Wednesday, March 30, 2011

Offer Equity to C-level Executives as a Recruitment Tool?

Q: Should you offer equity (for free or for purchase) when enticing someone to join the company at the C-level?

A: Some owners like to give up equity to key employees to engender loyalty and commitment to the company and to bridge the gap between salaries in the area and what they can pay. Others do not offer this "equity as payment". There is no right or wrong. Most tech companies offer equity. It's really the only way for them to attract high quality personnel who will work 60-80 hours a week to build the company. Investment banks and other entities pay high salaries for this work ethic but start-up technology companies cannot afford to burn their cash paying those salaries.

I know of someone who has helped a large number of small companies and accepted equity as partial or full payment. She has all this equity that she can't collect on. (No, she is not I.) So if you do decide to offer equity, you must structure your Shareholder's Agreement and/or Buy Sell Agreement to provide minority shareholder rights. Otherwise, you're offering up something that may ultimately be nearly worthless due to the lack of an automatic buyback provision (upon severance or contractual end) or the omittance of non-dilution provisions.

If you do not wish to offer equity, you can offer a percentage of gross profits or of net income. You can offer to pay your new management a percentage of any distributions BEFORE you distribute to yourself. There are a number of ways to structure an offering to someone so the C-level executive you are recruiting can share in the upside of the growth they'll help attain.

If you are a start-up and seeking angel investors, you may be able to obtain investment by an "exec with a check". An "exec with a check" is a C-level manager who likes working with start-ups but does not want to start his or her own company. He or she may have had their own company in the past, but now they'd like to help someone else do it. Since you are early stage and need money, they will contribute their money and their time for a stake in the company.

If  your company is pre-revenue, please do not advertise for a C-level position and in the fine print say you must contribute capital or pay your own way until you make money. You can alienate executives who may consider working for you later on when you do have revenue and can pay a modest salary. There is nothing more off-putting than having a position misrepresented. I've heard tales by C-level executives of how they were recruited (and flattered) only to find out that "there was nothing there". Be upfront. Advertise for a hands-on, deeply involved investor. If you are pre-revenue and don't yet have financial backing, believe me, an investor is what you want.
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Monday, March 28, 2011

Options to Augment Your Executive Management Team

As I've said in the past and will continue to state, a good management team is crucial to building a company and attracting investors. You can NOT build a company with a 1-person management team. If your company is young, you may not have the financial wherewithal or the book of business to bring in management. But as your company grows to the $1 million and higher mark, it becomes important. If you plan to keep your business as a small lifestyle business, then you can disregard my comments on a good management team.

A lifestyle business is one that provides you with the income and resources to live the lifestyle you want. Your goal is not to grow a sustainable business that could be sold, taken public, etc. Instead your goal is to grow the business just large enough where you can pull a decent salary, run many of your expenses through the business, and take distributions when you need them to finance other investments or pursuits. There is absolutely NOTHING wrong with having a lifestyle business and wanting to maintain as such. A business such as this is a great thing to have and is what the vast majority of small businesses are. If, however, you'd like to grow your business much larger and help others (investors) grow their assets, then read on.

To reiterate, a high quality management team is key to the successful growth of any business. Yes, a strong CEO/owner/founder is usually the driver. But a driver needs a team to help accomplish the goals. As the business grows, the driver needs viewpoints different from his or her own and skill sets that augment and complement. For example, the CEO may have stellar sales skill and be great at building the customer base. However, much of the delivery of the service is operations, not sales. When the CEO is great at sales, s/he is usually only so so at operations. Without a good operational/service delivery person in charge of that area, the customers may begin to depart due to poor service or follow-up. As the company grows and the number of customers increase and the amount or level or complexity of service and product delivery increases, the need for additional management beyond the owner/founder also rises.

If you do not have the resources to hire additional management, there are options. One is to build a Strategic Advisory Board. The members of this board should be experienced members of the business community who excel in areas you do not. When you have a problem or concern or just need to talk things through, you can contact one of them to get their insight and guidance. The other good thing about a Strategic Advisory Board is that they do not convene regularly but are available for a phone call or coffee meeting (or a meal) when you need them. If you want everyone's input at once, you can schedule a conference call. This board provides you with additional management expertise and flexibility.

Another way to augment your company's management team is to hire interim management. You can hire a CEO, COO, or CFO for a year or two or for a few months. Sometimes you can hire a C-level executive for a few weeks or for a day or two on a monthly basis. You may be familiar with the plethora of "rent-a-CFO" organizations springing up. Some of the CFO organizations are really more controller-oriented, meaning they help with historical financials but are not adept at financing. However, most small businesses don't need the services of a true finance-oriented Chief Financial Officer. A CPA/controller focus will suffice.

If your company is encountering difficulties and needs to restrucutre, then an interim CEO or COO can step in and take the reins and install or change the infrastructure necessary to move the company into good profitability and growth. If you have an immediate growth opportunity (innovation, partnership, etc.) that you need to exploit but don't know how, an interim C-level executive can get you well on your way. Good interim management view your business as their business and know they succeed when you do. Some of the benefits of utilizing interim management is rapid deployment. It doesn't take 6 months to recruit and interview an interim CEO who may only be hired for 6 months or a year. It takes a month at most. Because interim C-level executives have relatively short stints at companies, they are highly results oriented. They have significant experience yet bring an objective, new viewpoint.
In summary, a good management team is crucial to growing your business beyond the "lifestyle business" phase. Options such as strategic advisory boards and interim executive management help you bridge the gap until your company has the revenues and/or profitability to hire management full-time. Even for medium-sized companies, boards and interim management are useful in navigating uncharted territory. For companies with outside investors, strategic advisory boards morph into Boards of Directors.
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Friday, March 25, 2011

Forbes magazine: Top 10 Cities for Minority Entrepreneurs

According to a recent ranking  published March 23, 2011 by Forbes magazine (www.Forbes.com), the top 10 cities for minority entrepreneurs (and minority owned businesses and their owners) are as follows:
  1. Atlanta
  2. Baltimore
  3. Nashville, Tennessee
  4. Houston
  5. Miami
  6. Oklahoma City, Oklahoma
  7. Riverside-San Bernardino-Ontario, California
  8. Washington, D.C.
  9. Orlando, Florida
  10. Phoenix
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Wednesday, March 23, 2011

Small Business Conferences in April

I received the following conference notices by email. (If you have a small business or related conference, seminar, etc. you'd like to champion, please email me.)

* Apr. 13, 2011 - "Getting Back to Business" Atlanta Small Business Procurement Industry Fair, sponsored by the General Services Administration and the U.S. Dept. of Health & Human Services - http://gtpac.org/2011/03/gsa-and-health-human-services-host-industry-fair-april-13th

* Apr. 27, 2011 - Small Business Conference, sponsored by the Region 4 office of the Environmental Protection Agency (EPA) - http://gtpac.org/2011/03/epa-to-hold-small-business-event-april-27th

Check these out. They may be just what you're looking for. If you aren't in Georgia, they have similar conferences in your area. Click on the link for information about those in your area.
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Friday, March 18, 2011

Stepping Up to Business Conf. Workshop Q&A

After the conference
Q: Should you have several different scenarios when doing financial projections / creating pro-forma financials?

A: Yes, but only if you or someone on your team (whether permanent or contracted) has the skill and acumen to do these correctly. If not, stick to providing one set of financial projections which focus solely on the probable or expected performance. Why? If the financial scenario modeling is done well, the bank or equity investor will use those as their own. If they are not done well, the model will be completely disregarded and your credibility will be undermined and perhaps even damaged.

For those of you who, like myself, are adept at building models and doing iterations of financial projections, banks and equity investors like to see three (3) scenarios: 1) Worst case; 2) Probable case; 3) Best case.
The worst case scenario is NOT when all he-- breaks lose. The worst case scenario is the most probable worst case you can think of showing the loss of one or two of your highest revenue-generating customers, a drop off in the economy and/or industry, the rejection of a highly anticipated product or service by the market, or some similar occurrence(s) Running a worst case scenario shows that you've thought about how negative situations will adversely impact your company's sales, profits, and cash flow. Doing this will also help you structure your financing to ensure you do not break a loan covenant.

The probable case is the general financial projections incorporating the assumptions you have in your strategic business plan. 

The best case scenario is when everything goes better than you have in your plan. Your new product or service could be wholly embraced by the market and grow exponentially. You could enter into a partnership that dramatically increases your customer base. Anything that you have reasonably considered that would vault your company's growth in revenue, net income, or cash flow can be part of the best case. Make sure you specify your assumptions and explain why this scenario is possible.


Q: Sometimes equity investors say "nevermind" when you ask them to sign an NDA before providing them with your business plan. Why is this and what should you do?

A: If you engage an equity investor for the first time and get them interested enough to say, "Show me what you have." or "Show me your business plan.", they will be somewhat taken aback and usually say, "Nevermind" when you ask them to sign an NDA before you hand over the business plan. Their thought process is, "You JUST told ME about YOUR business, not vice versa, and now you want me to sign something when I don't even know what your business is really about? Are you crazy? I'm doing you a big favor just to take a look at your document and you want me to jump through hoops already." (or something similar) Hence the response.

What you should provide an equity investor the first time you meet with them is a 1-page company profile. I've talked about this in previous blogs. This will provide enough enough about your company to pique the potential investor's interest. If they don't think your company is a good fit for them, they can talk to others in their network and pass on the 1-pager. That's one reason why equity investors don't like to sign anything until they are reasonably ready to commit. They constantly seek deals to invest in and part of that is getting referrals from others and making referrals to others. When they sign an NDA, they are restrained from making referrals.

If the investor or someone referred to you by the investor wants to know more, then you provide your Executive Summary. There should be enough information in each section to titillate and inform an investor yet not enough that you'd be concerned about a competitor getting hold of it. If the investor now is interested in potentially investing in your company, the investor is now a prospective investor. Now you ask him or her to sign an NDA before providing them with the business plan. Do you see the difference in the approach? Those two steps - one-page company profile then Executive Summary - make a big difference.
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Wednesday, March 16, 2011

Musings from Stepping Up to Business Conference

I conducted a workshop earlier today at the Stepping Up to Business Conference. It was targeted at small businesses and business start-ups seeking financing.  I thought my workshop went well after a slow start due to A/V issues (and a restroom port of call). My topic: Writing a Business Plan / Financing Proposal. I received some really good feedback. I number of attendees told me "Great job!" or that they really enjoyed the session. I'm glad. I aim to please. Finance can be fun, or at least interesting and I try to make it so. If any of the attendees/participants read this, thank you for coming.

In conducting the workshop I took the top-down approach. (I mean, I do consider myself a strategic advisor and highly strategic so this makes sense, right?) There are a number of websites offering business plan templates and a number of software programs out there that purport to help you write your business plan. However, I've had a number of business owners tell me they couldn't get started or the plan they wrote using these seemed too perfunctory. These plans templates are good. Some are great. But it's like many things. Garbage in, garbage out. If you spend time down in the weeds focused on the details, you miss the whole point of a business plan which is to view your business from on high...and all the things that influence and impact your business.

I focused on writing an Executive Summary. Honestly, no lender or investor wants to see your 20, 30, or 40-page business plan UNTIL they've decided that they will seriously consider lending to or investing in your business. And even then, if you are pursuing smaller sums of financing, they may not wish to see it believing the Executive Summary sufficient. You want to interest an investor in your business? Give him or her a copy of your 1-page company profile. If they express further interest, then provide them with an Executive Summary 3-5 pages in length. Give them an in-depth business plan before they are sure of their interest and you will likely run them off. Or they'll take it and get back to you when they finally get around to reading it. Which will be....a looonnnggg time from now. (Again, all this assumes you didn't know the investor from Adam. If you were introduced by a source credible to the investor, he or she will be much more receptive to your long business plan. But leading with the Executive Summary is still optimal.)

I will spend the next few blogs responding to some of the questions posed by the attendees. I assume that if one person has the question, others have the same or very similar questions.

You'll also be happy to know (for all my adoring fans out there - Hah!), that the conference organizers video-taped all the workshops, panels, and keynote address. They will make the video of my workshop available to me. And I will then make it available to you. Until then, stay tuned for more.
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Monday, March 14, 2011

Stepping Up to Business - Business Finance Conference, 3/16/11

FINAL REMINDER:  I will be leading the workshop "Writing a Successful Business Plan / Financing Proposal" at this conference this week. My workshop will be held in the morning from 10:15am - 11:45am. If you will be in Atlanta on March 16, I highly recommend you attend if you have a business with <=$10 million in revenue. There's information for businesses of all types. -
Tiffany C. Wright

Small Business Finance Institute

Q. Where does working capital come from?
A. More places than you might think!

Stepping Up To Business
  • Free business counseling onsite
  • Seating is limited
Learn how to improve funding for your business operations on March 16th.
Don't miss STEPPING UP TO BUSINESS, the education event for small business owners to learn key insights on how to finance your business.
Full Event registration $100.
For more details and registration, click
www.SBFI.org/registration
Other topics:
Start a Business with No Money - Bootstrapping to Success
Financial Statements 101
SBA Loan Programs
Strategies to Finance Working Capital
Navigating for Angel Capital
Managing Business Cash Flow
Micro-Finance Alternatives | Not Just for Micro-Businesses
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Friday, March 11, 2011

How to Pursue Equity Investors

If you want to pursue equity investors for your business, then you need to be aware of what investors are looking for. This will help you tailor your pursuit of them - the people you talk to, what information you provide, your "elevator" pitch, etc. The first thing to realize is that equity investment is a relationship business. The best way to do this is to either have an existing relationship with an equity investor or to get a referral or introduction from someone who does. If you cannot get an introduction, be prepared to be turned down repeatedly. If you are, don't get discouraged. Continue to refine your message and pursue other investors. You will find one that's a good fit for you and your business.

It's not always the case that you get turned down by equity investors when you do not have relationships you can leverage. It is true that you have much higher credibility when you are introduced by someone whom the person or entity you are pursuing considers credible. But you can leverage other networks. You can find investors who may be alumni of your school, who may belong to an organization you belong to, or who may have a strong affinity for your particular industry. Or, if your company has won awards, especially for growth, creativity, or customer service, you can tout your awards to potential investors. Any kind of connection that will encourage someone to take a call from you or read an email is a connection that works.

If you do not have a clue where to start, consider entering a business plan competition or attending (preferably participating in) an angel or venture capital conference or presentations. You can meet people who may be able to help you and the exposure can definitely help you assuming your messaging is clear. If your messaging is not, this exposure to other entities seeking investors will help you see the holes in what you are saying or doing, and how you can correct those issues.

If you wish to pursue equity investors and do not yet have entities or individuals who have expressed interest in your company, you will have to "shop the deal". That means that you will have to put out feelers to generate interest in your company. For smaller companies seeking angel investors, the best way to do that is to create an Investor Profile Sheet, a one-page summary of the company that provides a snapshot of the company, its market, its competitive advantages, and its performance to date. If an investor is interested but doesn't believe your company is a good fit for him/her/it, then the investor will forward the Investor Profile Sheet to others who may think your firm is a prospect.

Once an investor expresses initial interest, or as the first step if you are pursuing private equity or venture capital, send the Executive Summary. This should only be 3-5 pages in length and provide an overview of your company, the market, the management team, the growth prospects, the strategy, and the plan. You should include basic historic and projected financials. You want to paint a positive picture. If there was a glaring issue in the past (such as a huge drop in revenue), mention it here and how you solved the product. This will enhance you and your company's credibility as you go forward. (Some business owners try to hide problems and only bring them up when the investor finds out. This creates suspicion and undermines credibility.)

Once an investor expresses serious interest and has signed a Confidentiality Agreement (CA) or Non-Disclosure Agreement (NDA), or better yet, a Letter of Intent (LOI), then share the complete business plan. This includes full details on your market, your prospects, your goals, and your plan and methodology for achieving these goals. Finally, after you have an LOI or equivalent agreement, share all requested material with your now fully engaged prospective investor.
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Thursday, March 10, 2011

Small Business Finance Conference - Atlanta, GA, 3/16/11

I will be doing a workshop "Writing a Successful Business Plan / Financing Proposal" at this conference next week. My workshop will be on from 10:15am - 11:45am. If you will be in Atlanta on March 16, attend. -
Tiffany C. Wright

Small Business Finance Institute

Q. Where does working capital come from?
A. More places than you might think!

Stepping Up To Business
  • Free business counseling onsite
  • Seating is limited
Learn how to improve funding for your business operations on March 16th.
Don't miss STEPPING UP TO BUSINESS, the education event for small business owners to learn key insights on how to finance your business.
Full Event registration $100.
For more details and registration, click
www.SBFI.org/registration
Other topics:
Start a Business with No Money - Bootstrapping to Success
Financial Statements 101
SBA Loan Programs
Strategies to Finance Working Capital
Navigating for Angel Capital
Managing Business Cash Flow
Micro-Finance Alternatives | Not Just for Micro-Businesses
Read More

Friday, March 4, 2011

Make Mine a Million (M3) program

I received the following email, which I thought I'd pass on:

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Wednesday, March 2, 2011

Points to Consider for Financing Commercial Real Estate

I listened to a commercial real estate webinar on Loopnet and thought I'd share some of their takeaways and my own with you. Most small and medium business owners do not pursue purchases of commercial real estate unless they are a commercial real estate or related entity or they are considering or have purchased the property that their business resides in. There are a few who may pursue commercial real estate investment as a separate asset class to diversify their investments. This blog focuses on small business financing and not personal, so this blog entry is targeted to those who purchase office, industrial, or other commercial property to house their respective businesses.

If you are currently pursuing financing for a commercial real estate deal, make sure you do the following:
  • Be realistic in specifying and designating expenses. Be conservative in your estimates on income, ie., your projections.
  • Be clear and upfront about your personal financial position. If you are using other commercial real estate as an asset, make sure you are realistic about the current value of that real estate.
  • Underwriting standards are tighter. The focus of any lender or investor will be on debt service coverage and the associated debt service coverage ratios. Make sure the property you are buying will generate the operating and net income to have coverage and ratios well within the minimum for that lender or investor.
Who's funding commercial real estate investment?
There are still a number of banks funding owner-occupied commercial real estate. Therefore, if you are a profitable, cash flow positive company looking to purchase the building you operate from or will move into, and you have been in business for at least three years and have the financial records to prove this, you have a number of banks and other options to choose from. For those pursuing commercial real estate as a separate investment, options still exist. These include insurance companies, banks with foreign parents, and the "too big to fail: banks.

  • Insurance companies. These never really left the commercial real estate market. Why not? Insurance companies continually bring in money through insurance payments made by the insured. Since insurance companies invest large sums of money on an ongoing basis, they allocate portions of their portfolio to various types of investments. Most insurers allocate a portion of their portfolio to commercial or industrial real estate investment. To take advantage of the the revaluation taking place in the market, insurance companies currently appear to favor commercial real estate purchased out of foreclosure or bankruptcy or some other type of restructuring.
  • Banks with a foreign parent . These have been able to balance their loan portfolios globally and shift assets around from the US to elsewhere. Thus, in general, they've largely been able to mitigate their exposure to poor or underperforming US loans.  
  •  "Too big to fail" banks. These banks wrote down a lot of their non-performing or underperforming real estate assets. They are also continuing to work within their loan portfolios to manage assets to prevent an all or nothing scenario. Inquire about the loan portfolio exposure on a regional level for these national banks to ensure that they have tolerance for your particular deal.
If you want to know more about the commercial real estate market in your area, the market and property dynamics, and what's available for sale, check out Loopnet. I'm a big fan and have used them a lot in the past.
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