Stanton Financing Guide

I am not writing this to create a list of things not to say so people can hide the facts or in any way mislead potential investors. On the contrary I personally believe you must be 100% upfront with any potential investors, and even volunteer some weaknesses to be credible. I am writing it to help entrepreneurs and CEOs “design” these issues out of their business so they never have to say them. Although there are certainly many exceptions to these, as a general rule there are many good reasons why all of these things should not be part of your company, if you are looking for outside investors. I have discussed some of the logic why, but this should not be considered a comprehensive discussion of the reasoning behind each item. You should also realize some of the reasons are a function or perception, of the market. I would never say they all make sense all the time. Each situation is always different.

Most entrepreneurs greatly underestimate the difficultly and time required to succeed at this task. They also underestimate the opportunity cost to their business while they are “away” focusing on something else. You only want to raise outside capital, if you really NEED to have capital to grow. I am recommending to many CEOs I coach and mentor today that because it is so difficult to raise money today, and valuations are not great, it would be a far superior alternative to spend the same amount of time selling, or adding value to your business in other ways, than to spend six to twelve months chasing investors. In many cases spending the same amount of time and effort selling your products, or service, could generate just as much money and not dilute your ownership and subject you to the whims, regulations and covenants of bringing in outside capital. This does not, however, mean you should not develop a complete business plan. This process will greatly increase your chances of success whether you are raising outside capital or not.

1. I have not invested my own cash in the business, but have only put in lots of sweat equity. Experienced investors know that a start-up is a roller coaster ride of both highs and lows. They want founders to prove their commitment by investing their own money to the point where it will REALLY hurt if they walk away during tough times. Skin in the game is your vote of confidence, so don’t expect others to invest if you don’t. This does certainly not have to be all your personal net-worth, but it must be a significant portion. You can take out a home equity loan, borrow or withdraw from retirement funds, or just invest personal savings. In the end this will pay off, if you do it right, because it will make you more efficient with capital usage and allow you to bring in investors later, after you have created some value and increased your company valuation. Ultimately, if you are successful, you will likely own more of the company as a result.

2. This (or that) market research firm said this market will be a $2 billion market in five years, so all we need is 5% of that market to build a $100 million company. Counter institutively this is basically saying you have NOT done your homework, and do not really know who your customers will be. This is “top-down”, not “bottom-up” market research. Besides most of these analysts firm’s lost huge credibility when the bubble burst and people realized some projected numbers beyond what the population of the entire planet for Internet users. You need to describe, if not actually list, the exact customers where you can win in most cases and why. Research says that 32% of angels site weak market analysis and analysis of the competition as the most critical mistake entrepreneurs make in their business plan. You must design your launch strategy around a particular customer profile and offer something that that customer cannot get elsewhere. Smart investors would prefer an unfair advantage in a smaller focused market, because the marketing and selling costs will be lower (concentrated) and the sales close rate higher. This also shows you know what you are out to accomplish and are focused on a smaller market you understand well and can win.

3. My spouse (or any immediate family) will be our other senior officers. – Or we are going to use my brother’s company for distribution (or anything else). Investors do not like nepotism and also know that a divorce could destroy the company. They are taking enough risk already, so why should they add another layer of risk with the divorce rate at 50%? Why should they believe out of all the management in the world your brother is the best qualified? Also, there can be no conflict of interest issues with “deals” that could be perceived as favored or the result of nepotism. This allows for shifting of costs and revenue in ways that are totally legal, but at the same time unfair to the investor due to subjective factors. This is fine in a wholly owned private company owned by a single individual (a lifestyle company), but should not really ever happen with outside investors. Enron, Adelphia, Worldcom and Tyco are perfect examples, and these have made everyone more aware of how easy it is to abuse executive positions. It is even possible that in the future institutional investors who allowed this could be perceived as violating their fiduciary responsibilities and have liability. After the fact, if something went wrong and the company shut down, the perception could be that things were done improperly. The room for interpretation on the dissolution of assets could easily be perceived as improper, even when it is done right, due to the wide room for judgement on the value of the remaining assets of any company that is closing. Since this is effectively a fire sale prices will be well below “fair market value”. In short, avoid any and all conflicts of interest, whether real or perceived.

4. I am going to also be doing some consulting to cover my expenses because of my low salary. Or I have other businesses to run also. Or anything else I invent I will personally own the rights to. These are all variations of the same theme. You are not fully committed to the business you want them to put their money in. This might work for Donald Trump, but for anyone who has not made his or her first $25 million don’t expect that kind of latitude. Investors want and deserve your full-time attention as soon as they invest. This might be OK while you are pulling together your plan and don’t have outside investors yet, but investors are buying YOU lock, stock and barrel and want your full-time attention and focus. This not only means your time at the office, but as a CEO, or any senior executive really, it also means they want to own your thinking in the car and shower, and all your ideas that are a result of your work.

5. We have it all figured out. The fact of the matter is that the only guarantee you can make is the plan will evolve and change and the business plan is pretty much guaranteed NOT to happen. Only naive investors would think you are going to do everything that the plan says and not make changes as you go. If they really believe this, you probably do not want them as investors anyway. If you say this, you are basically saying you are wet behind the ears or unrealistic. Besides, if you really had it all figured out and proven, you probably would not even need their money, you would be “bankable” and pay prime rate instead of twenty to fifty percent per year to get equity dollars.

6. We have everyone we need on board in management to be successful. If this were true, you are either spending WAY too much money on staff, or you do not understand the skills you will need to bring on as the business grows and evolves. This is never true and saying it is like waving a flag saying I am an amateur. All investors assume you will need to hire other key players and set aside a stock option pool for that purpose.

7. We are going to sell this product to everyone (even in a single industry), because everyone can use it. This worked during the bubble for a while when $30 million was being dropped (foolishly) at a pop to fund some broad horizontal plays. Today, the smart money is mostly funding companies going after niches, and maybe some verticals (with top management teams, ideas and markets). Virtually every company today needs a market entry strategy that is narrow and focused to establish them as the “go to company” for a particular problem or solution. You NEED to be the big fish in a small pond first because small fish in the ocean get eaten alive more often than not. You can add niches, products or expand to an entire vertical later after proving every element of your business in a single niche. By the time you get there so much can change it is usually even a waste of time figuring out what that order will be in advance. Markets and technology are too dynamic today.

8. We have no competition. This is virtually never true, as people are doing something to deal with the problem you solve today. If you are a restaurant then the grocery store across the street is your competition. You can almost never view a market that narrowly, unless you just got the patent on nuclear fusion, even then coal, oil, hydroelectric and solar are still competition. Besides you really can’t know who else might be working on the problem and if it is an attractive market you will clearly have followers. So you need to articulate how you will stay ahead of competition either way.

9. Only our management team is qualified to develop and execute this business. This is about as false, naive and arrogant a statement as anyone can make, so don’t even come close. To say you are the only people in the world who can do this is not only terribly unlikely, it is in FACT something you can not possibly know for sure, because you don’t actually know everybody else do you? So it is always a false statement and shows overconfidence. It is better to err on the side of saying something like: “we know there will be competition and here is how we will be cheaper, different, better and/or faster.”

10. Our projections are very conservative. This is the most overused expression of the lot and I would guess it gets said in more than ninety-percent of investor presentations. The fact is that entrepreneurs are always optimistic; they wouldn’t be entrepreneurs if they were not, as they are certainly fighting the odds. Any good investor is going to make their own judgements on the ramp rate of sales and expenses anyway, so this is better left unsaid. The fact is you never know because you never know if there are fifty other companies working in stealth mode on the same idea. According to research 32% of angels site “unrealistic financial projections” as the number one mistake made by entrepreneurs.

11. We don’t know how much money we need, or we can do it on anything between $500K and $10MM. Investors want to know you have a solid plan. They also all have a certain amount they want to invest. Do your homework and understand exactly who you are talking to. You should know exactly what you are asking for before you go in and have a business plan with a financial plan that matches this. Asking for the wrong amount is as good as blowing the presentation entirely. Although you may be able to execute a business plan more slowly, yet successfully on less capital, and you may have a couple of scenarios figured out (you should), you can really only show one plan to any particular investor.

Level of Management Team Needed

Getting investors today requires a strong team, idea and market (not the same as idea). What level of team do you need to have a good likelihood of obtaining angel financing? Here is a chart of the level of management team you will likely need and you can interpolate between these levels. Currently, you will likely need to reach level five to bring in any angel investors and probably a level 8 to get any money from VCs. This also assumes you have an attractive, and large, potential market, some barriers to entry and a good head start or patent protection.

Conclusion

You need to pull out all the stops today to obtain angel financing. This means getting further on less money than ever before. Which in turn means better focus and using virtual company techniques to get much further on your OWN personal resources, and/or friends and family money. It also means pulling together a team of people that address all the major risks in the business. This requires creative deals to bring people in and probably not be paying them, certainly not full-time, while you are creating real value in your business. Investors want to invest in something that already has value built in, not an idea or business plan with a “one-man show” today.

The most common mistake made today made by entrepreneurs is going out looking for money before they are ready. The competition is fierce out there, so don’t burn your best personal contacts by approaching them with an incomplete or undeveloped business plan or company. If you have not successfully raised money before, get help from someone who has. C-Level Enterprises offers a complete financing review and critique that is guaranteed to improve your chance of obtaining financing. Go to www.CLevelEnterprises.com for further information. Also see www.StartupPlanet.com for audio courses on raising investor capital.

Mr. Robert Norton, is an author of four books, speaker and President and CEO of C-Level Enterprises. He has over 15 years as full-time President and CEO of numerous successful companies. Two grew to over $100 million in annual sales while Mr. Norton was there and one grew from $0 to over $1 billion in revenue today. His experience spans all key disciplines needed to start, grow and exit businesses in several industries. He can provide a breath of experience and perspective across all disciplines that only experienced CEOs can.

He founded and run the exclusive CEO & Entrepreneur Boot Camp – The Art and Science of Business Design. See http://www.CLevelBootCamp.com

With 22 total years experience, including former positions as Senior Software Architect, VP Engineering and CTO, Mr. Norton can understand both deep technical issues and strategic management issues. So often operations, product development, sales and marketing issues are deeply interwoven, requiring multidisciplinary experience to effectively solve problems. Mr. Norton’s breath of experience allows for complete validation and/or improvement of entire business models for maximum growth and profit. He is also a specialist at designing long-term competitive advantage into businesses so profit margins can be maintained and stockholders build sustainable revenue and profits that can justify high multiples on exit.

He is also the author of The Startup Manual, the first roadmap to starting and growing any business to $100 million in sales, available at http://www.StartupManual.com.

A complete biography is available at http://www.CLevelEnterprises.com a resource for CEOs, entrepreneurs and C-Level executives at early-stage companies.

Businesses are something which have a tendency to change hands now and again over the entire life of the business. Whether it is a merger or an outright sale, there are certain factors which will affect the overall value of a business that is put up for sale by its current owner. The following paragraphs will highlight some of these factors and explain why the overall value of business can be altered from time to time.

Delaying the Sale

Selling one’s business is an extremely important decision for a business owner to make. The sale thereof is something which can either make or break the financial stability of an individual at times. A factor which tends to affect the overall value of a business is a delay with regard to deciding whether or not to sell the business. As there are times when the market would be most profitable for a business sales transaction, this time period can pass should an individual business owner wait too long to determine whether to sell or not.

Not only outside factors, such as the general market, will affect the sale of a business. Internal factors such as a decrease in sales, creditors and unrest amongst employees within the company may all affect the time period in which a business goes up for sale. With that said, it is important that individuals sell when the time is right for selling. Unreasonable delay in a sale of a business may have adverse effects on the overall value of the business.

Private Business Owners Lack the Resources

Another factor which affects the overall value of a business with regard to the sale thereof has a lot to do with the lack of resources that many business owners experience. Unlike their corporate counterparts, smaller business owners do not have attorneys, accountants and financial advisors at their beck and call who can aid them in the sale of their business. Due to the lack of these professionals, business owners tend to take longer selling their business and finding the best buyers which will affect the overall value of the business.

Lack of Appropriate Business Sale Knowledge

Much of the information which an individual can gain from outside media sources such as television, magazines and websites deals with selling larger companies. For those individuals who are looking to sell a smaller, privately owned business, they may find difficulty gaining valuable insight into how to sell their business so that it brings in the most profitable price. Not having the requisite business knowledge can hinder the overall value of one’s business, as they do not know how to sell the business in a way which brings in the best price.

Future Profitability

A buyer in a business purchase transaction wants to know that the business which they are purchasing is one that will see future profits. It is not only important for the business to be seen as doing well at that particular moment in time, but it is also vital that the business will continue to do well in the future. Therefore, future profitability is something which will drive up the value of a business. After all, who really wants to purchase a business that will go downhill soon thereafter. The answer to that question is probably no one. If a current business owner can show factors which relate to future profitability of the business, then their business may be one that is portrayed as having good value.

Position the Company for Sale

A business that is going to achieve the best price and be seen as having the best overall value is one which is properly positioned for sale. There are many aspects which can adequately position a business for sale such as showing unique qualities that the company maintains, the value of its employees and the profitability of the company as a whole. The company must be prepared in a nice, attractive package in order to have the best positive value. A company which is under great management, sees good profits on the market and is a good purchase opportunity overall will yield the best selling price. Positioning the company for sale is best left up to professionals who are in the market of handling situations such as these.

Summary

To conclude, the previously mentioned items are certain factors which can affect the overall value of a business that is being sold. In order to ensure that a current business owner receives the best value for their company it is important to take certain steps to avoid sale delays, obtain the necessary resources to help the sales process along and retain the help of knowledgeable professionals in areas where they are needed. By taking the aforementioned steps, the current owner of the business will be better able to get the best possible selling price for their business.

Aaron Muller is a partner of KRBrokers. Visit our website for Seattle business opportunities. Established in 1984 and located in Seattle, Bellevue and Redmond. KR Business Brokers has helped thousands of business buyers and sellers achieve and realize their financial independence and business ownership dreams.

Many owners and managers struggle to get the small business financing necessary to operate and grow.

And while most people would universally agree that lower cost debt is better than higher cost debt, both end up having their place and purpose.

Low cost debt financing is reserved for low risk applications.

As the risk goes up, so does the cost of borrowing.

Pretty basic, right?

There is a twist however.

Most of the lower cost capital available for small business financing is based on personal net worth, personal credit, and income sources outside of the business.

So even though a business application of financing could be considered high risk, the business owner or manager may still be able to secure low interest rates based on their personal assets and income.

This creates the illusion that low interest rates are available for all small business applications, regardless of their size and relative risk.

Here’s where the trap comes in.

As the business grows, it will use up all the low cost financing leveraged from personal assets and will need to factor in higher cost small business financing sources to fund the capital requirements of the business.

At this point, the risk of the underlying business now starts to get reflected in the interest rates.

The problem is that hardly anyone ever plans for this to happen and the business leap frogs from low interest rate personal loans disguised as business loans into high interest rate personal credit cards.

If the business achieves short term profitability, there can still be low and medium range interest rate products available to fund growth.

But if the business startup period drags on, which is not at all uncommon, higher cost personal financing can quickly become the only capital available to cover short term losses and/or larger than expected start up costs.

To avoid falling into the low interest rate trap, consider the following steps when constructing your small business financing strategy.

>>> Be Ultra Conservative When Estimating Your Capital Requirements.

When you’re trying to start up a business, its all about being optimistic and getting things going so that you can make all kinds of money. Right?

In the excitement of planning a new venture its easy to delude yourself as to what the business start up is realistically going to cost to get going and become profitable.

A better approach is to be conservative with your small business financing requirements, factoring in all probable costs in more detail to increase accuracy.

Even if you think you’re being ultra conservative with your capital estimates, add another 20% to whatever number you come up with as a contingency fund.

Things can and will go wrong.

The perfect startup scenario is about the same odds as winning a lottery ticket, so you might as well go play your lucky numbers instead of banking on an overly aggressive small business financing plan.

>>> Understand The Limits and Criteria For Low Interest Rate Financing.

For startups, low interest rate financing comes from personal credit and government sponsored programs.

In either case, there are limits as to how much capital you can acquire.

The limits for government programs are normally well defined. Just don’t automatically assume that you qualify for the maximum amount.

Personal limits are going to be based on a combination of your credit score, your liquidat-ible personal assets, and the cash flow available to service the debt.

Short term profitability in the business will provide you with greater access to small business financing, but at a slightly higher interest rate compared to low cost personal financing.

The interest cost of incremental capital will continue to rise if the additional debt is not matched by corresponding amount of personal or business equity.

>>> Factor In The True Cost Of Borrowing

When creating your small business financing projections, make sure that you accurately estimate your cost of borrowed capital.

If your low cost money sources are not sufficient to cover off your capital requirements, then factor in higher cost sources available to you and see if the cash flow projections still work.

There is no value in creating an unrealistic cash flow projection.

It can only lead to poor business decisions which will not keep you in business very long.

If the cash flow numbers don’t add up, avoid the temptation to reduce your capital requirements or lower the average cost of capital just to make the numbers work.

The reality of good numbers may tell you not to proceed with your plans, which could very well be the best business decision you ever make.

Brent Finlay makes it easy to understanding business financing. Learn how to locate and secure proper financing for your business. To receive your free 6 part mini-course visit the business financing website

Widget sales are booming – the competition is scrambling, demand is up, and the books are finally treading water. Your core management team has big ideas for the future of Widget Inc. Opportunity is abundant; but how will you fund that next big leap?

As your start-up matures, obtaining second- or even third-round funding may allow your business to expand and grow into new opportunities identified after your business was established. If your product or service has proven itself in the marketplace, you may be a candidate for an additional round of funding.

Some possible uses of post start-up funding include:

* Penetration of new markets, either by industry or geographic location

* Development of new products or services that compliment your key lines of business

* Acquisition of competitors, staff and/or facility expansion, or new equipment

Damage Control

If your company is struggling to make ends meet, post start-up financing is not an effective way to address red ink.

Consider other methods of debt management such as refinancing, streamlining systems of production, and bootstrapping before looking for additional funding. Investors will not be interested in extending additional funds to companies that have not yet established themselves firmly in the marketplace.

Identifying Post Start-Up Funding Sources

The best source for post start-up funding may be your original investment partner. However, sometimes asking your investor-partner for additional funds can be a lot like asking your parents for a raise in your allowance. You’re going to have to really prove a need for it, and even then, your original funding source may have woke up on the wrong side of the financial plan.

Should this prove to be the case, there are additional sources to consider, including:

* Lending institutions (banks)

* Venture capital firms

* New private investors

* Other professional service providers within your core management team

If you developed a list of potential investment partners prior to start-up, renew your contact with these individuals. By telephone or letter, convey the success your product or service has experienced, as well as your purpose for the post start-up funding. With a solid track record in hand, you may be surprised to find how many potential second-round investment partners you have.

In addition, you’ll be in a stronger position during the negotiation process, meaning you won’t have to give up as much control to achieve your desired result.

Tips For Maximizing Post Start-Up Funding

* Don’t commingle funds. Avoid falling into the trap of using new funds to level the books. If you obtained additional funding for expansion, do not deviate from the plan. Address any cash flow problems or existing debt service independently from your company’s expansion needs.

* Learn from past mistakes. Undoubtedly, your company’s start-up phase was a learning experience unlike any other. Recall the lessons learned from handling your initial start-up capital. Now that you’ve established a strong working relationship, call in your management team to gather additional opinions on the best way to disburse funds on each project.

* Look for new opportunities along the way. As you implement your expansion plan, be on the lookout for ways to streamline and maximize the results of your efforts. Don’t be afraid to upgrade your plan; remember that your business plan should be a “living” document, able to flex as the status of your market and the general economy change.

Jim D. Ray is a seasoned entrepreneur and president of Web Presence, a national web design firm exclusively serving the small business market sector. To learn more, or for a free quote for your own web site, visit the Web Presence web site at: http://www.web-presence.net