Financing 101 (Part 2): Taking a Closer Look at Equity Financing

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Equity Financing - taking a closer look

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Finding capital for your company is key to its continued success and to its growth. Financing allows your business to take the next step or move to the next level. While borrowing money or taking on debt is one way to get the capital your company needs, it’s not the only option.  Businesses also often choose to receive equity financing, either along with or instead of taking on debt. We discussed the benefits and risks of debt in a recent post. Today, we’ll take a closer look at the advantages and drawbacks of equity financing.

The Source of Equity Financing

One of the major differences between debt and equity financing is the source of the money. Debt financing comes from a lender, such as a bank. Equity financing comes from an investor in the company. The relationship between a business and an investor is considerably different from the relationship between a bank or lender and a business.

Since an investor is taking part ownership of the company, he or she will generally be more involved in working with you and in overseeing certain aspects of the business. The investor now has a stake in your business, which usually means that he or she will be more inclined to see it succeed.

Benefits of Equity Financing

The relationship that develops between you and the investor can be seen as an advantage of receiving equity funding. Often, an investor has ample experience, not only investing in business, but also in understanding the ins and outs of the market. Some investors are more hands on than others and may offer your company guidance as it grows. Whether an investor is very involved in your business or not, most understand what a company needs to grow and the time it takes to develop a business or to take the next step.

Equity financing can also help boost your company’s reputation. If one investor decides that your service or product is worthwhile or that it has the potential to be profitable, other investors might also take interest in what your business has to offer. Interest from multiple investors not only means the potential for additional financing. It also means the potential to build and develop strong relationships in the business world.

Risks for Business Owners

While there are certain rewards when it comes to working with investors, there are also some risks. Finding the right investor can take some time. It’s more about building a relationship with the source of the financing than it is about successfully completing an application. There’s a risk that an investor and a business won’t be a good match, which can create conflict down the road.

While you don’t have to make monthly payments to your investor the same way that you make to a lender, there is an expectation that your company will produce a return on the investment. Not establishing an expectation for that return with the investor before entering into a financing agreement can create issues if your business is successful or if it encounters difficulties. Making sure that you and the investor are on the same page in terms of expectations is one way to reduce the potential for conflict.

If a business and investor can’t come to an agreement, there is a way to end the relationship. That involves one or the other buying the other out. Buying out an investor can be expensive for you, as you’ll usually need to pay more than he or she originally invested in your company to get that share of the business back.

Deciding between debt and equity financing isn’t necessarily an either/or choice. Your company might benefit from some debt and some equity or more equity than debt. The decision might also depend on how established your business is or where it is in terms of growth.

Working with a virtual CFO and the team at New Direction Capital means that your business will be able to make the right choices for it when it comes to finding capital and when it comes to building relationships with investors. If it is time to take the next step and you are looking for ways to grow, contact us for more information today.

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Things to Consider When Acquiring a Business

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There are several reasons why a business might consider purchasing another one. Your company could be interested in buying out a competitor or in purchasing a company that performs a service that complements the services offered by your business. Your business might be thinking of branching off into another industry, and acquiring a company with a proven track record provides a reliable way to do so.

The keys to a successful acquisition lie in doing a fair amount of research into the company first. You should know what you’re getting in the acquisition. Whether this is your first acquisition or not, the team at New Direction Capital has years of experience in acquisitions and can help you through the process.

The Story of the Other Company

When acquiring a company, whether it’s a competitor, a supplier, or a company offering a related service, it’s helpful to know the full story of the company, which means looking at the hard data and facts about the company as well as at the way people in the community perceive it. Joining your business with another business that has a negative reputation in its community can be problematic, for example.

Along with examining the company’s reputation, you also want to look at the type of business it does. Does the company have an established, loyal base of customers?  Is the industry it is in on the rise or is it a declining industry? Are there a lot of other companies in the area offering the same or a very similar product or service?

Its Financial Outlook

Part of researching a potential acquisition is learning more about the financial outlook and status of the company. The current owner of the business should provide you with tax documents, accounts receivable and payable, and profit and loss statements for the company. You also want to review the debts of the company and to take a close look at the structure of those debts. If a lender has placed a lien on the business or has the ability to seize the company’s assets if the business owner falls behind on the debt, that can be a red flag.

It’s also important to take a close look at the tax records of the potential acquisition. If the current owner has fallen behind on either payroll taxes or state sales tax, you might end up being responsible for those taxes when your company acquires the business. It’s a good idea to get confirmation from the tax authority that the current owner has paid up on taxes before moving forward.

Clash of Cultures?

Businesses differ not only in what they create or offer, but also in how they go about practicing their business. If you plan on merging your current company with the business you acquire, it can be worth taking a look at the cultures that exist at that company, compared to your current business. If your business is very formal, but the new company is very laid back, how will you bridge the gap between the two businesses? There’s also the issue of having your current employees clash with the staff of the company you’re acquiring. While your business cultures don’t have to be identical, looking for similarities or coming up with a way to work around major differences is an important part of a successful acquisition.

What Will You Get?

When you acquire a company, it’s essential that you understand what you’re actually acquiring. You might be purchasing the assets of the company, which would give you the debts and inventory of the company, but not the actual shares of the business or the entity itself. In that case, your current business could absorb the assets or you could create another business entity. If the deal is structured so that you’re purchasing the business entity and its stock, you’re buying the assets of the business and the actual business itself.

The way the deal is structured, whether it’s an asset purchase or entity purchase, determines the amount you pay in taxes. A virtual CFO can help you understand the different types of deal structure and the one that provides the most benefit to your company.

To learn more about the process of acquiring a business and the steps you can take to make an acquisition successful, contact New Direction Capital today.

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Do You Know What Investors Want?

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When you borrow from a lender to finance your business, the bank can generally rest assured that it will get its money, with interest, in the form of monthly payments. When your company receives equity financing from an investor, he or she usually expects to recoup the investment, and then some, when the business either goes public or is acquired by a larger company. Since investors have a lot more at stake when they supply funding to a company, they generally are a lot choosier than a bank or lender about who they work with.

Building a relationship with an investor is a lot more complicated than simply filling out a loan application. You want to show the investor that your business has what it takes to not just survive, but also thrive. New Direction Capital can help you figure out what investors want and how to give it to them.

Something Unique

Your company doesn’t need to re-invent the wheel, but it should be doing or offering something that stands out in a crowded field. Ideally, an investor will be able to see what makes your company different without you having to give a detailed  explanation. You want your business to be exciting to an investor, too.

Details and Planning

A great idea, product or service is just the start. An investor wants to see the bones behind the meat of your business, or the structure that’s holding it all together. That means you’ll need to have a concrete business plan to show to potential investors. Your business plan should include information about your company’s competitors and what makes you different from them, information about your customers, and financial information.

Show Them the Money

Financial information should include how much you are asking from the investor, and the percentage of the company he or she will get for that amount. For example, you might be asking for a $3 million investment, for which you’ll give the investor X percent of the company. The amount you ask for and the size of the company you offer in return lets an investor see if you have a clear understanding of what your company is actually worth or not. The financial part of your plan should also include projections for the company. You can provide several types of projection, such as “expected,” “best case,” and “worse case,” so that an investor has a clear idea of where things could be headed.

Strength in Management

The team of people running your company can make an investor decide to work with you or chase him or her away. You want to show the investor that you have a strong management team who have business experience and expertise when it comes to the product or service your company offers. For example, if your business offers medical services or advice, an investor will want to see a doctor or other medical professional on the team somewhere. If your business is coming up with a way to revolutionize the restaurant industry, someone on your team should have experience owning or managing a restaurant.

Past success doesn’t guarantee future success, but it can be a good indicator. Investors usually like to see some evidence of past success in the management team, as it gives them a level of assurance that your business has some idea of where it is headed and what it’s doing.

Show Them the Door

An investor does want to make back his or her money at some point. You can help the investor along by presenting an exit strategy, when you make the pitch and present your plan. The exit strategy you choose, whether it’s going public, being acquired, or having someone buy out the investor, needs to make sense for your business.

Even if your company is well staffed and has a strong management team, you might need a little extra help before presenting to an investor. The virtual CFO services from New Direction Capital can help you put together a business plan to attract and appeal to investors and can help you figure out a potential exit strategy, so that everyone is happy.

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Financing 101 Part 1

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Part of running a successful business is learning to make use of capital, or assets, in a way that makes the most sense for your company. Financing is one way for a company to raise capital. Typically, there are a few ways for a business to get capital from an investor, either through debt financing or equity financing. Today, we’ll take a closer look at debt financing, explaining what it is and why your company might consider it.

What is Debt Financing?

Debt financing is quite simply borrowing money or taking out a loa

n to fund your business. Any money your company receives from a bank or lender needs to be paid back. In most cases, the business also needs to pay interest on top of the original amount borrowed.

If your company obtains debt financing, it doesn’t necessarily need to work with a bank or other traditional lender. It’s also possible to borrow money from individuals, such as private investors, or  in some cases, from people with whom you have a close relationship.

Debt financing can take several forms. Your business can borrow a significant amount of money and pay it back over the course of many years. A business can also borrow small amounts and pay them back quickly or take out a line of credit, which allows it to borrow an amount, pay it back, then borrow more.

Benefits of Debt Financing

Borrowing for your business can actually have a number of advantages. First, it gives a company an influx of capital, which may be much needed. Generally, your business will have an idea of how much it needs to pay towards the debt each month, so you can work debt repayments into the budget. The only time when the payment on a debt might change from month to month is if the loan has a variable interest rate.

Another benefit of debt financing is that you and other leaders in your company retain control of the business. You don’t have to worry about making company decisions to please an outside investor, as the lender’s primary concern is usually simply getting its money back.

Finally, another advantage of obtaining debt financing is that you are able to deduct the interest you pay on the loans from your company’s income as a business expense. Although the business still needs to pay the interest, it won’t also have to pay income tax on it.

Potential Risks

While there are rewards to borrowing for your company, there are also a number of risks. A pretty considerable risk is that you will take out loans that are larger than you can afford to pay back or that you will borrow a substantial amount and that making the payments disrupts your business’ cash flow enough that you have trouble meeting other payment obligations.

A lender doesn’t gain control of your company when you borrow money from it. But, it might require you to put something valuable up as collateral. Some business owners make the mistake of using a personal asset as collateral, such as their home. In that case, there’s the risk that you will lose a house if your company defaults on the loan.

Having too much debt can also make investors consider your business too risky to invest in, which can make it difficult to obtain other types of financing. If the company does have trouble or end up shutting down, the debt doesn’t vanish with the business. Often, the owner or owners of the company remain responsible for paying back the debt.

A lot is at stake when it comes to financing a business. The services provided by New Direction Capital can help your business find the ideal balance when it comes to funding. If the difference between debt and equity financing has you scratching your head, or you’re concerned that you’ll borrow more than your business can afford, contact us today to find out how our virtual CFO services can help you.

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Will Forming an Alliance Help Your Company?

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The Walt Disney Company and Coca-Cola, Barnes & Noble and Starbucks, and 20th Century Fox and Paramount Pictures. What these companies all have in common is that they formed alliances or strategic partnerships and reaped the benefits of doing so. The partnership between Starbucks and Barnes & Noble has meant that fancy coffee is now served in bookstores across the country. The partnership between Fox and Paramount led to the creation of Titanic. Disney and Coke have been cross-marketing each other’s products for more than 70 years.

Forming an alliance isn’t something that only helps big companies. It can also increase the value of a small or mid-sized business. If you are thinking about partnering with another company to expand your customer base or increase your company’s value, New Direction Capital can help you pick the the right partner to provide the most benefit to your company. When forming an alliance, it’s essential to weigh the pros and cons of doing so, before you decide to move forward.

Expand Market Share

One of the big benefits of forming an alliance with another business is that it allows you to expand your share of the market. For example, your company might partner with a similar company in another state so that you can both reach a greater number of customers. Your company might join forces with a business that offers a complementary product or service, as was the case with Barnes & Noble and Starbucks working together. With cafes in bookstores, people have a place to relax and enjoy a cup of coffee while they read a book or magazine they just purchased.

Cut Costs

Forming an alliance with a company similar to your own allows you to share or split the costs of offering a new product or service. That was the case with Fox and Paramount when they teamed up to produce the movie Titanic, which was the most expensive film made at the time. Without the partnership, the cost to make the movie would have  been too great. But, with the partnership, the studios were able to produce a film that would go on to gross three times its initial cost.

Choose Your Partners Carefully

While a strategic alliance might be the best thing for your company, one of the potential risks of it is that it might simply not work out. You can cut the risk of having a partnership fall flat by taking your time choosing a business to work with and seeking the advice of a virtual CFO, who can help you weigh  the pros and cons of working with a specific company.

When choosing a company to partner with, it helps to look at a few different criteria. For example, is your company on the same page strategically as a potential partner? If you want different things for your products or ultimately have different goals, the alliance could fail.

Another thing to look at is the culture of your two companies. If your business is casual and laid back, it might clash with a company that has a very formal business culture. If you value sticking to deadlines, you might have a difficult time partnering with a business that is more relaxed about completing projects on a set schedule.

 Alliance Can Affect Your Reputation

Although the right alliance can make your company more well known, the wrong partnership can do more harm than good in the end. If you join forces with a company that has a history of bad customer service or of not delivering on its promises, that reputation can rub off on you, even if your business continues to offer stellar services or reliable products, which is another reason why you want to exercise extreme caution when picking a partner.

If you’re seriously considering a partnership or alliance, let New Direction Capital help you see if it’s the right step for you. Our team can guide you to the right questions to ask to see if an alliance will be beneficial for both parties. To learn more, contact us today.

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