OK, I know this sounds like a hard sell on my own behalf, but I also know that self praise is no recommendation. So, it was a hard decision to make, even whether I should write this blog at all.
But I am being genuine here. The one, single very best thing you can do, in order effectively to pursue and obtain venture capital, is to hire yourself a competent and experience adviser, who has a good and close relationship with the right lawyers, accountants, etc.
I know it sounds like the hard sell game, and I am the seller, but I am being sincere here. Of course, it would be nice, if you hired us, but, if you don’t, we hope you find the right principal adviser, who has experience in these matters. There are good reasons for saying this.
Firstly, if your business is worth investing in, then either you should have your hands full, or you are simply excess baggage. You should either be closing your next sale, or getting your next generation prototype to work, or hiring a replacement for the engineer who left suddenly, leaving a critical project uncompleted. You need to delegate. Even in an, as yet not active, start up, you probably have just as much, if not more to do.
If you are one of the fairly rare individuals, who can really get a venture capitalist interested enough to give you a term sheet, you’re probably bright enough to learn all the ins and outs of a VC financing structure. But that doesn’t mean that you should, or even that it will be effective. The usual VC capital structure model, while elaborate, really doesn’t change much from deal to deal. The parameters may change – pricing, compensation levels, vesting schedules, liquidation preference factor, etc. – but the essential structure of the deal follows a tried and true path. This is simply a case of where it is extremely hard to reinvent the wheel.
Another reason you need a good adviser, with the connection to the right lawyer, accountant, etc., is that no prudent VC, either individual or corporate, will invest in a company that is not represented by the competent troika – adviser, lawyer, accountant. Without those, it simply that too many questions are raised. It also puts a much heavier due diligence burden on the VCs and their own lawyers. They need to know that everything is where it needs to be – such as the corporate records are up to date, patents have been filed, and all of the outstanding stock has been properly authorized and issued. In getting answers to these questions, they get lots of comfort from having competent professionals, who know what they are doing, on the other side of the deal, where they can get a legal opinion from your side, on which they feel they can act. Even if you, yourself, could give such a legal opinion, it wouldn’t be worth much, unless you have a legal malpractice insurance policy of your very own.
Good venture capital advisers, lawyers, and accountants, who have many of these transactions under their belt, are more likely to pick up on subtle cues or wrinkles in the deal. They may be able to anticipate where a venture capital firm will give way on one point, and use that to your advantage, to protect you on another point. If you or your professional advisers haven’t done these deals before, then they, and you, won’t know where the trade-offs are to be found. You could easily give away too much, to obtain something that the venture capital firm didn’t really care that much about. In other words, there’s no substitute for experience. Related to that is that a venture capital professional will stay up to date on “market” deal terms. If the VC is asking too much, your advisers should know that; but, if they haven’t done enough deals, they would have nothing to which to compare things.
Depending on the state of the economy, the scarcity of capital, the state of the market for IPOs or strategic acquisitions, venture capital deal terms will change, just like the price of stock fluctuates in the public market. The difference is that, with private companies, and particularly individuals, it is not something as simple as just a quoted price. As one example, think of what is involved in a term sheet. There are many bells to ring, and whistles to blow, and, in particular, switches to flip.
It is a simple fact that you will always need good professional advice. For example, if you are a company already in operation, issues may arise, which you cannot, or should not, discuss with your employees. You may question why the VCs are asking for a specific term or a piece of information, and your partners or employees will not know the answer. You will want to know if the VC is being too aggressive, or if their body language suggest that you can get better terms. Here again, experience is the golden key. Good venture capital professionals have a “sense of the deal”; and this develops only with time, and with the often changing flow of the deal itself. Your competent advisers can often also come up with creative solutions, of which you would not have thought.
Almost every deal threatens to run aground over some issue in the progress between term sheet and funding – but there is almost always a solution. In negotiating deals, just as in navigating the skies, an experienced pilot, who knows how to avoid the storms and the turbulence, as well as how to land successfully, is the only real assurance, that you will arrive safely at your destination.
Once there were the heady days of 2006/2007. Money flowed, deals were done, and a voracious appetite for quality assets pushed prices to unsustainable levels. Then came the pause, but that didn’t last too long, before it began again. But suddenly it stopped again and investors held their breath. The inevitable happened, The crash came, and that was an end of the M&A business. Many did not see any recovery ever, at least in the previous form.
By 2008, equity capital had dried up, and suddenly the vendor’s market was finished. Those who invested pre crash are now those looking to sell the assets they acquired. In many cases, because they now have other uses for their money, they want out. So, these sellers are not pushing up prices; but they are not prepared to take big losses either. They are just being realistic.
The newly reawakened market in the M&A area is a big bonus for those banks, which can still handle it. Although a large slice of major funding is now being found outside of banks, they still remain a desired participant on the buying team, since some degree of debt funding makes the deal more efficient than trying to find 100% equity.
Nonetheless, I do not see any real evidence of the banks loosening any of the strings they tightened so considerably as a result of GFC. Many bank have exposure to a range of actors, and hence some of them now see an avenue for profit in being involved also on the selling side. The banks always take care of their profits first – especially those ‘too big to let fail’.
A trend which has developed in the post-GFC world of M&A is retreating to the core business and getting rid of anything, which is not solid profit. Multinationals are reassessing their strategies, and coming back to their basics. Shell, the multinational concern, has recently done just that.
Yet another trend involves private equity. A lot of such deals are being done in the U.K. And yet another involves trade purchases, which was the mainstay of the business years ago, before the relatively new structures were introduced. And these operate across national borders. In the last months, as an example, Mainfreight from Australia moved into The Netherlands.
Nonetheless the period after the GFC was not entirely dead in this area. Many M&A specialists found themselves doing deals at a time when almost everyone thought market conditions would have made deals almost impossible to do.
However, the general, real world facts are that, over the last couple of years, it has proved much harder to get deals completed. After all, a deal is not a deal, until the ink is dry on the paper, and the funds have been banked.
Although the market generally remains very flat, there’s a quiet confidence starting to make itself felt in the corporate world of M&A.
There is finance to be had, but because of the imposition of new rules, resulting from the financial crisis of the last few years, borrowers with a healthy cash flow are, contrary to what one might expect, suffering more than less fortunate companies in their attempts to borrow funds. The more strict affordability criteria today actually seems to have thrown out some common sense in assessing applications – something akin to throwing out the baby with the bath water.
In assessing whether to grant a loan, lenders had always worked on certain assumptions, whereby certain fixed costs where reasoned to be the same, or very similar, for a particular industry, or business, unrelated to the amount of the cash flow; and only sometimes related to size. Now, however, many lenders are assessing these items as a percentage of earnings, or cashflow. This means that the applicant with the greater cashflow will be disadvantaged, because, almost universally, the percentage method will result in greater amounts being deducted from the calculation of available servicing funds, than would be the case with the fixed sum. Thus, it is important for prospective borrowers to think carefully about which lender they will approach, because, effectively, some lenders will now lend less than others, based on this overall percentage approach to fixed costs.
Over the past few years, lenders have been increasingly moving away from basing lending decisions on cashflow and turnover, and the projected cash flows, and are now working on a basis of what a borrower can actually afford to pay right now.
Many lenders now use an affordability formula, either in conjunction with, or instead of, cashflow historical data and projections. All formulas now take into account the likely development of liabilities as a factor equal to, or even greater than, the cashflow situation. But, the problem is that there is some variance between these different formulas; and this make it very difficult for a company, seeking to borrow, to calculate just what should be possible. It is obvious that some knowledge of the inner workings in the light of experience is necessary to negotiate these tricky bends,
Some lenders are now requesting information on various items that would never have caused much concern in the past. Once again, what additional information is sought by one lending source may be quite different form the extra information required by another. Third party credit reports on the applicant company are now also playing a larger role than previously.
Funding is again becoming available, but the road to getting it is becoming harder to negotiate.
Easter is said to be a time of renewal; and that seems to be the case in the M&A market. After a long drought, there is, once again, money available in the market for Mergers and Acquisitions.
Potentially interested buyers have money again. Especially in the case of medium size companies, there is sufficient, current liquidity around to handle takeovers of that size. Buyers are on the prowl again, and hence one can expect prices paid for takeovers to rise.
Sellers have put the financial crisis behind them, and hence expect better prices, while buyers still have it stuck in their craw, and so remain cautious about price. To move things along, and overcome this difference in thinking, many buyers have turned to a variable contract of sale. A base price is agreed, which is then increased subsequently, depending on the business being sold reaching a certain performance level; upon which the additional sale price is payable. After all, the value of a business, reflected in its sale price, is almost always a function of the expected, future performance. Thus, such a contract is being found useful, also in the case of businesses with only a short trading history.
Of course, one has to be extremely careful with the terms of the agreement, since such an agreement does leave itself open to possible manipulation; and hence lenders and investors will base a real part of their financing decision on how clear are the terms, and how unlikely those are to possible, later manipulation. When I speak of manipulation, I mean such items as CEO salary, residuals, royalties, write offs/downs, accrued liabilities, and possible unnecessary or inappropriate investments.
But for interested buyers seeking the necessary capital, it seems he funds can again be found.
Some amendments to the Financial Collateral Arrangements Regulations 2003, which were designed to improve efficiencies in the taking and enforcement of financial collateral, recently came into effect in the U.K. Nonetheless, relative to floating charges, there are still uncertainties.
These Regulations are essentially the implementation of EU directives, which are said to promote the use of financial collateral within the EU. It is essentially a streamlining process, removing formalities which were required on taking and enforcing security over financial collateral (such as cash, shares and bonds). Since all these items can be used as collateral for various purposes, it is worth being aware of the changes, even though they are more of an incremental nature, which expand the scope of the regulations, and remove an anomaly regarding the availability of appropriation as a means of enforcement.
The amendments now included “credit claims” (claims arising under loans provided by deposit-taking institutions (i.e. banks)) within the definition of “financial collateral”, thus providing greater flexibility under several circumstances. They include an expanded definition of ‘possession’, in the case where financial collateral is provided by way of a credit to an account in the name of the collateral-taker, or its nominee.
One amendment clarifies the term ‘possession’ of intangible financial collateral, but uncertainty remains as to the extent to which floating charges will fall within the terms of the regulations. However, pledges, liens, and charges are now included in the definition of ‘security interests’ for the purpose of self-help appropriation, outside the regulations.
A further, new provision provides that foreign insolvency orders will not be of effect in the U.K., if, in the same circumstances, that order could not be made by UK courts, because of the provisions relating to adverse impact of insolvency law on financial collateral arrangements, as contanined in the Regulations. Whether the courts will adhere to this, or find a way around it, remains to be seen.
Despite the messages of impending doom, which still may be proven correct, and despite the ominous signs – Portugal falling under the rescue umbrella; Greece having to pay double figure interest, to be able to raise any money at all; Ireland’s present serious rumbles; and the possibility that the heavily indebted countries of the EU will have to devalue or bust – the Euro currency is, at least for now, defying all the odds, and is gathering strength. And it seems likely that it will do so for the immediate future.
Further, the Euro is doing it against a background of a rapidly improving U.S. economy. In comparison with Europe, there are many more U.S. firms earning even more than at any time since the 80s, all of which should mitigate against the Euro. On top of that, there is the ‘Atom’ situation in Japan, the rebellions in North Africa, and worries about the oil supply to the industrialized countries. Normally, under such circumstances, there would be a massive flight to the dollar.
Yet this established scenario seems no longer to hold good. In the last 3 months, the Euro has risen about 12%, from $1.28 to $1.44. That was definitely unexpected. Further, in the last weeks, the Euro has taken one hurdle after another in its stride; and thereby demonstrated a great attractiveness.
There is an unofficial rule, which maintains that trends, once established, tend to continue for a time, rather than collapse in the beginning. Hence, it seems the Euro may reach even further highs, at least in the short to medium run. Presently, the Euro seems to be swinging in an area between $1.42 and $1.45. It has been trying for a year to break through this barrier.
Last Friday, it reached $1.4440. If it can now spend a little time stabilised at $1.45, the signals are that, despite the problems of Euroland, it could then go as high as $1.50, or even $1.55. However, there is a very substantial school of thought, which maintains that the Euro cannot sustain such high levels in the long term. I am one, who tends to subscribe to that thinking.
But, more immediately, what does this all mean presently for those seeking funding? This is a situation in which potential borrowers, worldwide, may see a considerable advantage in presently applying for, and obtaining funding in Euro. If everything goes the right way, there is money to be made.
Nicholas Shaxson, the author of the book, Treasure Islands, about offshore finance centers, says these small havens “all tend to be plagued by allegations of corruption and there are often questions about whether they are investigated properly.”
Many of these offshore centers are either ex British colonies, or, by their legal system, connected to England, and so the assumption is (which is many cases not far off the mark)that there must be some control by London, although this is meant in terms of the legal system, under which many of the appellate cases end up under English jurisdiction. For example, the Caymans, where George Town, capital of the Cayman Islands, a British overseas territory that is home to roughly 50,000 people and 70 per cent of hedge fund registrations worldwide, have the English Supreme Court (previously the House of Lords) as their ultimate Court of Appeal.
Because of their prominent roles in the world financial system, some of these so-called offshore ‘havens’ have assumed importance far bigger than their physical size would suggest. Bermuda is a leading insurance center, while the British Virgin Islands is the global capital for incorporation of offshore companies.
In recent years in respect of these ‘havens’, there has been much binding in the marsh, and large numbers of stories of intrigue, corruption, and even conspiracy. However, a lot of this bad reputation is not deserved.
In Bermuda, where Bermuda Finance employs more than 5 per cent of the population, the country established a Financial Intelligence Agency in 2008.
The British Virgin Islands has invested in legal infrastructure to deal with commercial disputes arising from its status as the leading incorporator of offshore businesses.
The Cayman Islands is a base for most of the world’s hedge funds.
The Turks and Caicos Islands is largely a center for offshore trusts. The U.K. imposed direct rule in 2009 after a report found a “high probability of systemic corruption”. However, the investigative team soon discounted the initial allegations leaked by the police.
In recent times, all these jurisdictions have come under fire, or had allegations made about them in one respect or other, and, as a result, whatever may be the real facts about some of the more obtuse allegations, various questions were raised in London, particularly about the rule of law in Cayman – and the network of close relationships that dominates the elite of this, and other small, British territories. The case also goes to the heart of the U.K.’s somewhat dysfunctional relationship with the “pink dots on the map” that are both imperial relics, and, at the same time, significant operators in world finance.
Mr Umunna, the MP who is also parliamentary private secretary to Ed Miliband, UK opposition Labour party leader, says: “Britain should certainly be using its influence and the leverage that flows from that to encourage better standards of financial probity and governance to be adopted.”
The UK government has promised “further measures for promoting good governance and preventing corruption” in overseas territories. The Foreign Office concedes there “may be individual incidences where governance has been a concern” but denies there is “systematic or widespread” problems across the islands.
One attraction of these ‘havens’ – often for lenders, and sometmes for borrowers – is their usual, very strict secrecy laws. However, pressure for transparency persists, as the havens begin to yield billions to G20 treasuries.
When leaders of the world’s biggest economies met in London in April 2009, they issued an ultimatum to tax havens, writes Vanessa Houlder. “The era of banking secrecy is over,” they declared. The Group of 20 summit triggered a scramble by almost all offshore centers to meet their bigger neighbours’ demands. “Tax havens are disappearing,” French president Nicolas Sarkozy – one of their fiercest critics – said last summer, after 500 tax information exchange agreements had been signed.
However – and many non-government entities say fortunately – results do not live up to the hype. Skepticism about the will to enforce relentlessly such reforms was reinforced by recently unveiled German and British plans to negotiate a withholding tax for undeclared funds in Switzerland, rather than forcing account holders to open up everything.
Offshore centers continue to face questions about their role in the financial crisis, in what International Financial Centers Forum, a lobby group, says is “a politically expedient distraction from regulatory failures in the major onshore capital markets”.
Whatever the difficulties of securing a consensus, interest in the role of tax havens at a time of widespread austerity is likely to persist. With Mr Sarkozy at the helm at the November G20 summit in Cannes, they face another turbulent year.
Nonetheless those holders of deposits in these jurisdictions, still need something to do with those deposit, both to justify their existence, as well as to provide their depositors with expected profits.
In overview, even if, from time to time, a few rogue operators have surfaced (which have relatively quickly been exposed and deposed) the offshore lending industry continues to be maligned by innuendo, while at the same time remaining a viable source of funding for those prepared to roll with the punches.
A business plan is a document describing a company’s principal activities, or products, or services, its environment, and the objectives and strategies of management, backed up with suitable financial information.
Purpose and advantages of having a business plan
The plan is a presentation of a company and its opportunities.
It can serve as the basis for strategic planning and as a management and control tool.
It enables an investor or financier to evaluate a company, and assess the risks and prospects for return on investment.
It requires fact-finding, and forces the management to be realistic and to put theories to the test.
It should prove the management team’s planning capabilities and reduce the time required to study and negotiate financing.
Presentation of the business plan
A plan should be prefaced by a summary of the business opportunity and the key aspects of the firm, including information on:
- desirability of products or services; or
- feasibility of the project (such as in the case of real estate development) markets (if applicable);
- management team;
- financial projections;
- amount and nature of funding required and the estimated return this will produce.
The plan must include enough information to enable an investor or financier to make a decision, but it must not be overloaded with superfluous or irrelevant detail.
Precautions in writing a business plan
Ideally, and at least initially, the entrepreneur or the management team should prepare the plan themselves, simply because they, of all people, know their project best. . They should, of course,d seek outside help in areas where they lack expertise.
It is certainly useful to have the plan evaluated by a knowledgeable outsider before presenting it to potential investors or funders.
The plan must demonstrate that the project is able to meet the funder’s criteria, such as:
- the management is qualified;
- the description of the market and marketing methods is well established and realistic (if applicable);
- the property has a sufficient valuation (if real estate) the projected new funding will be adequate;
- the product is competitive; or
- the project is profitable (for example, in the case of real estate development) the production capacity will be adequate (if applicable);
- the probability of an attractive return on investment is high.
The funding applicant should:
- prepare a 3 to 5-year plan;
- undertake and document a specific feasibility, and, if applicable, marketing study;
- be prepared to make a personal financial commitment;
- divide large-scale plan into phases;
- provide a list of users, suppliers, clients, etc. who are ready to act as references;
- include both strengths and weaknesses of the business plan (this adds credibility and underlines the practical knowledge of management);
More Detail for the Business Plan
The plan must be adapted to the situation. Nevertheless, certain basic information is necessary in all cases. This includes the company’s major objectives, opportunities and profit targets, any assumptions made, resulting forecasts, special risks, and resumes of the management team.
Of course, not all the following items will be applicable to every application. For example, often in the case of a real estate development or acquisition, matters relating to production etc. would not be applicable.
Provide a general introduction to the business plan
Describe the development of the company to date, and indicate products and target markets, capital required and profits expected.
Provide an idea of the schedule of the program and elaborate on objectives. Mention the unique qualities of the business, why it would make a good investment, and identify the individuals involved.
Management details for the business plan
- provide a complete curriculum vitae for each member of management;
- emphasise achievements, duties and references;
- supply current and proposed organisational charts with a description of the duties of management;
- give full details pertaining to remuneration of management;
- give details of shareholders’ participation;
- explain non-monetary contributions;
- give objectives and main motivation of shareholders and how they view their contribution to the organisation’s success
Manpower in the business plan
- indicate skills required and manpower availability;
- provide statistics
- turnover, productivity, etc; comment on mechanisation or automation.
Marketing in the business plan
- describe products,indicating characteristics;
- explain product policies;
- provide sales brochures, photos and the results of market analyses;
- explain advantages of company’s products over competitors’ lines;
- indicate profit contribution of each line of products;
- describe the present and projected marketing policy:
- what are the target segments and customers?
- What are the most attractive opportunities?
- provide a breakdown of sales by customer, territory and product group;
- explain supply channels; describe market characteristics and potential for existing and future products;
- what is the expected market share (per product line) what substitute products can/or could be found?
Production as described in the business plan
- explain the production process;
- provide equipment requirements;
- indicate necessary investment
- describe available fixed assets;
- provide actual manufacturing capacity;
- explain possible improvements;
- list the raw materials used and major suppliers;
- how do the prices of supplies fluctuate?
- explain quality control methods used
Business plan – Product research and development
The plan must indicate whether or not the business has the technology necessary to create and develop products (if this is part of its strategy).
- indicate the originality of the process or product;
- provide technical reports to support the firm’s case;
- indicate costs related to development and the manufacture of prototypes;
- summarise a schedule for development;
- indicate time and costs necessary for accelerated production;
- indicate patents available and names of patent holders
Financial information for the business plan
This part of the plan should summarise the financial structure of the company. A financial plan generally includes:
- financial statements for most recent three to five years, if available;
- recent monthly financial statements, if available;
- projected income statements and balance sheets for the next three to five years, indicating all assumptions;
- cash flow projections for the first two years, prepared on a monthly basis;
- breakdown of fixed and variable costs; details of costing system;
- break-even point analysis; a list of all loans, financial obligations, and their terms and conditions;
- details of customer backlog; breakdown of inventory into raw materials, work in progress and finished goods
Additional information for the business plan
- description of authorised and issued share capital;
- complete list of shareholders, including number and percentage of shares held;
- incorporating documents;
- existing shareholders’ agreements;
- names of lawyers, accountants and consultants;
- names of bankers and other lenders;
- information on any past or current litigation;
- information on any former and/or affiliated company;
- information on any important rules and regulations concerning the firm’s operations:
- anti-pollution laws, government standards, etc.;
- information on important contracts:
- franchise agreements, distribution/supply contracts, grants, etc.;
- contracts related to industrial technology (patents, licenses, trademarks, etc.).
And that, in a nutshell, is the makings of a great business plan.