Raising Capital Archives

Small Business Acquisitions and How to Finance Them

August 5, 2021/in Operations, Raising Capital/by Vince Calio

Acquiring another business can be a complicated task, but one that could very well be worth the effort to ensure the survival of your small or micro business.

The time may also be right for considering an acquisition, as interest rates are low, making borrowing for an acquisition relatively cheap. Additionally, according to the most recent NFIB Small Business Optimism Index, the net percent of owners raising average selling prices increased 10 points to 36%, the highest reading since April 1981.

While deal volume is not back at a pre-pandemic level, according to the NFIB, sectors such as liquor stores, home improvement businesses, e-commerce sites, medical businesses, manufacturers, and distributors are seeing high activity.

Reasons to Consider an Acquisition

One reason you may consider acquiring another business is that, now that we are (hopefully) in the waning days of the COVID-19 pandemic, your business may very well have taken a financial hit, and you may need to scale up by purchasing a similar business if you wish to survive going forward.

Purchasing a similar business would give you an entirely new stream of revenue and a new pool of clients, as well as increase branding in your market – even if you’re a microbusiness such as an independent restaurant or retail store owner. If you’re an accounting or law firm or other type of business services firm or medical practice, it may even increase your client base to other regions of the country, depending on the location of the business you are seeking to purchase.

Another potential reason to make an acquisition is that you may want to complement your business by offering additional services. For example, if you own and operate a construction firm that specializes in building houses, you may want to purchase a company that specializes in masonry and paving work so that you don’t have to subcontract that work whenever you build a new home.

Due Your Due Diligence

If you’re interested in making a strategic acquisition, your first task will be to work with an M&A advisor or even an accounting firm. While most banks are not interested in M&A advisory work for small businesses, there are several advisors that do specialize in handling acquisitions for small to medium-sized businesses (SMBs).

Talk to your advisor about:

Why you want to make an acquisition;
What type of company you are seeking to purchase;
The location of the company in which you wish to purchase;
The feasibility of merging your company’s balance sheet with the acquired company;
The value of similar businesses in your industry and in your geographic location;
A realistic amount you wish to spend on an acquisition;
The logistics of merging your company with another, and
How to fund the acquisition through debt.

A reputable M&A advisor should be able to do the due diligence for you and find you a list of companies in your area that may be a compatible target for an acquisition based on their business models, revenue, management structure and other factors. The advisor should also come up with a fair value of the acquisition target based on the financials of the target business.

Create a Combined Business Plan

Once you and your M&A advisor has found an acquisition target that meets your criteria and agrees to be acquired, you will have to produce new short- and long-term business plans for your new, combined entity in order to get financing to fund the acquisition. The basic ingredients of a business plan for a newly combined business typically include:

#1 Creating a New Management Team, Staff

Discuss with the head of the company that you are looking to acquire the logistics of combining your staff. Start with who will oversee the new company, and what functions each of you will have. If you are a microbusiness and the new company will only have 6 or 7 employees, then combining your respective workforces should not be too challenging. If your newly formed company will have 20 or more employees, you may wish to create new departments with new department heads, with each serving a different function.

Staffing redundancies, such as two people from each respective company essentially serving the same purpose, may be a red flag in the eyes of a prospective lender, so make sure your new staff structure is as efficient as possible. These factors will be crucial in the contingency –or 12-month plan– that you will need to present to a prospective lender to finance your acquisition.

#2 Creating a New Mission Statement in Line with Your New Capabilities

Your new company’s mission statement should detail the new array of products that you offer, how employees approach their work to reach goals and why your new company is improved in the way it provides products and services as a result of the acquisition.

Next, ascertain the capabilities that your new entity has to offer in terms of sales. For example, the company that you are acquiring may offer eCommerce capabilities, while you have more retail locations. Post acquisition, your new company will offer both and your mission statement needs to reflect this. Your new company may now offer business-to-business, business-to-consumers capabilities or combinations thereof as a result of the acquisition. In addition to being a key component of your mission, these factors should be the benchmarks for your five-year business plan.

#3 Showing That You Can Absorb Debt

Typically, the company that you acquire will have some debt that you have to absorb. In order to get financing for your acquisition, you have to convince the lender that you can handle that debt, especially since you are using debt to finance the acquisition.

Joshua Jones, Chief Revenue Officer at Kapitus, said the ability to take on new debt is key to acquisition financing.

“The [lending] bank is going to say, ‘does this asset (the acquired company) cover the new debt service on that business?’” said Joshua Jones, chief revenue officer at Kapitus. “Because now, you’ve just applied a whole new payment (through the financing of the acquisition) and the best way to show in your business plan that you can absorb that debt and increase your gross profit is either through efficiency gain or scale.”

#4 Projecting Gross Income of the Newly Formed Company

Work closely with your accountant or M&A advisor to project a 12-month income. There are various ways to project income, and it is typically far more complicated than simply adding the gross income of your company to that of the company you are acquiring, so talk to a financial expert on this.

“An effective planning tool is through the use of projections,” said Michael Kuru, a CPA specializing in family-owned businesses. “When a business is acquired, there is a strong indication of the gross income that should be generated. The experienced business owner should have an idea as to the underlying cost to generate that income.’

Obtaining Financing for an Acquisition

Generally, the best type of financing for a small business acquisition would be an SBA loan, with the most common being the 7(a) loan. You may also want to consider a business loan, since the requirements for a SBA loan are typically stringent, require a high credit score, and are generally not easy to obtain.

According to Jones, however, “An SBA loan will always be the most seamless with the acquisition strategy because it is going to provide the length of payback that’s more applicable to an owner buying a business and having the available profits to pay down the loan as a percentage of profits over time.”

SBA loans are typically offered by two different entities – a brick-and-mortar bank, or an accredited non-bank SBA lender (of which there are only 14). Many alternative lenders such as Kapitus do not directly provide the SBA loan, but have built a wide array of accredited lending partners and uses modern technology to underwrite, approve and manage the loan disbursement and repayment process, often in a timeframe that is much quicker than that of a traditional lender and often has fewer requirements.

Executing an acquisition could be an expensive and extremely complicated task. At the very least, however, buying another small business could help your business survive in the post-pandemic world. At most, an acquisition could help you thrive as it would allow your company to expand, scale up products and offerings, and ultimately pull in new business.

The importance of a business action plan

How to Construct a Business Action Plan to Get Things Done

October 10, 2019/in Operations, Raising Capital/by Wil Rivera

You’ve probably heard about the importance of creating a business plan to plot the growth and development of your business. So you outline your goals to increase sales, reduce costs and improve profits. But then what happens? Setting goals is fine, but they need something that brings them to life. Something that makes everything happen. That something is a business action plan.

Here’s how to construct an action plan for your business that brings your goals to life.

What is a Business Action Plan?

While a strategic business plan outlines the overall growth, direction and development of the company, an action plan converts those objectives to identifiable tasks.

Quite simply, an action plan is a carefully thought-out listing of all the things that have to be done to turn your goals into reality. Let’s take an example.

Suppose one of your goals is to increase sales by 10% by hiring an additional salesperson to make more outside calls to potential new customers. The steps to achieve this objective might be as follows:

Write up a job description
Post your the postion on jobboards
Review the resumes that you receive and select 10 candidates to interview.
Schedule in-office interviews over the next three weeks.
Take one week to go over interviews to choose a candidate and make a job offer.

Each objective in your strategic plan needs a detailed list, like the one above, of the tasks needed to accomplish the goal.

What are the Components of Action Tasks?

Effective action-oriented tasks follow the SMART outline. They are:

Specific – Setting a goal to increase sales is too general. But saying you want to increase sales by 10% is specific. This way, you take last year’s figure, suppose it was $850,000, add 10% or $85,000 and you have a new specific target of $935,000.

Measurable – Progress towards achieving a goal must be measurable. Weekly sales reports, for example, will track the movement along the path to a revenue goal.

Attainable- Employees must genuinely believe that it is possible for them to reach the objectives. If they don’t feel the objective is realistic and reasonable, they won’t even try.

Relevant – Goals must conform to the company’s business model and customer demographics. The goal should be worthwhile, match other company efforts and applicable in the current economic conditions.

Timely – Set a target date. Establish a deadline to keep the focus on tasks leading to long-term goals.

Which Resources are Needed?

Identify the resources needed to carry out each action task. How much will it cost? How many people will be needed? Will you need to purchase any additional physical assets?

In our example, someone has to write the job description, place the ad and make sure the ad is paid for. How many hours of an employee’s time will this take, and how much will the ad cost?

Communicate the Plan to Your Employees

Get your employees involved. Let them know what your plans are and explain how these actions fit into the company’s business strategy.

Ask for their input and solicit suggestions. Employees are much more likely to support your plan and participate in its implementation if they are part of its creation.

Designate a person to be in charge of each task. Someone has to accept responsibility for the execution of the assignment.

Set Timelines for Each Task

Each task must have a specific time to complete and a deadline. Without timelines, work will expand to fit the time allowed.

Monitor the Progress

Create procedures to receive regular progress reports for each action task. The responsible employees must be aware that they will be monitored, weekly if necessary, to make sure things are moving along. If obstacles appear or deviations from the expected timelines occur, adjustments can be made to get back on track.

Business action plans are the means to convert strategic ideas into reality. Tasks that are created with action plans using the SMART method with employe participation will have the highest likelihood of success.

Raising Capital Through Crowdfunding

July 11, 2018/in Operations, Raising Capital/by Wil Rivera

When the JOBS Act (“Jumpstart Our Business Startups”) was signed back in 2012, the intent was to make access to capital easier and less restrictive for small businesses. This was one of the few bipartisan pieces of legislation passed by Congress and has had broad support for a number of years.

Under Title III of the JOBS Act, also referred to as the Crowdfund Act, small companies could issue securities (sell equity / shares) to the public in ways that were not previously permitted. The hope was that average Americans would be able to invest small amounts of capital in small business ventures through a web based platform without the cost and complexity associated with public securities exchanges. Hundreds or thousands of small investments would be pooled together to give the business the working capital it needed. The “crowd” makes it possible for good ideas and concepts to get launched, even when the business or concept doesn’t appeal to conventional investors and banks. Now small business opportunities were open to thousands of non-accredited investors and potentially millions of individuals seeking investment opportunities.

A number of Crowdfunding platforms were launched, developing creative ways of raising capital. But, not all of these platforms are created equal and each offers different financial options for both the business and the investor. Some offer campaigns to solicit donations in return for rewards or discounted goods and services, while others seek investors to purchase equity in the company or provide various forms of debt financing.

The most popular method of crowdfunding is referred to as “Reward Based” Crowdfunding, which solicits donations in return for incentives or rewards that the sponsor (or small business) provides. The leaders in this arena are Kickstarter.com and Indigogo.com. The business seeking money launches a campaign that has a stated goal for their capital raise. Typically, the reward is a discounted product or service of the business that is offered for redemption in the future in return for providing capital today. Let’s say you are publishing a book that, when finished, will retail for $25.00. As part of your capital raising campaign, you offer donors to your campaign the same book for $20.00. The hope is that the discount will be attractive enough to gain hundreds of donors. This method of fundraising has been done for years in places like PBS. Many entrepreneurs consider this to be “cheap money” because they are raising capital without selling off an equity stake in their company, or incurring debt that needs to be repaid.

In reality, this type of crowdfunding is not dissimilar to alternative finance options that factor your receivables, such as merchant cash advances or revenue based finance. These companies purchase future receivables at a discount by providing working capital immediately against sales you will make in the future. They may give the applicant $100,000 today for $125,000 worth of future sales over the following year. The same principal is at work here that occurs with rewards crowdfunding – just without the work of creating marketing campaigns to enlist donors and the uncertainty that can come along with “all or nothing” crowdfunding.

The second group of crowdfunding platforms provides you with working capital in exchange for a piece of your company’s equity. This is really an abbreviated micro public offering of your company’s stock. One of the biggest benefits of equity crowdfunding is access to larger funding amounts of $500,000 and more. While equity financing seems attractive to many business owners because it technically does not need to be repaid, it does come with many other costs and considerations. First and foremost, is that you will be bringing on new partners with all the benefits and headaches that this entails. The downside is that you now have many partners and you have a new level of transparency and reporting that you didn’t have before. Managing numerous investors can become time consuming. Even if the crowdfunding site combines the investor “crowd” into a single pool, you are still required to report results according to SEC requirements.

The most recent draft of SEC regulations requires founders to have their financials reviewed or formally audited by a CPA. Additionally, companies are legally required to publicize a detailed business plan, a list of all large shareholders in the company, a description of the financial condition of the company, as well as file an annual report with the SEC. This is no small undertaking and many smaller business owners consider other options, particularly when raising smaller amounts of capital.

Equity crowdfunding platforms operate in different ways. Companies like CircleUp, act as intermediaries between investors and companies looking for funds. They typically hold investors’ funds in escrow until the round ends successfully, then transfer equity to the company and complete the transaction. Some platforms like Crowdfunder.com and Fundable.com are basically publicizing the individual fundraising campaigns to the investor public and do not act as an intermediary in the transaction. The company seeking funding contacts the individual investors and collect funds and deliver stock certificates on their own.

Check with various sites to see if they have had any successful placements with businesses in your sector. Not all platforms are suitable for various business types. CircleUp and LocalStake perform well with consumer products, food & beverage, apparel, fitness and supporting technology. While EquityNet and AngelList focus on higher tech, B2B and IT driven businesses.

Outwardly, crowdfunding looks like a simple process, but the reality is that it takes work and time for the company to create a compelling campaign and oft times produce the documentation necessary for a successful capital raise. This is particularly true if you are seeking equity or traditional debt financing. The obvious advantages include access to interested investors who regularly follow these sites as opposed to identifying and soliciting investments from individuals you may get introduced to. This is the scalability of technology, but it also puts pressure on you to produce a story that will get an investor to write a check.

Even if your campaign is well crafted and up there on a popular platform, it will be up to you to drive interest through social media and your own savvy. Many crowdfunding campaigns are heavily funded by people you already know and in fact some sites actively push you towards your family and friends to seed the round. Frankly, if that’s the case there is really no reason for you to channel their investment through the Crowdfunding platform as they will charge you a fee for money they had no influence in raising.

The other factor is time. These campaigns can consume a considerable amount of your time and attention and may result in an unfunded capital raise because you failed to hit your target (all or nothing financing). You have your ideas and strategy out there for the public to see and scrutinize and while most agree the risk of someone copying your newest creative, disruptive idea is small – it can happen.

All things to consider before putting everything up on the web.