The reason for hiring a business attorney may not, however, be so apparent. A good business attorney will provide vital assistance in almost every aspect of your business, from basic zoning compliance and copyright and trademark advice to formal business incorporation and lawsuits and liability. First, some general rules about dealing with lawyers:

If you are being sued, it’s too late. Most small businesses put off hiring a lawyer until the sheriff is standing at the door serving them with a summons.

The time to hook up with a good business lawyer is before you are sued. Once you have been served with a summons and complaint, it’s too late–the problem has already occurred, and it’s just a question of how much you will have to pay (in court costs, attorneys’ fees, settlements and other expenses) to get the problem resolved.

America’s judicial system is a lot like a Roach Motel — it’s easy to get into court, but very difficult to get out once you’ve been “trapped.” Most lawyers agree that while nobody likes to pay attorneys’ fees for anything (heck, let’s let our hair down–nobody likes paying or dealing with lawyers, period), but the fee a lawyer will charge to keep you out of trouble is only a small fraction of the fee a lawyer will charge to get you out of trouble once it’s happened.

Originally Posted on: Florida Small Business Consulting - SuncoastGlobal.com

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Royalty Financing is appropriate for established companies that have a product or service, or emerging companies about to launch a product with high gross and net margins. Also for companies with elastic pricing–i.e., the ability to raise prices without impacting sales. Appropriate for companies that experience a quick cause and effect between marketing activity and sales increases.

Royalty financing may appeal to investors who typically do not make investments in private companies. In addition, angel investors; venture capitalists, and even state, city or regional economic-development agencies can be talked into the concept of royalty financing.

Royalty financing is inexpensive for companies with high-margin products or services. It is relatively easy to find because the technique appeals to a wide variety of investors. In addition, because royalty financing is essentially a loan, it generally does not provoke state and federal securities laws.

Many companies still in their formative stages face a difficult dilemma when looking for equity capital. Equity investors, whether they are angels or venture capitalists, often demand a big piece of the company because of all the risk they incur. The problem is compounded by the fear that, if the organization gives up 30 percent, 40 percent or even 50 percent of its equity on the first round of outside financing, nothing but a grubstake is left by the time the company goes public.

Enter royalty financing, which eliminates the dilemmas of equity financing by removing them from the picture, explains Peter Moore, founder of Rockwater Capital Management, a consulting firm in Portland, Maine, that helps companies raise capital, and a proponent of the royalty financing technique. “Instead of selling equity,” Moore says, “a company simply pledges a piece of its future sales against an advance provided by the investors.”

Here’s how Moore structured a financing transaction to help a software company turbocharge its sales. Rather than go after angel investors, Moore approached the Greater Portland Building Fund, and Coastal Enterprises Inc., quasi-public economic-development organizations charged with developing business in the state.

But instead of a loan or equity, Moore sought for his client an “advance” of $200,000 against its future sales. If the advance were made, each investor would get 3 percent of the software company’s sales for 10 years, or until they received payments totaling $600,000. This $600,000 would represent the original $200,000 investment, plus $400,000.

At the broadest level, for the investors to earn the agreed-upon $600,000 within the maximum allowable time frame, the software company would have to generate total sales of $20 million over 10 years. Although the software company had less than $1 million in sales at the time, it had over the course of its three-year life doubled sales each year.

“This was a big selling point,” Moore says. Moreover, investors were comforted by the fact that the firm’s software program, which helps companies manage hazardous-waste streams, meant there were 300,000 potential customers.

The deal was structured so that the time frame was flexible-up to 10 years to make repayment-but the return, $600,000, was not. Because of this, the return the investors could earn was variable as well and ranged from pretty good to exceptional. Specifically, if the software company repaid the advance in 10 years, the investors would earn a compound annual return of 11.6 percent on their investment.

If, however, the company’s sales mushroomed, and $600,000 was paid to the investors in five years, their compound annual return also mushroomed to 24.5 percent-a rate that even an institutional venture capitalist would have to admire.

It took Moore and his client about four months to hammer out all the details of the deal. One of the key terms he negotiated was for a delay in the commencement of royalty payments. Specifically, royalties did not accrue until 90 days after the deal closed. In addition, the actual royalty payments did not have to be paid until 60 days after the revenues were recognized.

“All in all, it was five months from the time the company received the financing until the first payment was due,” Moore says. “This gave the owners the time they needed to put the capital to work and start producing sales.”

Originally Posted on: Florida Small Business Consulting - SuncoastGlobal.com

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The supply of venture capital is limited. According to recent surveys from the National Venture Capital Association, U.S. venture capital firms annually invest between $5 billion and $10 billion. Many of these investment dollars go to companies already in the institutional venture capitalist’s portfolio.

Venture Capital may be used for everything from financing product development to expansion of a proven and profitable product or service. It is also extremely expensive. Institutional venture capitalists demand significant equity in a business. The earlier the investment stage, the more equity is required to convince an institutional venture capitalist to invest.

Venture Capital is extremely difficult to acquire. Institutional venture capitalists are choosy. Compounding the degree of difficulty is the fact that institutional venture capital is an appropriate source of funding for a limited number of companies.

First Steps

Using a shotgun approach means you send your business plan or some derivative thereof to as many venture capitalists as possible and hope that the numbers alone will strike one that has been looking for a deal such as yours.

The shotgun approach has its proponents and its critics. For instance, Gordon Baty, a partner with Cambridge, Massachusetts-based venture outfit Zero Stage Capital, says, “Of every 100 plans that we get, 90 are completely irrelevant because they do not match our investment criteria regarding the industry, stage of development, geographic location, or the amount of capital we typically invest.” Of this misguided bunch, Baty says, “our receptionist can weed out their business plans.”

Fair comment. But the shotgun approach has one significant advantage over the rifle method. The latter relies on intensive research that is based on a venture fund’s past investment patterns. What your research will fail to turn up is all the available venture capital funds that have now decided to focus their energies on restaurant deals, business service companies, publishing companies or Internet-content businesses.

In many cases, your mail will be well off the mark, and your letter will be weeded out by the receptionist-or the college intern sorting the mail. For instance, some venture capital firms might specialize in wireless communications companies from the so-called first stage on, while your company, which makes disposable medical devices, is in the development stage.

A more reasonable approach might be to take at least one pass through your institutional venture capital sources and weed out the obvious misses for your particular line of business. Even a quick screen prevents many obvious misses. Of course, such an effort, while seemingly logical, undermines one of the chief benefits of the shotgun approach to begin with. That is, it lets you reach investors who may have changed their historical investment criteria and are now looking for companies like yours.

If you can mail your letter, business plan summary and business reply card for 50 cents each, it’s worth going after the 1,200 to 1,800 traditional sources of institutional venture capital.

The rifle approach, which favors limiting your search to 15 to 20 well-researched targets, is the one favored by most attorneys, accountants, consultants and other assorted experts. Venture capitalists seem to favor it because a highly targeted approach by entrepreneurs replaces an abundance of irrelevant opportunities with a manageable number of interesting ones.

The rifle approach is simple but time consuming. Basically, you search by five variables and then rank your candidates by how well they meet these criteria. The five key search variables are:

• Searching by line of business: Most venture capitalists specialize in one or more industries. It’s the focus on a particular technology, industry or business that supposedly lets them pick winners in their formative stages. This specialization is good news because it allows you to easily identify venture capitalists who should be interested and those who probably won’t be.
• Searching by geographic preference: The very hands-on approach of institutional venture capital investing makes distance a factor. That is, to be a board member, and perhaps be intimately involved in a company’s development, a venture capitalist would find it difficult to invest in companies that are 2,000 or 3,000 miles away.
• Searching by stage of development: In the same way that venture capital investors specialize in one industry or another, they also specialize in different stages of development. That is, some companies invest in early-stage companies, while others invest in more mature companies.
• Searching by leadership status: In the world of venture capital investing there are leaders and there are followers. The leaders, also known as “lead” firms, are those that have recognized expertise and who conduct extensive due diligence on their prospective portfolio companies. The followers, known as “follow-on” investors, are more passive. They simply invest alongside the lead firms.
• Searching by deal size: Institutional venture capitalists generally place upper and lower limits on the sizes of their investments. These limits are closely related to the overall size of the fund the venture capitalist is managing. VCs with $250 million to invest typically don’t want to look at your $500,000 deal. Why? Because to invest the entire fund in $500,000 increments means the firm would have to invest in 1,000 deals.

If you follow the above methodology, your list of prospective venture capitalists should be short-perhaps 15 or fewer.

Originally Posted on: Florida Small Business Consulting - SuncoastGlobal.com

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This type of capital is appropriate for early-stage companies with no revenues or established companies with sales and earnings. Companies seeking equity capital from angel investors must welcome the outside ownership and perhaps be willing to relinquish some control. To successfully accommodate angel investors, a company must also be able to provide an “exit” to these investors in the form of an eventual public offering or buyout from a larger firm.

The supply of angel investors is large within a 150-mile radius of metropolitan areas. The more technology driven an area’s economy, the more abundant these investors are.

The best use of this type of capital runs the gamut, from companies developing a product to those with an established product or service for which they need additional funding to execute a marketing program. Also, angel investors are appropriate for companies that have increasing product or service sales and need additional capital to bridge the gap between the sale and the receipt of funds from the customer.

This type of capital is expensive. Capital from angel investors is likely to cost no less than 10 percent of a company’s equity and, for early-stage companies, perhaps more than 50 percent. In addition, many angel investors charge a management fee in the form of a monthly retainer.

Angels are easy to find but sometimes difficult to negotiate with because they usually do not invest in concert and may demand different terms.

First Steps

Angel investors are at once difficult and easy to find. The situation is analogous to searching for gold. Generally, it’s difficult to find, but once you hit a vein…all your hard work pays off in a big way. Here are the places angels might be hiding:

• Universities: According to Bob Tosterud, Freeman Chair for Entrepreneurial Studies at the University of South Dakota, angel investors tend to hover near university programs because of the high level of new business activity they generate. He advises that if you are looking for money, call the nearest university that has an entrepreneurship program, and make an appointment to speak with the person who runs it. Generally, he says, such people can point you in the direction of angels.
• Business incubators: According to the National Business Incubation Association (NBIA), there are about 1,000 business incubators in North America. At first blush, incubators appear to be the mere bricks and mortar facilities that offer entrepreneurs reasonable rents, access to shared services, exposure to professional assistance and an atmosphere of entrepreneurial energy. But according to NBIA president and CEO Dinah Adkins, many business incubators offer formal or informal access to angel investors.
• Venture capital clubs: The tremendous wealth created through the commercialization of technology, as well as the robust stock market of the 1990s, have resulted in a large number of angel investors who have begun to formalize their activities into groups or clubs. These clubs actively look for deals to invest in and their members want to hear from entrepreneurs looking for capital.
• Angel confederacies: Some angels, shunning the formality of a venture capital club, band together in informal groups that share information and deals. Members of the group often invest independently or join together to fund a company. So-called confederacies are not easy to find, but once you locate one member, you gain access to them all, a number that could top 50 investors.

Here are 10 action steps you can take to find angel investors in your area:

1. Call your chamber of commerce and ask if it hosts a venture capital group. Many such groups have a chamber affiliation.
2. Call a Small Business Development Center near you and ask the executive director if he or she knows of any angel investor groups. Ask the SBA if you don’t know where an SBDC is.
3. Ask your accountant. If your accountant doesn’t know, call a Big Four Accounting Firm and ask for the partner who handles entrepreneurial services. Ask him or her to point you in the right direction.
4. Ask your attorney. Lawyers always know who has money.
5. Call a professional venture capitalist and ask if he or she is aware of an angel investor group.
6. Contact a regional or state economic development agency and ask if anyone there knows of an angel investor group.
7. Call the editor of a local business publication and ask if he or she knows of any groups. These professionals often write about such activity.
8. Look at the “Principle Shareholders” section of initial public offerings (IPO) prospectuses for companies in your area. This will tell you who has cashed out big.
9. Call the executive director of a trade association you belong to. Ask if there are any investors who specialize in your industry.
10. Ask your banker. If you do business at a small bank, ask the president of the institution. If yours is a larger commercial bank, ask your lender. If you do not have a lender, ask for a lender who works with loans of $1 million or less. A good small-business banker knows of such groups because companies that have received an equity investment are good candidates for a loan.

Originally Posted on: Florida Small Business Consulting - SuncoastGlobal.com

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It’s best use is for commencing initial operation to the point where outside investors can see and feel the venture, as well as understand that you took some risk getting it to that point.

Startup financing will possess two of the following three qualities: good, cheap and fast. It will never possess all three qualities. How easy it is to get depends on two things. If you have nothing, it’s difficult. If you have personal assets, the hard part is putting them at risk. But doing so is the rite of passage to both success and failure.

First Steps

If you’re starting a business, it’s your baby. This idea may leave you feeling simultaneously liberated and inspired. But it also has an edge. Specifically, if it’s your baby, it’s also your obligation to finance it beyond the “I’ve got an idea” stage.

How do you get that first dollop of funds that will either advance your idea to the point where it can attract outside capital, or perhaps jump-start you into profitable operations? Here are some options:

• Sell Assets. If you own things, you can sell them. It’s that simple. Jewelry, rugs, pool tables, boats, time-shares, second properties–the list goes on. Most people’s largest assets are their homes and cars. Homes are covered later. Here’s what you can do with automobiles.
• Borrow Against Your Home. This is the oldest trick in the book. It’s also one of the best because you can exert almost total control over the process. Here’s how it works: Say you need $50,000, your home is worth $250,000 and you owe the bank $100,000 on your mortgage. You can borrow against the equity, in this case $150,000.
• Borrow Against Insurance Policies. If you want to know where all your money goes, look at your insurance payments. Each month you probably pay for health insurance, life insurance, disability insurance, auto insurance and perhaps homeowner’s insurance. Unfortunately, you can only borrow against whole life policies, but most have some cash value after three years.
• Friends and Family. Friends and family present a formidable source of capital. Your typical friend or family investor is male, has been successful in his own business and wants to invest because he wishes someone had done it for him, according to Kirk Neiswander, senior vice president of Enterprise Development Inc., a nonprofict subsidiary of Case Western Reserve University’s Weatherhead School of Management in Cleveland. But, take the following steps to protect everyone from each other:
  • Get an agreement in writing. This will eliminate all conversations that start with, “You never said that.”
  • Emphasize debt (loans) rather than equity (ownership). You don’t want friends and family in your company forever. Before you know it, they start telling you how to run the place, and long-buried emotions emerge. Make it a loan, and pay it back as fast as you can.
  • Put some cash flow on their investment. If Dad says, “Here’s $50,000–try not to lose it, and pay it back as soon as you can,” that’s great. But consider paying some nominal interest at regular intervals so that you and he have a reality check. And it’s better to pay this quarterly rather than monthly. This way, when things are teetering, your lender won’t immediately know it.
• Borrow Against Your Investments. If you’re starting your business part time while keeping your full-time job, a potentially stable investment is borrowing against your employer’s 401(k) retirement plan. It’s common for such plans to let you borrow a percentage of your money that doesn’t exceed $50,000.
• Credit Cards. They’re not terribly creative. But credit cards are quick and easy. In a perverse way, they are also cheap. That is, a minimum payment of $50 per month can hold down a whole lot of debt. Of course, if you only make the minimum payment, your balance continues to grow, and if the business fails, you have to pay the piper. But if things go well and the business pays off the balances without missing a beat, then you look back at your early credit card financing with a nostalgic fondness, and perhaps a twinge of longing for simpler days.

Originally Posted on: Florida Small Business Consulting - SuncoastGlobal.com

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Nevertheless, entrepreneurs need to put a value on their start-ups in order to raise money, and investors need to put a value on their investments to generate liquidity. Since neither entrepreneurs nor investors are known for right-brain artistic thinking, this article aims to provide some tips for left-brain thinkers to make sense of start-up valuation.

1. You are what the market says you are. If investors are telling you that your start-up is worth $1 million, then that’s what it’s worth. You might think it’s worth more. You might even know it’s worth more because your company may have more than $1 million is liquid assets, or more than $1 million in receivables, or more than $1 million in sweat equity. But if you’re unable to raise money for your start-up with a valuation above $1 million, then you’ll have to accept the market valuation.
2. But you can also tell the market what you’re worth. Although this might seem to contradict the point made above, it’s possible to tell the market how to value your company. After all, if investors think your start-up is worth $1 million, it’s usually because of something you’ve told them. By definition, start-ups don’t have a history of financial performance on which to base a valuation. Therefore, it’s up to the entrepreneur to develop a process for valuing the company based on comparables and financial projections.
   • Comparables: Find out how much similar companies in your industry and geography are worth. You can use sites such as BizBuySell and BizQuestto determine how much businesses are selling for in your industry. If you have a high-tech or high-growth start-up, accountants and lawyers are among the best advisors to help you determine the market rate for comparable companies at your stage. In my experience, attorneys tend to overvalue star-tups, and accountants tend to undervalue start-ups, so you may want to talk to both before making a decision.
   • Financial forecasts: Although it’s notoriously difficult to forecast revenue at a start-up, you’ll need to do this to determine value-and eventually to defend your valuation. For example, if you’re starting a pet food store, your valuation and financial projections will likely be lower than if you’re starting a speculative biotechnology firm.
3. You’re not really worth anything until you’re profitable. If you’re not profitable, your business probably isn’t worth very much. That is, it doesn’t have as much liquidity as it would have if it were profitable. Many businesses cannot be sold, since there aren’t enough business buyers for every seller. Almost all unprofitable businesses cannot be sold for the same reason.

This makes valuation particularly challenging for a start-up. Since young businesses take time to become profitable, the trick of valuing start-ups is to focus on the future. First, determine how many years it will take to be profitable. A business with a long road to profitability will usually be worth less than one with a quick path to profitability. Next, determine how much comparable companies have been valued at when they reached profitability.

A company that could be worth $5 million at profitability will be worth some fraction of that number at the start-up stage, based on factors such as the likelihood of success, the time frame to exit and the quality of the management team.

It’s easy to get caught up in the excitement of valuing your company at the highest amount possible and forget that you’ll one day have to deliver on the expectations of investors. It’s also tempting to adapt your business model to maximize start-up valuation.

Be careful about overvaluing your start-up with faulty assumptions; it will only make your life more difficult-particularly if your investors have governance rights, such as positions on the company’s board.

Much like artists, entrepreneurs need to use creativity in valuing their start-up businesses. Traditional approaches to valuation based on book values and P/E ratios are akin to painting by numbers. If you want your start-up to be a masterpiece, you’ll need to use the right side of your brain as much as your left to determine value.

Originally Posted on: Florida Small Business Consulting - SuncoastGlobal.com

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