Posts Tagged ‘equity investor’
Equity Financing Exit Strategy
September 27th, 2010
“Equity Financing Considerations Are Similar To Marriage With Some Added Twists”
When business owners are looking to raise capital through equity financing, they are planning to sell off a portion of the ownership of their business to someone else in exchange for a cash payment. This sale of ownership can be of a controlling or non controlling nature, but unlike debt financing where you pay back the money borrowed, ownership can have very long term connotations.
That’s one of the reasons why many people equate equity investing to marriage in that you’ve got to plan whether you want to be in the relationship for an extended period of time and under what conditions.
And while marriage agreements can be made going into the relationship in the form of prenuptial agreements, business financing scenarios involving equity capital should go one step further and have both an entry and exit agreement in place.
Especially for small businesses, it makes very little sense to take on an equity partner with no clear exit strategy for either partner. Many businesses get trapped in a situation where either a owner wants to leave the ownership group or the owners can’t get along anymore and someone needs to buy out the other.
Without an upfront agreement as to how an owner can exit, the process can be grueling to complete and financially damaging to both parties, but particular to the trusting and naive that get taken advantage of by the remaining owner or owners.
While any equity investment will clearly outline what you get for the cash you’re paying, it also should have its own form of prenuptial agreement and states exactly how things ARE going to end. There is no misconception here that everyone’s in it until death do us part, and even if that was the case, what happens to the ownership shares on passing? Failure to plan out the end right at the beginning is a bad idea in virtually any situation I’ve come across.
But in the hast to secure financing and the excitement of getting going or getting things back on track, the exit strategy is many times over looked or over simplified.
And the exit strategy you’re prepared to consider will also better align you with sources of financing that are better fits for what you’re looking for. For instance, there are many equity investors out there that want to double their money in three to five years and then get all their money back along with the required gain. This speaks to a very specific exit strategy that has to work for both sides at the outset of discussing the deal.
For investors that want to ride the wave of opportunity there should still be an exit plan to really protect both sides as the longer the relationship goes on the more likely something is going to happen with respect to ownership and ownership objectives.
The other part to keep in mind is that the more sophisticated the investor or investor group, the more the exit plan is going to be stacked in their favor, taking advantage of the entrepreneurs financial ignorance or sheer desperation.
So, yes equity financing is very much like marriage, but with a contract going in and one going out with the divorce or funnel preplanned.
Click Here To Speak With Business Financing Specialist Brent Finlay
Business FinancingEquity Financing Considerations
September 5th, 2010
“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
Business FinancingThe Balance Between Borrowing Money and Saving Taxes
November 10th, 2009
Are You Saving Taxes And Destroying Your Borrowing Potential At The Same Time?
Business finance covers a lot of ground including accounting, taxation, foreign exchange, business analysis, and business financing to name the main groupings.
And while all these areas fall under the same umbrella, they don’t necessarily work in harmony, especially when some of these activities are outsourced to a third party accounting practice.
For small and medium sized businesses, a common example of this is the impact of annual financial statements and business tax returns on a businesses ability to borrow money.
Many business lenders follow fairly rigid criteria related to financial ratios including balance sheet leverage and payment coverage. These ratios and others can be directly impacted by the decisions business owners and managers make with their accountants with respect to tax strategies.
Most business owners and managers don’t necessarily understand the connection between taxation and financing and in some cases, believe it or not, neither does their accountant. The primary goal is to reduce taxes and therefore improve cash flow.
There is nothing wrong with this approach as long as you don’t require business financing to operate your business. If you do, then here’s a couple of things to be mindful of.
First, if you have a senior financing facility in place with a debt lender, there are likely financial covenants in place that require you to main certain ongoing levels of balance sheet leverage and income profitability that are relative to the amount you’re borrowing. Aggressive tax savings strategies can put you off side of these covenants which at the worst will get your loans called in and at the least will increase your cost of borrowing.
Second, if you try to secure new business financing capital with financial statements that are over leveraged and/or do not show enough debt servicing ability, there’s a very good chance that funding will not be available, or if it is, it will come at a higher cost.
Bottom line, there is a balance between minimizing business taxes and maximizing borrowing capacity. Failure to maintain or keep track of this balance can be very costly in the long run.
Business Financing