Liquidation of a Business

Liquidation of a business is probably the last choice of harvesting because it is the least advantageous to the owner. Other means of exiting the company would be in the founder’s financial interest, such as selling outright or merging with another business. 

Not having a proper exit strategy will usually result in the business’s liquidation if the owner dies, takes another job, or opens a different company. Deciding on an exit strategy before you need one will give you the best outcome for gaining capital from your exit. If all else fails, some of the capital tied up in the business will be recovered by liquidation.

Typically, liquidation involves the sale of the physical assets of the business. It may raise capital for the purpose that the owner intends, but usually at a loss. Optimizing the sale proceeds is why the owner should make sure the equipment is in the best condition possible. It is essential to understand the value of your equipment or inventory. An appraisal can help the owner to know what to accept in the case of a retail liquidation. Auctions are a common means of liquidation. It is an easy way to recover the highest dollar value of your physical assets. In addition to auctions, negotiated sales are a means for liquidation. A negotiated sale is when both parties are willing to discuss pricing. Having one buyer for everything could save time and money by offering one low price to take everything off their hands.

It is essential to remember the intangible assets that you have worked hard to build up. One example is a customer database. A customer list could be valuable information for someone in the industry.

It would be wise for an owner, no matter what the means of liquidating their assets, to make sure the buyer understands that the sale is “without recourse.” Without recourse refers to the fact that the assets are sold “as is, where is (SBA.gov).”

There are liquidation companies that can help a business get the most money they can for their assets. Hiring such a company would be wise as they assist with the entire process, including marketing the assets’ sale. 

Since one will only receive a percentage of the actual value of the business’s assets, liquidation should be the last option of consideration. Having an exit plan from the start of your business will give you the best financial outcome in harvesting the business.

https://www.sba.gov/managing-business/closing-down-your-business/liquidating-assets+, Retrieved on 9/27/2020

Kagan, J. (2020), https://www.investopedia.com/terms/w/without-recourse.asp, Retrieved on 9/28/2020

https://www.bizfilings.com/toolkit/research-topics/running-your-business/exit-strategies/liquidation-as-an-exit-strategy, Retrieved on 9/29/2020

Crowdfunding

Seedinvest involves five steps from start to completion of a successful raise.  The first step is to create an application. The application includes basic information and details about your company. There is no one type of industry Seedinvest has will accept to crowdfund. However, they are looking for early stage, high growth companies technology companies.  After your application is submitted, it will be looked at by a screening committee. The screening committee is looking for potential of your business. The screening committee will consider current customers, demonstration of the product, industry potential, and competition. If you are able to get past the screening committee, then it is time for due diligence. Due diligence includes a thorough legal and business analysis of your company. Seedinvest is looking to make certain your company is a good fit to be a part of raise and that there are no risks or liabilities that Seedinvest or their investors might risk from the transaction. The final step is to close the round. This is includes legal agreements regarding the account. 

This crowdfunding source is extremely competitive and requires a well written business plan.  They are looking for startups that are actual businesses and not just hypothetical. A product that can be demonstrated is a requirement. In addition, the company should have at least two full time team members. Seedinvest requires some history of success. This crowdfunding source only makes these stipulations because investors are looking for these attributes in a start up.

Only about one percent of applicants to Seedinvest are accepted (Neiss). However, on average, startups will raise about $435,780 (Neiss) which is more than the average crowdfunding source. According to seedinvest.com, “The companies on SeedInvest raised 89% more than the industry average in 2017.”  

Generally, it takes 45 days to receive the capital. The website states that it will take 3-6 months for a “Regulation A” raise. According to sec.gov, a Regulation A raise allows a company to sell securities to the general public.

Seedinvest is looking for start ups trying to raise between $500,000-$50,000,000 in capital. There does not seem to be any reporting requirements that Seedinvest requires. I think that would be agreed up in the profile creation step of the process. I reached out to Seedinvest to ask this question and some others, but unfortunately an associate got back to me and declined an interview.

There is a 7.5% placement fee and 5.0% equity fee when raising money with Seedinvest (seedvest.com/FAQs).  This is a value because of the successful network of investors that Seedinvest claims to have.

Ganti, A., https://www.investopedia.com/terms/p/preferredstock.asp, Retrieved on 9/24/2020

https://www.seedinvest.com/faqs, Retrieved on 9/24/2020

Neiss, S, (2018), https://venturebeat.com/2018/06/09/todays-best-crowdfunding-platforms-by-the-numbers/, Retrieved on 9/24/2020

https://www.seedinvest.com/raise, Retrieved on 9/24/2020

https://www.sec.gov/oiea/investor-alerts-bulletins/ib_regulationa.html, Retrieved on 9/25/2020

Hyatt, A., (2016), Crowd Start, ISBN 978-0-98952-101-7

Valuation (Ent 650)

Valuation

Valuation is a science and an art. There are complicated formulas as well as subjective decisions to be made. A valuation can be qualitative and a gut feeling. There is a lot involved in the valuation of a business.  

Generally, if one is selling a business, they are going to want a high valuation. In preparation for the sale, a founder would want to show a loyal customer base and excellent working capital. On the other hand, if they purchase a business, they would want to see a lower valuation.

In addition to the sale of the business, valuation is necessary when funding a business. Founders and buyers are utilizing numbers to give their best guess at the future value of the company.  Discounted cash flow considers inflation, so it is an excellent method to determine a possible investor’s equity disbursement.

Even though the valuation is quantitative, there are multiple methods for determining a final number. Because of the complexities of a business’s valuation, one would want to have a good accountant on their side. Some of the valuation methods discussed in the book “Entrepreneurial Finance (2014)” are multipliers, price/earnings ratio, free cash flow valuation, and asset valuation. Other sources list market capitalization and discounted cash flow (DCF) as methods of valuation.

There are many methods to come to the value that best benefit the party’s interest. Knowing that it is not exact science can help a founder at various stages of its maturity.

Rogers, S. (2014), Entrepreneurial Finance, McGraw-Hill Education, ISBN 978-0-07-182539-9

Hayes, A. (2020), https://www.investopedia.com/terms/b/business-valuation.asp, Retrieved on 9/18/2020

Cash Flow Project – Growing Your Business Too Quickly

Mike Weimar

Cash Flow Project

Ent 650

Growing your business too fast

Unexpected growth in revenue is a good problem to have in business. Many struggle to gain new customers and build long term business relationships. If new business is coming quickly to your start-up, that is excellent news! However, that growth needs to be profitable. Unprofitable growth can lead to cash flow problems. Without proper controls, significant and unexpected growth can seriously damage a business’s cash flow and their ability to pay the bills.

The founder of a start-up is passionate about their business and customers. They want to exceed their expectation, which will turn into additional sales. However, it is essential to focus on cash flow. Additional revenues do not necessarily equate to additional profits without proper management of the business. Growth is vital for a new business, but it is even more important to experience profitable growth.

A founder may complete the negotiation of a price with a client on a large contract. It might be larger than any other deal that the owner has had an opportunity to gain. So naturally, you would like to be as sharp as you can on your price offer. There is a lot to think about besides price alone. The following questions need to be considered.

1. How much time will this contract take me away from existing customers?
2. How much time will this contract take me away from pursuing new customers?
3. How quickly will this new customer pay?
4. Will I have to hire additional staff to service all of my customers, including the new customer?
5. Considering any other expenses, including extra labor, will the additional revenue make it the bottom line or just be eaten up by costs such as labor, receivables, or additional controllable expenses incurred as part of the service?

Without consideration of the above questions, a business owner could easily find themselves in the position where the revenue they are gaining is being used to pay the bills. When that happens, the path to profitability is not pretty. One might consider delaying payments to vendors. However, this could ruin your vendor’s relationship, which you have worked hard to build. Another option is you could decrease the quality of your service or product. The downfall is you may lose customers and gain a bad image. An unintended consequence of growing too quickly is poor customer service. You and your staff may not have enough time in the day to respond appropriately to customer needs. Another possibility is the lack of inventory. Not having the proper cash flow could result in having to decrease the amount of product carried in stock because the owner cannot afford to pay for extra inventory.

In most cases, profitable growth is worth the wait. An owner needs to feel confident that their product or service is worth the price they are asking. Once a deal is locked in, it isn’t easy to increase the price if it is necessary for the future.

15 Signs You are Scaling your Company Too Quickly, (2018), https://www.forbes.com/sites/forbescoachescouncil/2018/03/05/15-signs-youre-scaling-your-company-too-quickly/#3be501746611, Retrieved on 9/3/2020

Entrepreneurial Finance, Rogers, S., (2014), ISBN 978-0-07-182539-9, McGraw Hill Education