Does everybody wish on occasion that they had a guardian angel? Someone who is looking out for your best interest and can provide assistance when needed? As a business owner, you may need this assistance at various times, because of the unpredictability of entrepreneurship. Enter the angel investor…
Week 5: Angel Investors
Angel investors, also known as business angels or informal investors, are people who provide financial backing for small business startups and entrepreneurs. Recently, they have begun to organize themselves into groups known as angel groups or angel networks, in the interest of sharing research and information. They differ from other types of lending resources in that they generally invest using their own funds. They tend to be less personal than peer-to-peer lending, more professional than having family or friends providing seed money, and more intimate than banks or other financial institutions.
Investopedia.com describes angel investors as “usually investing in the person rather than the viability of the business. They are focused on helping the business succeed, rather than reaping a huge profit from their investment. Angel investors are essentially the exact opposite of a venture capitalist.”
The pros to angel investing is that, if your proposal interests them, then your opportunities can be fully recognized in a very short amount of time. Another is that they are typically willing to accept risk and demand little or no control in return for the chance to own a piece of a business that may be valuable someday. Angel investors,
however, require a high amount of return on their investment, as such an investment is deemed to be high risk; if your business fails to make a profit, or just out and out fails, they lose their investment.
Wikipedia cites the Kauffman Foundation, saying “professional angel investors seek investments that have the potential to return at least 10 or more times their original investment within 5 years, through a defined exit strategy, such as plans for an initial public offering or an acquisition.” Even though it’s a potentially expensive resource,
the depressing fact is that it’s incredibly difficult for a young business venture to qualify for a cheaper venue, such as bank financing or traditional loans.
Below are some great resources for beginning your search for a genuine angel investor:
Inc.com has its own directory for angel investors, as well as a comprehensive guide to finding one:
Angel Investors of Chicago
Angel Investors of Chicago is a local resource for finding (what else?) angel investors located in Chicago. Their page describes them as “an alliance of highly experienced developers and investors dedicated to providing capital to early and mid-stage entrepreneurial companies.”
Gust.com is one of the more widely recognized resources for finding angel investors; they pride themselves on “professional investor relations, from pitch to exit.”
Have you had experience with angel investors? Have you searched for them before? Were you successful? What was the most helpful piece of information that you found in researching angel investors?
One of the places small business owners and entrepreneurs have learned to be most wary of is traditional financial institutions; namely, banks. However, a not-so-traditional version of a traditional financial institution has become one of the champions of small businesses: community banks.
Week 4: Community Banking
If customer service, local benefits and a surprising lack of underhanded hidden fees is important to you (not to mention a drastically higher approval rating for small business loans), then community banking is definitely worth considering. A simple definition of a community bank is one that is locally owned and rooted in a particular community, and that has less than $1 billion in assets.
As opposed to megabanks, community banks often offer genuine benefits without providing many restrictions to enjoy these benefits. For example, if a community bank offers one hundred dollars to you when you open a checking account with them, it usually happens just like that, no need to keep open multiple accounts or already have an existing, or a minimum deposit of $250, nor hidden maintenance fees for the simple pleasure of keeping your money safe for you. Community banks tend to make it more their mission to help you with your money, as opposed to trying to separate you from it.
Community banks have numerous advantages to both the individual and the small business when compared to larger corporate banks and franchises. Generally, community banks will take into account a broader range of qualifications other than just your credit and current backing, such as character, family history and discretionary spending when making loans. Because they are smaller, community banks have a more intimate relationship with the businesses they work with, and are able to renegotiate as they grow; their flexibility is a quality that makes them highly prized as a resource.
One might wonder why community banks decide to stay as altruistic as they do if it means staying smaller and seemingly unambitious. Community banks do, in fact, have ambitions; they simply differ from the ambitions of mega-banks. Community banks (their name being a dead give-away) invest heavily in their community, and thrive when their community thrives. It is a personal experience highly underrated by the majority, but appreciated by anyone in need of alternate resources. Additionally, community banks are in themselves small businesses, and small businesses need to look out for each other — thus making it in their best interest to aid local entrepreneurs. They make it their business to assist, as they understand and empathize with the needs and concerns of soon-to-be small business owners.
Since a community bank is also a local business heavily involved in the community, they know the needs of said community and the logistics of the area. This is invaluable information for any prospective small business owner.
Check out this recent report from the Aite Group on the benefits of community banking and how to optimize your interactions with your local banks: http://www.aitegroup.com/Reports/ReportDetail.aspx?recordItemID=837
Do you bank with your community bank? How is your relationship with them, as opposed to megabanks? Have you considered looking into their loan process?
Week 4: Leaving? Check In Later
The big day has arrived. All of your financial documents have been reviewed, your successor has been announced and you are finally able to step back from the rigors of your business. Whether you are serving as the Chairman of the Board or simply the Chairman of Your Recliner at Home, you will want to stay engaged in your company in some form or fashion.
Your executives, investors and staff share an interest in guaranteeing that leadership changes hands smoothly. And you as an outgoing executive will also have much to gain: The value of stock options and holdings in your retirement plan will depend on the company’s future performance and will directly reflect on the value of your legacy.
Leaving the CEO or President position can be difficult, but there are options for you to check in later and monitor the future progress and financial health of your business. Here are the options:
First 30 days: Stick around. Attend a few meetings with the new executive and endorse his or her knowledge, savvy and amazing ideas for the future of the company. Your in-person recommendation at client meetings may quell any fears that your existing clients have about keeping on with your company.
First 90 days: Review the company client lists. Are your 20-, 30- and 40-year relationships still being maintained since the transition? You will also want to determine how much new business has been generated since your departure.
First 180 days: Meet with the CEO 1:1. How have they found adjusting to your role to be? Do they have any additional questions for you? Your input is invaluable and may help the new CEO make any needed corrections quickly, or inspire new creativity among leadership.
After the first year: Review the annual report. Which goals were achieved and which ones were missed? What trajectory has your company taken? Will you give this CEO or President one more year or will you join the Advisory Board in a search for a new superstar?
When was the last time you had to coach an individual or team through a new situation? Tell us your story!
Week 3: Locate a Professional
If you’ve been following this month’s blog series, you have already estimated what your company is worth and you should be in contact with a business broker to transition your business to the right hands. However, even if you have an accountant, broker and a financial advisor on your team, these experts may not be expressly qualified in business transition work.
There are unique transition firms that work with business owners to highlight the best practices to relinquish ownership of a company and comprehensively prepare for the move. Who can recommend a great transition firm? Start by asking your accountant, lawyer or broker, or consult with a local trade association in your industry.
Entrepreneur Magazine lists the following information as needed before meeting with a transition firm:
- Financial documents:
- A minimum of five years of financial documents
- Audited financials for three years
- Pro-forma sales and cash flows for two years out
- Three years of taxes
- Company insurance documents
- Personal financial information (account statements, complete copies of federal and state tax returns, estate documents)
- Customer lists (shows history of longevity)
- Vendor lists and relationships
- Operational systems and procedures for everyone and every part of your business
- Legal corporate documents
- Contracts with vendors, suppliers, customers and clients
- Intellectual property rights and assets
These experts can become involved at any stage of your transition to review the work you have completed, provide recommendations and take the necessary actions to get you on the right track. Even after you have completed your transition, a transition firm can work with your financial planner to assist with wealth management.
If you follow the steps below (in order) with a transition firm, you will be able to exit your business in a less stressful fashion:
- Gather all data and documents about the financials of your firm
- Interview experts for your transition team
- Select and begin consulting with your transition team
- Create and execute your transition plan (which could range from six months to five years)
- Successfully complete the transaction
- Ensure that a wealth management system is put in place for a secure financial future
When you started your company, who did you seek the advice of first – an accountant, lawyer or financial planner? Share your selection with us in the comments section below.
Week 2: Who Is Interested In Your Business?
If you have considered selling your business, it’s vitally important to do the proper research. My prior post discussed getting a professional valuation of your company, and this post will give you some ideas on how to locate and identify the best possible buyers.
I recognize that financial valuation isn’t the only factor when looking for buyers. You are selling the product of years of hard work, and you want to be sure it’s the right match. With that in mind, I’d like to offer a few tips to help you in finding an appropriate successor and partner:
- Hire a business broker. Business brokers are much like real estate agents for businesses. They will actively market you and guide you through the process. The Wall Street Journal has partnered with a very useful website called http://www.bizbuysell.com. Check them out to get specific references for brokers in your area.
- Look for people you respect in your industry. If they run their business successfully, you can be confident that yours will transition seamlessly under their care, as well.
- Don’t overlook the competition out of habit. Your biggest competitors may well be the best people to buy you out. The combination of your innovations and theirs may well give rise to a product, service or a way of doing business that can change lives.
Frankly, a business broker is the biggest asset you can have while navigating the waters of a sale. They will be able to give you advice on everything from valuation to closing, with the added incentive of a percentage of the deal to get you the best price possible.
Remember, you’re not just selling the tangible assets of a business. You’re selling your brand and your reputation. Your careful planning today will assure you a comfortable retirement. I encourage you to do your due diligence, just as your eventual purchaser will have done theirs.
In your opinion, how long does it take to build a strong brand before it is ready for sale?
Small businesses need to step through the uncertainties. Work on increasing sales. Inflation is already here. We are paying more now for our purchases. So increase prices now. Here’s how to do that, for example: If your health care costs are 5% of sales and you expect (or assume) that these costs will increase 20%, that puts health care costs at 6% of sales; the bottom line result is a 1% decrease in margin; to make that up, increase selling prices by 1% to keep pace. Continue to apply this technique to other cost items. Remember, “a penny makes a difference.” A 1% margin improvement for $10 million in sales is $100,000. That is big-time money! CFO-Pro says, “Walk right through that fear! You’ll feel a lot better. Don’t wait to figure out what the government is doing. They will never get it right! Now–what are you going to do?”
Business growth presents special challenges in financial planning because executives often believe growth is something to be maximized. Unfortunately, fast-growing companies that lack the financial acumen to manage their growth can and do fail.
Increased sales require more assets of all types (i.e., inventory, accounts receivable, productive capacity), which must be paid for. Retained profits and new borrowings generate some cash, but only limited amounts.
Knowing your company’s sustainable growth rate can help you avoid biting off more sales than your company can chew. The sustainable growth rate is the product of four ratios:
G = P x T x R x L where
P is profit margin % (net income / sales)
T is asset turnover ratio (sales / total assets)
R is profit retention rate % (net profit – dividends)
L is assets to equity ratio (assets / beginning equity) or leverage
Unless an owner is willing and able to sell equity or borrow money, the sustainable growth rate is a ceiling on the growth achievable without straining resources. As equity grows, a company can borrow more money without altering the capital structure. The sustainable growth rate then is nothing more than its growth rate in equity.
Here’s an example of calculating a sustainable growth rate:
$1,000,000 Last year’s sales
$2,000,000 Total assets
$ 400,000 Beginning equity
.5 T ($1,000,000 / $2,000,000)
.5 L ($2,000,000 / $400,000)
Assuming no additional equity infusion, the sustainable growth rate is:
10% x .5 x 85% x 5 = 21.25%
Assets, liabilities and productive capacity will expand proportionally to sustain growth in sales up to $1,212,500. Any growth greater than 21.25% will begin to strain resources—debt capacity will be reached, lenders will refuse additional credit requests, and cash will be deficient to pay bills.
Count Your Blessings
Calculate your sustainable growth rate and keep an eye on your numbers. You can have too much of a good thing, whether it’s turkey or sales.