1 Financing Your Already Established Business Georgetown University Alumni Career Services Keith Kohler, K² Financing with special guest Ivan Abrams, Abrams & Company, Inc.
2 Introduction K² Financing Financing: focus on debt origination Services: strategy; CFO for rent Making the Numbers Work for You Why K²? Your Trusted Advisor (K2 is the world s second highest peak after Everest) Words matter, but numbers take you there and are the ultimate measurement Projects
3 Objectives and the Goal Offer relevant information and perspective to assist you in Preparing yourself for the financing process Understanding requirements/criteria for seeking/obtaining financing from within and via outsiders Assembling/creating the right documents/materials to make the case Understanding typical economic deal terms The Goal: The application of these lessons to your business to result in successful financing
4 Before You Seek Any Financing What is your level of financial acumen?? 0. Complete focus on product or idea 1.Simple calculations e.g. costs, expenses 2.Embrace your financial statements 3.Establish a financial rhythm 4.Understand the outsider s view 5. Make the Numbers Work for You
5 Who Are You Now? Future? Your Background (Family, Education) Your Relationships (Status) Your Professional Experience Your Experience to date with your current business Your Successes and Your Failures Your Personality / Attitude / Outlook Your Attitude towards Risk Your Character / Reputation Your Network / Ability to Network Ask yourself and someone who knows your company
6 Who Else is Involved? Who else makes decisions or influences your decisions, now and into the future? Spouse / S.O. Business Partner(s) Trusted Advisors, Your Network Parents / Key Relatives Children What about their values? Objectivity? Ethics?
7 Base level Knowledge Know Thy Market Customers, Competition, Major Trends Know Thy Self Your Role/Responsibilities, Others, Advisors Know Thy Purpose Mission, Vision, Values Source: Robert Craven, Launch Natural
8 Financing from within : You Knowing Thy Market, Thy Self, Thy Purpose is often enough to obtain financing from within It s all about you first Savings Credit Cards Life Insurance Home Equity Lines of Credit Assets (Liquid and Illiquid) Stocks, bonds, real estate The danger of IRAs» Stiff penalties for early withdrawals» Cannot be used as pledged collateral Future Earnings Salaries, fees Inheritances
9 Financing from within : Others Knowing Thy Market, Thy Self, Thy Purpose is often enough to obtain financing from within Second source: Back to your influencers Spouse / S.O. Business Partner(s) Trusted Advisors, Your Network Parents / Key Relatives Children Ask Yourself: Are you willing to risk, and possibly lose, any of these relationships?
10 Financing from within : Others Analyzing the secondary source Consider the same questionnaire from earlier Beyond money, what other value or contribution? Knowledge / Experience / Network Help with customers or with vendors Will they want to be involved? To what degree? What is needed to close the deal? Handshake Deal? Documentation?
11 Financing from within : Others Structuring the Deal The Equity Dilemma The valuation issue: almost all early stage businesses (under $1M or with less than 2 years in business) are hard to value The qualification problem: Companies under $1M will often not qualify for debt financing, so equity may be the only option if your own resources or friends / family financing is not available Loans are usually the best option Terms (interest rate, payback schedule) must be offered according to risk profile Ask for a grace period before repayment Avoid personal guarantees or liens if possible The middle ground: Convertible debt A loan that can be converted into equity shares Usually converts at the closing of next round of financing Offers first investors discounted shares
12 Financing from within : How far? How far will financing from within take you? Must have perfect understanding of Total amounts available Timings of the amounts / contributions Your payback schedule Can you go back to those first funders a second time? More? Renegotiate with them for better terms? Moving from within to outside Must plan ahead long before starting the process Must have a strong understanding of your company s cash requirements
13 Cash Requirements Cash Requirements Money needed to operate and grow the business Lack of knowledge of, or planning for, ongoing cash requirements is a major reason why businesses fail Must understand your supply chain fully Get full knowledge of the payment terms of your suppliers and also your customers Is there seasonality? Example: promo/price reduction periods required by distributors several times during the year (UNFI)
14 Moving from within to outside Equity vs. Debt Sources Major Difference: Debt requires repayment obligations; Equity paid at sale or at next round of financing Timings: Debt can be paid down over very long terms, or be interest only throughout; equity requires an exit typically within 5 7 years Characteristics of outside sources Broader and deeper level of scrutiny Fitting into their exact criteria More about the numbers, less about you (or your product) Risk and Return Often very hands on Equity: It s my money Debt: Reporting requirements; managing the receivables
15 Outside Sources: Equity Angel Investors The logical, first step after all sources from within Invest their own funds Typically seek investments that will return 10x Groups found in major cities Like to be close to their investments Venture Capitalists Come in after angels and financing from within Invest the pooled money of others Typically invest in stages Private Equity For later stage companies
16 Typical Requirements: Equity Proof of Concept Consumer Acceptance: Loyalty Trade Acceptance: Velocity Are you keeping track of these right now?? Should track and review at least monthly Gross Margins higher than market Strong management team with proven successes in similar/relevant industries and demonstrated success in the current venture Minimum revenue levels: Angel investors: $500K to $1M Smaller Funds: $1M to $5M Larger Funds: $5M to $10M or greater
17 Outside Sources: Debt Bank offerings Lines of credit Term Loans (equipment, real estate) SBA Loan Programs (More attractive than ever) SBA guarantee fees currently waived (saves 2% or more) SBA Express: up to $1,000,000; decisions within 2 days SBA Micro: up to $50,000 The funding bank applies its own underwriting criteria; the SBA is just a guarantor Will sometimes subordinate their position to allow for future financing Specialty finance products Asset based lending Purchase order financing Factoring
18 Typical Requirements: Debt Commercial Banks Minimum two years in business Repayment ability (based upon profitability and/or cash flow) Quality of collateral Personal Guarantees Other Debt Funding Sources Quality of accounts receivable (credit risk) Overall balance sheet strength (profitability not always required) Minimum revenue level typically of $1M $2M Personal or Validity Guarantees
19 Equity vs. Debt: The Bottom Line Debt is always cheaper than equity Debt is best used for operating expenses; equity is best used for capital or larger expenses Equity will require you to scale your business more quickly and drive towards the exit Obtaining equity investment requires infinitely more preparation, effort, and time So how will you gain the interest of equity investors?
20 Focus on A, B, C, D, E, F, G Accuracy (100% Proof) Brevity (The Elevator Speech ) Clarity (Understood by others) Depth (You ve examined all angles) Energy (It feels right, your enthusiasm) Focus (It s what you do, it s who you are) Greatness (Are you the next Vitamin Water?)
21 Your updated Profile(s) The Basics: All the P s Projected Profit and Loss ( Pro Forma ) The 1, 2, 3 rule The Plan or Presentation Your objective: Develop the story (ABCDEFG) that explains exactly how you will make your numbers Your product or your idea is SECONDARY Pretty Pictures, Print Materials, Packaging
22 Profile Profile Level 1 (Relevance) Old School Resume: Word Doc, Attachment New School Profile: Linked In, Other networking sites Profile Level 2 (Expanded Credibility) Website / Blogs Twitter / Facebook / YouTube Profile Level 3 (Recognized Expertise) Books Articles / Interviews / Speaking Engagements / Webinars Profile Level 4 (Transaction Success) Managed, grew, and sold a business with good returns Important: What comes up (first? anywhere?) when your name is searched? Can you influence it?
23 Profit and Loss Key Components Revenue (Income) Cost of Goods Sold ( COGS what to include?) Gross Profit (Revenue COGS) Expenses (Be careful of personal expenses) Net Income (Profit or Loss) Key Metrics (must be tracked monthly) Gross Margin: You versus the Market Expenses: Under control and in context Revenue: Building blocks, concentration Profitability: Only relevant over time Detailed notes on results to date and expected future results.
24 Plan or Presentation Either PDF Summary or Powerpoint Financial model (never PDFed) Suggested Contents Executive Summary: Why invest in the company and you? Market Overview Highlights to Date (Evidence of Success) Why your product/service will win Competitors Financial Model with use of proceeds and notes Discussion on Risk Revenue Growth evidence (VELOCITY) or strategy Management Team Product Descriptions, Benefits and Features Timelines / Milestones
25 More Docs for Debt Providers Accountant reviewed tax returns Accounting software good enough for analysis, but not for closing a deal Accurate Interim statements Balance Sheet Profit and Loss Aging Accounts Receivable Report Aging Accounts Payable Report
26 Deal Structure: Equity Can vary dramatically based upon risk profile and company valuation Term Sheets / Contracts will contain the following economic terms: Investment amounts and timings (tranches) Types of Stock (common, preferred) Warrants: ability for investors to purchase more stock into the future Valuation: pre money and post money Options for existing and future managers Distributions (how participants get paid)
27 Lines of Credit Deal Structure: Debt Avg. base interest: prime prime +3% variable Annual fee (~1%) and unused line fees Be careful about covenants Asset based lending Avg. base interest: 8% 12% variable Annual fee (~1%) and handling fees (~1%) Factoring Avg. factoring fee: 1.5% 2% per 30 day period
28 Conclusions Seek the optimal mix of debt and equity To do this, you must know the options / instruments available to you and Their requirements Their structure When you qualify for them Finding the right financing partners Shop the deal Do your diligence (as much as they do with you) Deals must be managed actively Always seek more favorable terms if you qualify
29 Some final thoughts You should be in a good position to qualify for outside financing if you reach $1 million in revenue and minimally break even results If business or personal circumstances or relationships change, you must adjust accordingly and quickly Particularly if it can threaten your ability to comply with requirements of an equity investor or a debt instrument You must know this for you, your business partner(s), your funding sources, and anyone that has a material effect Keep trusted advisors close, especially in those subject areas where you feel least skilled Develop the right support network to keep you strong, focused, and in good physical, mental, emotional, and spiritual health
30 Some final thoughts Get to level 5 as fast as you can 0. Complete focus on product or idea 1.Simple calculations e.g. costs, expenses 2.Embrace your financial statements 3.Establish a financial rhythm 4.Understand the outsider s view 5. Make the Numbers Work for You
31 Resources Entrepreneur, Inc., Fast Company LinkedIn Groups Target those in your industry and ones discussing investments (such as Deal Source) Businessinsider.com, venturehacks.com and local SBA offices Local Chambers of Commerce CPAs Attorneys (with knowledge of structuring partnerships or closing on financing)
32 Can I help you with Into the Future financing or preparing yourself for the process? strategies / coaching to help improve profitability, decision making, or operational results? Connecting you with my network for help with Sales? Legal? Branding? Technology? Others? The starting point: a review of your core financial statements (Bal. Sh., P&L, A/R, A/P) And for you
33 Thank you for your participation! Keith Kohler, K² Financing