Growth Financial Options
It has been a 14 months since I had written my last Blog on the above subject; however, I feel compelled to refresh the subject as so much has happened since that first Blog; beginning with why people in business wait so long to call a business doctor (alias consultant) when they have been experiencing serious symptoms for months or even years?
So rather than going into a textbook explanation of the WHY’S and ANSWER’S to address these problems; I thought it best to describe the actual ILLNESS and SOLUTIONS for each case we encounter, beginning with the first case below ( sort of a match test to see what you the reader may identify with).
CASE 1: START UP to GROWTH
This Founder Entrepreneur comes to us with a sterling new invention which will revolutionize the industry and has developed a technical team that has brought their invention to “Proof of Concept” status, throughout the four years he has been raising seed money from friends and family, and now he wants to raise even more money to continue his research or he and his invention will go down in flames having missed the strategic market window, which is closing fast.
His problem is no more working capital to continue-What does he do? What are his options Where does he go to find solutions?
Fortunately for him he came to the right place as most of my team have been there and done that ourselves and know of what we speak.
One of the first questions we ask is, in addition to determining if the invention is patented or copyrighted and assuming it is one or both, how badly he wants to keep control of his technology or is he amenable to bringing in equity partners or is he “OK” with giving up control of his company as answers to these questions determine which direction we should take him/her.
(This is like a doctor asking his new patient if he/she is allergic to certain drugs or other allergies before exploring or determining a cure.)
Once we know whether our patient, now client, has no known reaction as it relates to founder control then we are ready to offer our suggestions, which covers a smorgasbord of financial options (re: our website for details/www.mitchelletteandassociates.com); such as, equity or debt in the form of refinancing and/or restructuring the current company’s debt or finding an investor(s) or even a buyer for the business, perhaps a synergy partner or seek-out contract manufacturing if applicable and if there are hard assets in the company such as machinery and equipment, then there are finance companies that do that kind of financing. These options are just for starters as there are many more to explore and like a doctor who administers different drugs, we do this until a solution is found or we keep on searching from our arsenal of weapons from which to choose.
FYI: Just for the sake of options that are available for this situation and other similar cases, all involving financial restructuring in one form or another, let’s list the weapons we can employ:
Traditional Banking-Banks with a special commitment to entrepreneurs or start-ups; of course, they will want extra-collateral and personal guarantees even from others that may not be involved in the business but will pledge their assets on behalf of the Founder.
Non-traditional Banking: This group is commonly known as “HARD MONEY LENDERS” and charge much higher interest rates than traditional banks but are not as strict in the COLLATERAL area, which is why their rates are higher but they do have some similar loan requirements as traditional banks, which needs to be explored before any closing.
Asset Based Lenders: This group of lenders are focused on accounts receivables applying certain percentages to eligible receivables, if they exist, or no need to talk to them unless the founder’s company has inventory, which under certain circumstances could also qualify for a loan percentage and if the applicant has machinery and/ or equipment, that to can be leveraged in the loan process.
Startup Investors: This group, which is growing consists of wealthy RISK TAKERS (a la Shark Tank) who for the right deal and project will make many kinds of offers; some too onerous to accept and other offers that make sense and can launch the IP of the founder into major markets, thus insuring the perpetuation of the Founder’s dream. This approach depends largely on seeking a Consulting Firm (like ours) with a large network of “SHARK-TANKERS” to contact.
Purchase-Order Financing (POF): there are also companies that specialize in advancing money against valid yet to be shipped and converted into a receivable, order based on the quality of the order; for example, the Founder’s company makes a product that a major buyer/customer orders and the Founder’s company cannot fill the order because they do not have the cash or credit to order the material to fill the order. Then the POF entity will advance the cash for the Founder’s company to buy the material and take the order as collateral, relaying on the product shipment to convert to a receivable, which becomes the ultimate asset to justify the advance.
Equity or Hedge Firms: This is yet another group to contact as they have their own standards for investing and are, in some respects, similar-to SHARK-TANKERS and they are well connected to their own money sources, if the concept is worth pursuing.
Contract Manufacturing: As an inventor with a patented idea and short on operational cash, you may develop an interest to contract your work out to a vendor, who has the equipment to build your product and drop ship it to your customer or ship to you, the founder, and you then can ship to you customer if you want your customer to think you produced the product in your own facility. This is a great and innovative way to avoid any kind of financing to purchase your own equipment and hire and train employees to build and ship your product. (we do this a lot with our early stage inventors, even as a precaution for them not to go through the exercise to build an in-house operation until the Founder’s invention/concept is market tested, which makes it easier for the founder to raise money once the proof of demand is established in the market).
Licensing: This is a great way to build and market your own company or concept as the advantages are numerous from not needing any serious working capital to build an in-house business to just sitting back and collecting your share of the licensing revenue, known as ROYALTIES while sitting on a beach somewhere reflecting on life with a toddy in your-hand.
Synergy Partnering: This is how I started my first company. I had the idea but needed a machine shop to produce it, thus visiting many shops until one of the shops I visited needed a businessman to help grow the business. So, after numerous discussions we partnered into a single entity, which worked-out perfectly I provided what he needed, and he did the same for me. It was a good brain trust as I knew nothing about milling and he knew nothing about business, which is often the case when trying to find a synergy partner, just like finding a marriage partner.
OK, the above options depend on the experience and knowledge of the consulting firm you engage and will apply to the various case studies that we will use as examples of what option(s) from which to choose in the following exercises.
Reprinted from Previous Blog:
When is the best time to hire a Consultant? That question looms over just about anyone in business today, beginning with the pre-startup, note I said pre-startup, because that is when the structure of the company and the feasibility to fund it must be considered to ensure a smooth transition into the many issues needing resolution to successfully move the startup forward.
There are many issues to consider, among which is the legal structure, maybe a Delaware Corporation, a limited Liability Corp, S-Corp, C-Corp and even incorporating in your own state? Officers, Board of Directors, Board of Advisors (preferred), authorized and issued Stock, Incorporator’s equity position and what percentage of the company the incorporator is willing to exchange for raising money in the many forms available, with which to do so; such as, straight equity for cash, debt to equity conversion options, loans and even in-kind exchanges and/or sweat equity et al.
It is better to formulate all the inner-structure of the company in the beginning than undo the mistakes usually made early by the entrepreneur before he or she hires a consultant; but wait, most of the above is the work of an attorney and necessary; however, the role of the consultant at this early stage is to put the structure of the startup in perspective, usually including a professionally written business plan that will serve as a roadmap for the startup at which point the consultant will most probably recommend an attorney or law firm, with whom they have a rapport or professional relationship to execute the legal documents as referenced above, including various investment documents for any forthcoming fund raising, which the consultant will quarterback, using his/her network of potential investors and contacts.
FYI: It is very important that the consultant and the attorney understand each other’s role and work together as a team for their mutual client, since any disagreement in legal structure and/or fund-raising campaign must be amicably resolved to effectively move forward within the total compliance of the law applicable to the fund-raising effort; such as, SEC regulations & restrictions regarding qualified investors et al.
Then, because of the fact we are dealing with a startup, we probably have an invention or an idea that needs to be patented, enter the need for an attorney to file for patent protection. This is an early stage must for the typical startup before they even begin to raise funds so as not to give-away their idea and lose their market edge.
The above, not only takes some seed money, usually raised from family and friends, for the initial payment to a consultant and attorney, but also, takes time (usually three months) before the incorporator sees the first dollar raised for operations.
Your startup is now a successful company, perhaps with three to five years of financial history under its belt and needs growth capital to expand thus, they may want to rehire their original consultant and law firm, which would be preferred, or seek new guidance, as they may have outgrown the advice of their original advisors, either way, they may be considering a merger or acquisition to jump-start the growth rather than wait-out internal growth, which would take much longer to achieve, which opens-up a new set of issues beginning with finding a consultant with M & A connections, followed by a competent law firm equipped to handling M & A’s.
The consulting firm will navigate the client through the business side of an acquisition; such as, market and financial feasibility, including valuations and may even require the services of an accounting firm, at some point; it is also important to know that the consulting firm has a broker component for any closing between M & A candidates, in addition their law firm.
Of course, our growth company has options, other than an M & A; such as conventional bank and/or individual financing, synergy partnerships, bridge lending, just to name a few and should rely on their consultant for contacts and implementation.
Typically, this group has a positive history of success that temporally has resulted into a cash crunch due to unfavorable market conditions, poor management decisions, cessation of bank credit, over-inventory or just too much debt and no extra borrowing capacity.
This situation may be a candidate for selling, though painful even liquidation, as companies that fall into this category are literally, but not always, “birds of prey” open to hard money lenders with high interest rates or private individuals that want more than just an arm but a leg or more-you get the idea, not pretty; however, there are plenty of instances where these companies make it through and become successful once again. It just depends on the structure and how good the consultant and law firm are in structuring the right interim financing.
BUY SIDE INVESTOR OR SELL SIDE SELLER
Both groups would be best advised to interview and hire a good Consultant/Broker, who has the network and the moxie to link the connections to get the job done. The consultant should also have the experience to evaluate and recommend the right buy or sell side structure, since it is not just finding an entity to buy on behalf of the buyer client or the sell on behalf of selling client but to find the right match for both, which is not an easy task and requires a proven consultant/broker to accomplish the mission.
MITCHELLETTE AND ASSOCIATES, LLC
2927 DEAN PKWY, STE 300
MINNEAPOLIS, MN 55416