursued, then $2 a share would have been given back so far.  Think about that.

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:  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, 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!