Posts Tagged ‘Equity Financing’

“There Are Many Things To Consider When Looking Into Equity Financing Options”

When seeking equity financing for an existing or future business, its important to make sure you have a clear understanding of what you’re getting into.

Many times business owners are either in too much of a rush or pressed against a wall to consider the pros and cons of any equity financing options they are considering, being more inclined to take what they can get. Even if there is more time available to consider the “goodness of fit” of a potential investor into the business operation, the key issues and considerations can still be easily overlooked or glossed over.

The primary thing to remember is that taking on an investor is like marriage. You could be involved with this new person or person for a long time, and breaking up the relationship at a future point in time may not be very easy or even possible to accomplish under terms you can live with.

That being said, one of the first tenants when considering taking on an equity investor is start with the end in mind.

The reality is that anyone who gives you their money is going to want it back, so it only makes sense that the ending of any proposed investor marriage is clearly lined out from the outset in a manner that is acceptable for both parties.

From the business owners point of view, the goal may be to be able to buyout the investor at a specific point in time for a clear dollar amount, or at least for a dollar amount that is calculated by an acceptable formula.

This creates a structure where both sides can size up the value to each other of getting involved in a transaction in the first place as well as providing some level of protection to both parties.

Selling off part of your company without doing this is dangerous to say the least.  Everything can seem nice and light at the start of the business relationship, but things can change radically in a very short period of time.

And regardless if the business is ahead or behind on its financial projections created at the time equity financing was secured, there is a defined process for either party to deal with any changes in circumstances or expectations.

Once the honeymoon is over, its hard to predict where the relationship will go so it only makes sense to provide both sides with a way out that doesn’t potentially kill the business in the process.

Click Here to Speak to Business Financing Specialist Brent Finlay

Technorati Tags: Equity Financing, equity financing considerations, equity financing options, equity investor, equity investors, options for equity financing

I’ve written a lot lately about many of the changes in the capital markets and many of the ways these changes have impacted the ability of small and medium sized businesses to locate and secure financing.

The hard part of these recession driven changes to the market is that there isn’t going to be a near term return to the market conditions we’ve basically gotten used to over the last two plus decades.

Let’s face it, the capital markets have not seen anything like this since the end of the second world war.

A large percentage of the capital markets were driven and built up over time by the long run health of the overall economy.  Yes, there have been some significant bumps in the road over the last thirty or so years, but nothing as game changing as what we’re seeing right now.

Large parts of the market have disappeared all together as record numbers of bank and commercial financing company failures lead the headlines on an almost daily basis.

When the economy gets back to steady monthly growth, the crater in the market we now see isn’t going to fill up anytime soon.

This tells us that the go forward Business Financing market is going to take on a very different look for some time to come and it may take decades to get back to anything close to what has been in place in recent memory.

The biggest benefit to business owners with the old status quo was that there were numerous sources of capital all trying to carve out their own unique place in a market that seemed to be growing without end.   Similar to the residential market, the commercial sub prime market exploded as companies raced to get their share of the market demand for more capital.

But when the economy slowed down, and highly leveraged companies started crashing all over the place, starting a domino effect like nothing we’ve ever seen and are still experiencing, collapsing the capital market structure that was created over several decades.

And while government bailouts have helped stabilize the money supply to some extent, its hard to know if the main beneficiaries are actually going to make structural changes to their practices or continue on overheating the economy once things get back on track, getting us all set up for another recession in the not too distant future.

Bottom line to all this is that things are going to be different from now on and may be significantly different for decades to come when it comes to locating and securing business capital that your going to be able to cash flow.

Business owners have been spoiled by the funding choices available to them, causing them to practice what I would call less that optimal Business Finance practices.  In fact, in many cases, there is no business finance strategy at all.

The reality is that when you borrow money or take on an investor, the money belongs to someone else and they are going to want it back.  The building up of debt over time without a plan to pay it down is good in theory from a weighted cost of capital point of view, but in reality sudden changes in the fortunes of your lender or investor can turn your business upside down in a hurry with no solution in sight.

Business owners need to get back to contingency planning, having some amount of capital buffer to weather financial market storms, and managing their balance sheets so that debt levels are kept in check.

The days of fast and loose money are gone for now and I’m not sure if and when they’ll be back.

Click Here To Speak To Brent Finlay For Your Business Financing Needs.

Technorati Tags: Business Finance, Business Financing, business loans, Debt Financing, Equity Financing

Things To Consider When Courting Equity Capital

Its been written many times over that selling shares in your business and taking on equity capital in return is many ways like marriage… long term potential commitment, relationship challenges, the difficulties in breaking up, and so on.

I’m not going to recycle this analogy.  Instead, I want to focus on the preamble and courtship that comes prior to the union and I want to look at it from both sides of the courtship.

From the point of view of the business owner seeking capital, the process can be many times drawn out and rather grueling.  Any interest that does surface can easily be mistaken as love at first sight due to the stressed out and/or desperate nature of the those seeking capital.

Like any courtship, there should be a dating process whereby several meetings take place over a period of time to see if there is a worthwhile relationship to develop or not.  Those seeking capital can develop tunnel vision over the physical (money) attributes and overlook other characteristics and flaws that should be evaluated as well.

Regardless of how tired or desperate your search for capital has become, a proper courtship should still be undertaken before jumping into bed with a potential investor.   Every investor has a history, a past, a lending portfolio and strategy that one would be well advised to learn about before cashing any checks.

From the investor side that provides equity capital for an interest in a business, the same need for courtship also applies.

Investors, for the most part, are more courtship oriented, especially those that have previous investments notched in their belt and have likely seen a lot of what can happen when there is a Las Vegas type wedding ceremony between the parties soon after meeting.

An investor is far better served by playing a bit hard to get and being prepared at the outset for an old fashioned courtship.  As mentioned previously, the business seeking capital is too often in a hurry and wants to get funding in place as soon as possible.  These capital seekers can provide well polished presentations and convincing arguments why they should be the ones chosen to receive equity capital.

The interesting thing about courtship is that many times the applicant for capital can’t provide any great level of substance after the flurry of the initial presentation and first few dates.  If an investor can find an opportunity with some real staying power over several meetings as well as being able to hold up to some background checks and story verifications, then there may be a serious relationship in the making.

While both sides can feel the pressure of outside competition competing for the others affections, in the end, goodness of fit is more of a courting process than an intense  weekend fling.

For those couples that take the time to put each other through their paces, the resulting opportunities will be far more rewarding if further pursued and far less regrettable if the process of courting equity capital reveals significant blemishes and warts lurking beneath the surface that otherwise would have been overlooked or gone unnoticed until after the wedding.

Technorati Tags: courting equity capital, equity capital, Equity Financing

Be Direct And Specific When Trying To Secure Business Financing

Before you speak to a debt financier or equity investor about securing capital, you should have gone through the process of pre-qualifying them to some extent to make sure they are relevant to your business financing requirements.

When you go to speak to a source of business capital, its their turn to qualify you and the sooner you allow this to take place, the faster you’ll get their serious attention.

Too often, business owners and managers start off their initial discussion with lenders or investors with a long winded explanation of their business opportunity or business potential, trying to impress the capital provider with what they view is the best approach to securing capital.

Instead of creating a good first impression, they are more likely to put the capital provider to sleep as the provider impatiently waits for the business owner to disclose the pertinent initial information they require to perform their initial assessment of the Business Financing opportunity.

Seeking business capital is a marketing exercise and like any marketing approach, the goal is to provide the target audience with the information they are interested, not the information you feel they should be interested in.

So here’s the best way to get off on the right foot with a debt or equity financier.   This approach may also get you a fast No as your audience will be able to qualify you faster, but at least you won’t be wasting your time pitching a lost cause.

Start off by stating exactly how much capital you’re looking for, why its required, and how exactly it will be applied in your business.  While this may seem obvious, its rarely the beginning point of business owner presenting to a lender or investor.  The primary reason being that human nature seems to think that if a compelling enough business case can be created right off the bat, then the amount of funds requested and the application will be secondary in nature.

In reality, by not being able to immediately describe in financial terms what capital you seek and why, you’re more likely to leave the impression that you don’t have a buttoned down plan of action that has been summarized in financial detail, regardless of the raw potential of the proposed investment.

When you lead with a detailed summary of your financial requirements, you’re not only allowing the capital provider to see if you fit into their current criteria, but you’re demonstrating to them that you have gotten a well thought out plan of action that can be accurately described in terms of numbers.

This is a great way to get serious attention from a debt or equity provider who are inundated with dreamers and entrepreneurs either weak at or uninterested in the underlining financials and corresponding stewardship that goes hand in hand with gaining access to someone elses money.

Once you’ve established what you want and why, the lender or investor will be able to make their initial assessment and either give you a fast no that you would have gotten anyway, or start moving forward in their seats with a higher level of interest.

We will address the next phase of the your initial discussion in tomorrow’s post.

Technorati Tags: Business Financing, capital providers, Debt Financing, Equity Financing, secure captial

There Are Many Equity Financing Sources Out There.. Which One’s Best For Your Business?

First off, lets focus our discussion around equity financing objectives, not the exact form whether it be angel, or venture capital group, or institutional fund, or whatever.

Regardless of the form of equity financing source, what’s more important is the investor requirements or intents.

Too often small and medium sized business owners or entrepreneurs start seeking equity financing for a business venture because they either realize that they can’t borrow enough debt financing, or they need more equity in the business to leverage more debt financing.

So, effectively they’re backing into the need for equity financing in the first place, out of necessity.  And because most types of Business Financing capital hunts are unplanned, the business ownership group is usually in a rush due to some time pressure, perhaps even in an early stage panic mode.

As a result, the business owners are not perhaps as selective as they should be, or they don’t start the equity financing process with their objectives clearly outlined.

This is where all the different shapes and sizes of equity capital come in.

Like the business owner trying to Secure Capital, the investor is trying to place capital.  Each investor is going to have their own profile of industries they like, returns they expect, level of risk, business stages their interested in, and so on.

My question to the business owners looking for money is are they presenting an investment opportunity for investors they want or don’t want?

If you’re in a rush, which most entrepreneurs are, many will answer that they don’t care about the profile or reputation of the investor, they just want the money.

While this mind set and approach can create the desired results, its unlikely that the results will be optimal for the initial business owners that were trying to get equity funding, but its much more likely that things worked out just fine for the investor, especially if they are a well seasoned equity capital provider.

Let me explain.

The more of a rush you’re in and the less thought through your strategy and implementation plan are, the more likely you’re going to attract very opportunistic investors that understand their superior bargaining position and will take full advantage.  If they inject money, they will likely command a large ownership stake, likely a large controlling interest, board control, and every other kind of control their lawyers can think up.

But again, there are all sorts of variations around this theme.  The key point is, unless you know what you want and are in a good bargaining position to get it, you’re likely to see very one sided investor offers that may very well give you the money you’re looking for, but ask for close to your soul in return.

When a business ownership group or individual is seeking equity financing, they need to consider two questions before starting their courtship with potential investors.

Question 1:  How much of the company (and in what ownership form and conditions) am I prepared to offer for the capital I seek?

Question 2: Am I looking to sell off an interest in the business for the long term or for the short term only?

Question 1 has a lot to do with your bargaining power which will relate to what business stage you’re at (pure start up, pre-commercial, early stage, growth, etc.), what types of assets you own and their ability to appreciate in value and generate cash flow, your management team and their related experience to what you’re trying to do, how much capital you’ve put into the business, the related time line for making use of the capital to be invested and the payback period, and so on.

Question 2 is critical to your ability to build out your business over time according to your vision and strategy.  For example, a business ownership group or individual may be prepared to relinquish a large portion ownership, perhaps even a controlling interest, if the original group or owner has the ability to buy back the interest at some predetermined time in the future for some predetermined price or price calculating formula.

Without this sort of objective, the equity capital you raise can very well get into the be careful what you wise for category.  For example, its not at all uncommon for very opportunistic investors to aggressively buy into a company with great potential with the underlying goal of getting rid of all the original owners and managers within a few years in order to take complete control of the venture.

There are also investor financing groups who are only looking for short term investing opportunities which in many cases are no more than 5 years in length.  They typically will require a certain amount of minimal return with some upside potential based on the performance of the business.

The key here is to clearly understand what you have to negotiate with and what you’re prepared to live with before seeking equity financing.

That way you’re more likely to get something that can work for both sides and if you have to compromise, at least you’re doing it with you eyes wide open.

Technorati Tags: Business Financing, equity capital, Equity Financing, equity funding, investor financing