The Entrepreneurs Advocate

Archive for the ‘Entering Business’ Category

Interest in Angel Investing from both investors and the entrepreneurs who need the money is at an all time high. Many of the participants from both camps are relative neophytes at the process. Here is a list of common pitfalls that can plague both Angels and Entrepreneurs.

Miss-Matched Expectations & Goal Alignment: Angel investing is a type of marriage and we all are aware of the poor statistics related to marriage success rates. The following bullet points mostly reference un-aligned expectations by all parties involved.

Risk Appetite: If the Entrepreneur’s company is little more than an idea with zero to little sales, capital received from the Angel needs to be “flyer” money- i.e. if it doesn’t come back, no ones life is ruined. What people think their risk appetite is and what they can really stomach (a 50% stock portfolio drop in one year for example) needs to be fleshed out in black and white.

Management Styles: Does the Entrepreneur just want the capital and then be left alone? Does the Angel’s capital come with the expectation of being part of every decision big or small? I know of numerous examples were Angels and their Entrepreneurs are NO longer on speaking terms because the right questions and leadership parameters did not get asked before funding. An honest review done by a competent third party with no skin in the game is highly recommended.

Exit Strategy (or lack thereof): When is the day a company should start Exit Planning? The day the company is created. Bankers Advocate is in the Exit Strategy business and we see time and time again that a concise and flexible plan needs created and constantly updated. Time is not your friend and all contingencies need discussed. If the Entrepreneur expects to run the company forever and the Angel Investor is expecting a liquidity event in 3-5 years that and other differences need worked out. A viable Exit plan that all stakeholders agree on needs formulated.

Single Investor or Angel Group? For the Entrepreneur to receive monies/expertise from a group versus an individual is highly desirable but not always doable. As they say, beggars can’t be choosers. However, the skill sets a group can bring and the group dynamics of multiple Angel’s can help temper the idiosyncrasies of a single investor.

Candid Answers to Tough Questions: This point is squarely directed at the Entrepreneur. You will be asked many tough, smart and insightful questions. Your answer should never be a guess. I would recommend multiple roll playing sessions with your advisers to fully vette your presentation. Audiences can tell when you are just winging it and all credibility is quickly lost.

In summation, both those in need of and the suppliers of capital need to ask honest and sometimes humbling questions of themselves. The right research done before the check is cashed can save a tremendous amount of grief and frustration later.

“It is critical that young people are exposed to Entrepreneurship and basic finances. Pass this on to any budding Entrepreneurs” CC

SBA News Advisory

PRESS OFFICE                  

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SBA Offers Free Youthpreneur Webinar Series To Promote Entrepreneurship and Financial Literacy

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Recognizes National Entrepreneurship Week & America Saves Week February 20-28, 2010

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Release Date:  February 22, 2010   

Contact:  Cecelia Taylor (202) 401-3059

Advisory Number: MA10-02     

Internet Address: http://www.sba.gov/news

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WHAT: The U.S. Small Business Administration will host a series of

Youthpreneur Webinars in recognition of National Entrepreneurship Week and America Saves Week.  The topics will emphasis youth entrepreneurship and engage the next generation of small business owners in skills building and financial empowerment.  They will be able to learn the basics of entrepreneurship, strategies for today’s business world, and using social networking to advance business ideas. 

WHEN: February 23-25, 2010

Daily, 11:00 a.m. and 3:00 p.m. (ET)

WHO: Be inspired and learn from some of the best in business and

entrepreneurship.

Webinar presenters and topics include:

Jennifer Matthews, President and CEO

Creating Financial Literacy, LLC

Topic: Why My Credit Score Matters NOW

Tuesday, February 23 at 11:00 a.m.

Vince Shorb, President, The National Youth Financial Educator’s Council

(NYFEC)

Topic: Financial Education/Entrepreneurship Tuesday, February 23 at 3:00 p.m.

Steven Harris, President

JS Investment Group

Topic: Youth Entrepreneurship and Financial Literacy Wednesday, February 24 at 11:00 a.m.

Michael Simmons, Co-Founder & CEO, Extreme Entrepreneurship Tour

Topic: Why Every Student Should Be an Entrepreneur Wednesday, February 24 at 3:00 p.m.

Shonika Proctor, CEO, Renegade CEO’s

Topic: Me…Myself…and Why? A Business Roadmap for Determined Teens Who are Making Their Way Thursday, February 25 at 11:00 a.m.

Jason Duff, Founder and CEO, Community Storage & Properties, LTD and COMSTOR Outdoor, LTD

Topic: How to Leverage Top Internet Tools to Grow and Market Your Business at No Cost Thursday, February 25 at 3:00 p.m.

HOW:  For free visual and audio access to the Webinar go to

www.ReadyTalk.com

Click “join a meeting” and enter access code 3761101 Then dial 866.740.1260 and enter access code 3761101 (plus the #key) System Requirements:

- Windows, Mac, Linux and Solaris operating systems

- Internet Explorer, Safari and Firefox Web browsers

- Separate telephone line needed for the audio portion

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February 20 – 27 is National Entrepreneurship Week, a celebration of the heritage of entrepreneurship in America and NEW opportunities for a NEW GENERATION!  For details on the events, check out the National Entrepreneurship Week Website www.nationaleweek.org

February 21 - 28 is America Saves Week. Individuals are encouraged and assisted with assessing their savings progress.  Assistance will be provided by organizations and professionals with an interest in improving the financial security of individuals and families.  For more details, visit the America Saves Week Website www.americasavesweek.org

In my talks with business owners and their advisors throughout 2009 and early 2010, I see one common theme - Survive. Business Owners who back in 2007 planned to fund their retirement by selling their business in 2009 were hit with multiple hurdles. “Those doing well enough to sell or want to sell are shying away,” says Mike Handelsman, general manager of BizBuySell in San Francisco. “If they sell, it’ll be based on cash flow and revenues, which are depressed now. In many cases, this is their nest egg, so they’ll put off retirement to wait out these uncertain times.”

A few bright spots are beginning to appear as 2010 comes to the half way point. Borrowing for good deals has slightly freed up and there is a great deal of  money on the sidelines (”dry powder”). Most American’s still see business ownership as the best path to creating personal wealth. What should an owner do in 2010?

Make sure your business stands out among the crowd of mediocre companies. How do you do that? One, make sure your books and records are immaculate. This is still the number one reason a business doesn’t sell or sells for a reduced price. Two, show a potential buyer that there is plenty of business in the pipeline and your have the systems and procedures in place to capture that business. Three, do any delayed maintenance before going to market. You get once chance at a good first impression, don’t blow it. Fourth, have a third party appraisal done of your business with pre-financing in place. This will allow you to move quickly on serious buyers. Don’t wait for them to arrange their own financing which might be inferior or from the wrong bank.

Plan, Plan, Plan… Whether you want to sell in six months or six years that is the key to monetizing the value you have built in your business.

“Note: This article is from the Orlando Business Journal - by Kent Hoover Washington Bureau Chief, but it is being reported in numerous publications. The SBA 7-A program is the key lending product to buying/selling a business worth less than $4 million. Onerous was not a strong enough term to describe the $250,000 Goodwill cap.”

The U.S. Small Business Administration delayed implementation of a new $250,000 limit on the amount of goodwill that can be financed by 7(a) loans in a business acquisition.

The new limit was scheduled to go into effect March 1, but the SBA responded to concerns raised by business brokers and lenders, who contended the rule would make it impossible to use government-guaranteed 7(a) loans to buy many businesses, particularly service businesses or professional practices.

Goodwill includes the intangible assets of a business that create cash flow, but do not have a book value. Hard assets such as real estate or equipment are not included in goodwill.

On Feb. 6, the SBA advised lenders that, in cases of business acquisitions, no more than 50 percent of a 7(a) loan should be used to finance goodwill. In no case should goodwill account for more than $250,000 of the loan amount, according to the SBA’s guidance.

Because of the uproar over this limit, the SBA decided late Feb. 27 not to implement it until at least Aug. 31. Until then, the agency will review requests to exceed the $250,000 goodwill limit on a case-by-case basis.

The agency will analyze the types of businesses and transaction structures submitted in these applications to decide what limits should be placed in the future. The SBA currently does not have data on the amount of goodwill financed by its past business acquisition loans.

You can utilizing a Versatile Entrepreneur Retirement Savings Account Plan (VERSA).

The VERSA Plan structure allows you to rollover your 401(k), or other qualified plan, into the equity of a new or existing business without the burden of taxes or penalties. Frequently we are asked if the VERSA Plan is a loan. No, it is not a loan. It is equity.  In addition, it meets all of the equity requirements of commercial lenders and the SBA alike.  The capital that is rolled into the VERSA Plan is used to buy the equity of the company just as you would buy a mutual fund or a stock in your qualified plan.  That stock is then held in the plan for the benefit of the business owner. 

One caveat, your new company needs set up as a “C” corporation by the lawyer who sets up the VERSA for you. We have used the VERSA numerous times for Entering clients or Entering Buyers to access their retirement funds with no tax penalty.

“Note: Since this was written, the prime has dropped to 4% and furthur rate cuts are possible.-Chris” 

One item not receiving a great deal of attention through the financial crisis is the fed’s action causing the prime interest rate to drop from 5% to 4.5%.

Many business loans are prime based, so this will be welcome relief for many business owners. In addition, interest rate are very low for those who qualify. Banks are hungry to make loans in their narrower preferred categories. SBA loans are still being made (albeit with tougher rules) and funding certain business acquisitions and franchise purchases are in many lender’s sweet spot.

 These are advantageous times to buy a business since multiples are down and lenders will be your willing due diligence partner to make sure their monies are safe.

SBA backed loans are down 31% in South Florida. The new SBA SOP (standard operating procedures) have made the rules more onerous for Entering clients and prospects. A constant refrain we hear from banks is we would have done this deal a year ago. In the past we would have placed loans with 1-2 target banks and typically that was good enough. Now we place packages at 3-5 lenders and are constantly researching new lender’s risk parameters and appetite for loans by market segments.

This is toughest borrowing market we at Bankers Advocate have seen in in 10-15 years. What steps can you take to make sure a lender will fund your transaction?

• Books and Records Current and Error Free- Many posts in this blog harp on this subject, but it is even more important in this tough lending environment.
• All Loans Now Require a Business Plan- A good idea before becomes a requisite now. Much of the data gathered during the third party appraisal process can be used in a business plan. Having the data will make this go smoother and faster. Also, it is a good learning and team building exercise for the Entering and Exiting entities to work on this together.
• Third Party Evaluations Required-We have never taken an assignment without one being done. It is good to see the SBA back us up.
• Source of Equity-Rules have tightened on borrowing monies against your house and other assets. Coverage on this new debt cannot be only covered by the cash flow from the new business. Verification of funds by the lender has been made stricter too. Documentation and analysis needs done prior to the loan being submitted.
• Change in Ownership must Benefit the Business-This is a tricky one, but we can help write the narrative for the loan documentation.
• Exiting Seller Financing-Lenders like to see the Exiting  party “invested” in the process. Some amount of seller financing is encouraged  and even required on some deals by the SBA.
• Experience of Entering Buyer-A good resume, track record and tying this together with a good business plan is paramount. This needs addressed early in the process as this variable has become a deal breaker.

Deals (and loans) are still getting done, but planning, structure and choosing the correct lender(s) is even more critical in these challenging times.