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    Power point finance modules 3&4 Power point finance modules 3&4 Presentation Transcript

    • NESBDC PROFESSIONAL DEVELOPMENT CORE COMPETENCY Financial Statements and Financing November 2011
    • Agenda
      • Introductions
      • Pop Quiz
      • Practical Issues in Accounting
      • Issues in Finance
      • Acquisition Case Study
      • Cash Based Business Case Study
      • Accrual Based Business Case Study
      • Equity Financing
      • Wrap Up
    • Pop Quiz
      • What % of your clients are start ups, growing or troubled businesses?
      • Are you seeing debt or equity deals?
      • What do you want to focus on today?
      • What can we do today to help you become a better counselor?
    • Practical Issues in Accounting What should you ask to see? When should you ask to see it? Statement of Cash Flow Profit & Loss Statement Balance Sheet Tax Return
    • Do the accounting records make sense? Read all reports for consistency, scale, and trends Places where you will see the most common errors: Beginning Equity Inventory Classification/Over Classification Short term/long term debt
    • Issues in Finance
      • Bankruptcy
      • Is it necessary?
      • Plan for the worst and hope for the best
      • Identify all debt
      • Lawyer up
    • Issues in Finance
      • So… your clients need some money!
      • What do they need the money for?
      • Where do they get the money?
      • What does it take to get the money?
      • How can you help them?
      • To start up a business
      • What will it cost?
      • What are the key criteria?
      What do they need the money for?
      • 2. To expand a business
      • What will it cost?
      • What are the key criteria?
      What do they need the money for?
      • 3. To acquire a business
      • What are you buying?
      • What will it cost?
      • What are the key criteria?
      What do they need the money for?
      • Types of funding
      • Grants
      • Loans / Debt
      • Equity
      • Mezzanine
      Where do they get the money?
    • Debt vs. Equity
      • Equity:
      • Emphasis on collateral and
      • cash flow to reduce risk
      • Deferred repayment
      • Repayment dependent on company performance
      • Higher risk for investor, lower risk for investee
      • Higher cost if business is successful
      • Ownership dilution
      • Supports long-term expansion
      • Involved partner relationship
      • Complex issues and documentation
      • Debt:
      • Emphasis on collateral and cash flow to reduce risk
      • Repayment starts after funding
      • Return not based on company performance
      • Lower risk for lender, higher for borrower
      • Lower cost for borrower if business is successful
      • No ownership dilution
      • Supports short/medium-term expansion
      • Monitoring relationship
      • Boilerplate issues and documents
      Information Source: Coastal Enterprises Inc. (CEI)
      • Sources of Funding
      • Debt – Conventional
        • Banks
        • Credit Unions
        • Economic Development Agencies
        • CDC’s and LDC’s
        • Guarantee Programs
      Where do they get the money?
      • Sources of Funding
      • Debt – Unconventional
        • Asset Based, Factoring and Purchase Order
        • Leasing
        • Trade or Vendors
        • Strategic Partners
        • Seller Financing
        • Earn Outs
      Where do they get the money?
      • Sources of Funding
      • Personal Debt
      • Equity
      • Other
      Where do they get the money?
      • SBA Guarantee Programs
      • 7A
      • Express
      • Patriot Express
      • 504
      • Export Working Capital
      • Export Express
      • Micro-loan
      • Other
      Where do they get the money?
    • What does it take to get the money?
      • Process of Securing Funding
        • Information / Business Plans / Projections
        • Timing
        • Credit Decision
        • Term Sheet
        • Closing
        • Funding
    • What does it take to get the money?
      • Funding Issues and Terms
        • Term sheets
      • Inside a Banker’s Head
        • Five C’s of Credit
        • Tools
        • Ratios
    • ___ ______ __________
      • Top 10 reasons why a business is not funded:
      • Lack of cash injection – too little “skin in the game”
      • Lack of planning for cash reserve
      • Lack of collateral
      • Incomplete business plan
      • Credit problems
      • Business assumptions not realistic or backed up
      • Technical assistance not obtained when needed
      • Business unwilling to provide additional information
      • Lack of research to support business concept
      • Business unwilling to do needed legwork/homework to follow up
    • What does it take to get the money?
      • Inside a Venture Capitalist’s Head
        • Team
        • Track Record
        • Market
        • Valuation
        • Exit Strategy
    • How do you help your clients?
      • Ask the right questions
      • Know the landscape
      • Provide an objective assessment
    • Acquisition Case Study
      • Acquisition of a Liquor Store
    • Cash Based Business
    • Accrual Based Business
    • Supporting Equity Requests Moving From “ Funding Eager ” to “ Funding Ready ”
    •  
    • Capital Sources Vary According To Stage Friends & Family State/Gov’t Agencies Banks ($1 – 25K) ($100K - $1M) ($250K+) Cash Flow Business Angels VC/Private Equity ($25 - $500K) ($500K - $5M+) Product Lifecycle Passive Investors Active Investors Sweat equity & personal savings Seed capital Pre- venture capital VC Concept Working Model Sales Production Prototype Production Introduction Engineering Prototype Information Source: Innovation to Invention - Commercialization of New Technology by Independent & Small Business Inventors, DOE, 1989
    • Royalty Financing
      • The return is based on earning a % of future revenue,
      • not a % of ownership
      • For the entrepreneur:
      • - Not a fixed cost obligation – depends on performance
      • - No ownership dilution
      • For the investor:
      • - Provides a known exit – no “cash-out” event required
      • - Can work with less than venture grade companies
      Information Source: Vested for Growth
    • Small Business Innovation Research
      • Phase I - Feasibility Research
      • - SBIR – 6 months – up to $150,00
      • - STTR – 12 months – up to $150,000
      • Phase II – Concept Development
      • - SBIR/STTR – 24 months up to $1,000,000
      • Phase III – Commercial Application Private Funding
    • Participating Agencies
      • DOD Defense
      • HHS Health
      • NASA Space
      • DOE Energy
      • NSF Science
      • DHS Homeland Security
      • USDA Agriculture
      • DOC Commerce
      • EPA Environment
      • DOT Transportation
      • DoED Education
      TOTAL ~ $2.3B
    • Attributes of angel investment
      • Private investment
      • Accredited investors
      • Stage of investment – generally early
      • Investment range ~ $25k - $1.5m
      • Typical range - $250 - $500k
      • Average investment - $400k
    • Investors support VC funds that can consistently manage high risk capital $ $$$ Pension Funds University Endowments Insurance Companies Banks VC Fund Yrs 1-5 Yrs 4-10 12 – 25 co’s Information Source: Coastal Enterprises Inc. (CEI)
    • Venture capital managers must plan for losses as well as gains VC pricing/evaluation must accommodate expectations of portfolio loss 1/3 = 100% loss 1/3 = Return of cap 1/3 = Profit 12-25 Investments Information Source: Coastal Enterprises Inc. (CEI)
    • Stage risk overlays weighted business risk
      • Early stage : Pre-revenue; early revenue with losses
      • Development stage : Established revenue with losses
      • Later stage : Established revenue with profits
      Stage Risk Return multiple
      • Early
      • Development
      • Later
      • Highest
      • Medium
      • Lowest
      • 7 + X
      • 4 – 7X
      • 2.5 – 4X
      Information Source: Coastal Enterprises Inc. (CEI)
    • The venture capital process involves several distinct stages Qualify (1 day) Diligence (8-24 wks) Close (2-4 wks) Partner Exit (4-7 yrs)
      • Sector
      • Story
      • Management
      • Margins
      • Growth Potential
      • Exit options
      • Management
      • Market
      • Competition
      • Technology/ Barrier to entry
      • Strategy/ plan
      • Terms
      • Legal/ Accounting
      • Investment
      • Active Partnership
      • Board of Directors
      • Sale/ merger or IPO
      Information Source: Coastal Enterprises Inc. (CEI)
    • What Does It Take To Create a Fundable Business? Basic Research Product Business Idea Team Financing Strategy Market Intellectual Property Other
    • Think about the sources of funding across the life of your business Business Lifecycle Friends & Family Banks State/Gov. Funds Business Angels Venture Capital (equity) Information Source: Coastal Enterprises Inc. (CEI)
    • Stage of Firm 1|Seed 2|Startup 3|Early Stage 4|Expansion 5|Later Stage 6|Exit Stage Private Equity & Buyout Funds/Mezzanine Financing Angel Investors Personal Sources Source of Financing SBIR / STTR Resources Community Development Venture Funds Venture Capital Funds Strategic / Corporate Venture Capital Investment Banking / IPOs Information Source: NorthStar Economics, Inc Guide to Growth and Venture Capital|Wisconsin
    • Non-Traditional Funding Perspective
      • Top 10 reasons why a business is not funded:
      • Failed to capture the interest of investor
      • Management team does not impress investor
      • Outside area of investor expertise
      • Market size too small
      • Time to profitability too long
      • Business requires more funding than group can provide
      • Stages of funding needed does not match investor criteria
      • Market timing is too early or too late
      • Business plan is weak
      • Funding environment is tight
    • Develop Alternatives - Clean Up
      • Non-Traditional Funding:
      • Understand risk from investor perspective
      • Get as specific feedback as possible from the investor
      • Integrate learning from unsuccessful attempts for funding prior to seeking funding again
      • Consider traditional funding sources
      • Re-scale plans
      • Understand partnering aspect
      • Accept joint responsibility
      • Strengthen financial projections
    • Reassess Status
      • What does the business without funding look like?
      • Could it be a good thing not to obtain the funding you want?
    • Move Forward
      • Business without funding – doing things differently:
      • Recognize that it may be a good thing to not obtain the funding you want.
      • Note that gaining funding would not have made the work stop .
      • Work on reframing and rescaling the business to meet the new needs.
    • Move Forward
      • Discontinue pursuit – doing things differently:
      • Recognize that it may be a good thing to not obtain the funding you want.
      • Put the idea or plan on the back burner, and know you can revisit it later on.
      • Make room for new possibilities.
    • Equity Funding Perspective
      • Top 10 reasons why a business is not funded:
      • Failed to capture the interest of investor
      • Management team does not impress investor
      • Outside area of investor expertise
      • Market size too small
      • Time to profitability too long
      • Business requires more funding than group can provide
      • Stages of funding needed does not match investor criteria
      • Market timing is too early or too late
      • Business plan is weak
      • Funding environment is tight
    • Wrap Up
      • Did we focus on the areas you wanted to?
      • Did we help you become a better counselor?
      • Did we have
      • FUN?
    • Massachusetts Small Business Development Center Network John Rainey MSBDC – Clark University 950 Main St. Worcester, MA 01610 508-793-7615 [email_address] www.clarku.edu/offices/sbdc Hollis McGuire, CPA, MBA NH Small Business Development Center Melanson Heath & Company 102 Perimeter Road Nashua, NH 03063 603-589-2114 [email_address] http://www.linkedin.com/pub/0/515/704