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Power point finance modules 3&4

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  • 1. NESBDC PROFESSIONAL DEVELOPMENT CORE COMPETENCY Financial Statements and Financing November 2011
  • 2. 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 2
  • 3. 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? 3
  • 4. 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
  • 5. 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
  • 6. 6 Issues in Finance Bankruptcy  Is it necessary?  Plan for the worst and hope for the best  Identify all debt  Lawyer up
  • 7. 7 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?
  • 8. 1. To start up a business  What will it cost?  What are the key criteria? 8 What do they need the money for?
  • 9. 2. To expand a business  What will it cost?  What are the key criteria? 9 What do they need the money for?
  • 10. 3. To acquire a business  What are you buying?  What will it cost?  What are the key criteria? 10 What do they need the money for?
  • 11. Types of funding  Grants  Loans / Debt  Equity  Mezzanine 11 Where do they get the money?
  • 12. 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)
  • 13. Sources of Funding  Debt – Conventional  Banks  Credit Unions  Economic Development Agencies  CDC’s and LDC’s  Guarantee Programs 13 Where do they get the money?
  • 14. Sources of Funding  Debt – Unconventional  Asset Based, Factoring and Purchase Order  Leasing  Trade or Vendors  Strategic Partners  Seller Financing  Earn Outs 14 Where do they get the money?
  • 15. Sources of Funding  Personal Debt  Equity  Other 15 Where do they get the money?
  • 16. SBA Guarantee Programs  7A  Express  Patriot Express  504  Export Working Capital  Export Express  Micro-loan  Other 16 Where do they get the money?
  • 17. What does it take to get the money? 17  Process of Securing Funding  Information / Business Plans / Projections  Timing  Credit Decision  Term Sheet  Closing  Funding
  • 18. What does it take to get the money? 18  Funding Issues and Terms  Term sheets  Inside a Banker’s Head  Five C’s of Credit  Tools  Ratios
  • 19. Top 10 reasons why a business is not funded: 1. Lack of cash injection – too little “skin in the game” 2. Lack of planning for cash reserve 3. Lack of collateral 4. Incomplete business plan 5. Credit problems 6. Business assumptions not realistic or backed up 7. Technical assistance not obtained when needed 8. Business unwilling to provide additional information 9. Lack of research to support business concept 10.Business unwilling to do needed legwork/homework to follow up
  • 20. What does it take to get the money? 20  Inside a Venture Capitalist’s Head  Team  Track Record  Market  Valuation  Exit Strategy
  • 21. How do you help your clients? 21  Ask the right questions  Know the landscape  Provide an objective assessment
  • 22. Acquisition Case Study 22  Acquisition of a Liquor Store
  • 23. Cash Based Business 23
  • 24. Accrual Based Business 24
  • 25. Supporting Equity Requests Moving From “Funding Eager” to “Funding Ready”
  • 26. Friends & Family State/Gov’t Agencies Banks ($1 – 25K) ($100K - $1M) ($250K+) Cash Flow Business Angels VC/Private Equity ($25 - $500K) ($500K - $5M+) Product LifecycleProduct Lifecycle Passive Investors Active Investors Sweat equity & personal savings Seed capital Pre- venture capital VCConcept 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
  • 27.  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
  • 28.  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 Small Business Innovation Research
  • 29.  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
  • 30. Attributes of angel investmentAttributes of angel investment • Private investmentPrivate investment • Accredited investorsAccredited investors • Stage of investment – generally earlyStage of investment – generally early • Investment rangeInvestment range ~~ $25k - $1.5m$25k - $1.5m • Typical range - $250 - $500kTypical range - $250 - $500k • Average investment - $400kAverage investment - $400k
  • 31. $ $$$ 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)
  • 32. 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)
  • 33. Stage risk overlays weighted business riskStage risk overlays weighted business risk • Early stageEarly stage: Pre-revenue; early revenue with losses: Pre-revenue; early revenue with losses • Development stageDevelopment stage: Established revenue with losses: Established revenue with losses • Later stageLater stage: Established revenue with profits: 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)
  • 34. 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)
  • 35. Basic Research Product Business Idea Team Financing Strategy Market Intellectual PropertyOther
  • 36. 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
  • 37. Top 10 reasons why a business is not funded: 1. Failed to capture the interest of investor 2. Management team does not impress investor 3. Outside area of investor expertise 4. Market size too small 5. Time to profitability too long 6. Business requires more funding than group can provide 7. Stages of funding needed does not match investor criteria 8. Market timing is too early or too late 9. Business plan is weak 10.Funding environment is tight
  • 38. Non-Traditional Funding: 1. Understand risk from investor perspective 2. Get as specific feedback as possible from the investor 3. Integrate learning from unsuccessful attempts for funding prior to seeking funding again 4. Consider traditional funding sources 5. Re-scale plans 6. Understand partnering aspect 7. Accept joint responsibility 8. Strengthen financial projections
  • 39. 1. What does the business without funding look like? 2. Could it be a good thing not to obtain the funding you want?
  • 40. 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.
  • 41. 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.
  • 42. Top 10 reasons why a business is not funded: 1. Failed to capture the interest of investor 2. Management team does not impress investor 3. Outside area of investor expertise 4. Market size too small 5. Time to profitability too long 6. Business requires more funding than group can provide 7. Stages of funding needed does not match investor criteria 8. Market timing is too early or too late 9. Business plan is weak 10.Funding environment is tight
  • 43. Wrap Up • Did we focus on the areas you wanted to? • Did we help you become a better counselor? • Did we have FUN? 45
  • 44. 46 Massachusetts Small Business Development Center Network John Rainey MSBDC – Clark University 950 Main St. Worcester, MA 01610 508-793-7615 jrainey@clarku.edu 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 hollis.mcguire@unh.edu http://www.linkedin.com/pub/0/515/704