"We engaged with Belmont Acquisitions for a wide range of advisory services for our small public company. They assisted us with our first acquisition, raised over $1 million in capital, renegotiated debt, and provided investor relations services and compliance. During our time with them, our stock increased over 4000% with great liquidity for our investors."
"We have been a client of Belmont's almost since Belmont's inception. We found their Funding Proposal process to have been very helpful to crystallizing our business plans and its cost was money well spent. Belmont and its principals became longterm investors in our company and they have introduced us to numerous other funding sources as well."
"When no one else would provide funding for my business, I engaged Belmont to build a professional Funding Proposal. It was money well spent and Belmont provided the money I needed to acquire two self storage locations."
"When we decided to "go public" the only choice for us was to work with Belmont Acquisitions. They explained every step along the way, and took over all of the heavy lifting in regards to being pubic so that we could concentrate on our business. Then they helped us get our finances in order, with technology issues and almost everything else we needed."
"Belmont arranged our company's acquisition of multiple medical clinics by a public company. I have found their process in preparing our Funding Proposal, which is a comprehensive business plan, to be extraordinary. It helped us focus on our success. Belmont's experienced Personnel are dedicated and bring results- whether as a private or public company I would highly recommend them"
"When I wanted to buy an Allstate Agency, other than family, only the principals of Belmont believed in me enough to provide funding and advice."
"Belmont's unique process for mitigating risk through their Funding Proposal process obtained funding for my business when all other attempts failed because we were in dire straights.
"When I decided to raise capital to mine gold in Africa no one wanted to help me until I engaged Belmont. Using their business plan with detailed assumptions and cash flow reconciliations and risk mitigation strategies which they call a Funding Proposal I was able to raise the money I needed for my African Gold mine in less than 3 weeks! I highly recommend the Belmont team"
"I have done business with Belmont's principals for years. They were instrumental in helping us recapitalizing a credit card technology company that had raised over $60 million dollars with products that we then sold to MasterCard and AMEX. I found Belmont to be knowledgeable, hard working and always got results."
"I have done business with Belmont's principals for many years. They have successfully assisted me in renegotiating debt on an acquisition I made, assisted us to take another company public, and supplied and raised capital for a number of companies I've been involved with. I still do business with them today and recommend them whenever I can."
"We receive many loan applications from many sources. There are certain industries that we normally just don't process for funding. However, when we receive a funding package from Belmont, which is always complete and mitigates our risks, we are even able to process loan requests in those restricted industries. They do an excellent job."
"I have worked with Belmont in more than one of my business enterprises over the years. Two things stand out in my dealings with Belmont. One is their innovative business solutions and strategies. The other is their integrity."
"We recently engaged Belmont and are extremely impressed with their vigor, attention to detail and results. In the short time we have been with them they have already raised us almost $500,000 in working capital and have introduced us to powerful business and funding groups that we otherwise would not have available. They are more than just consultants as they treat our business as their own with as much passion as I do."
"Belmont has found numerous sources of money for our growing small public company. They Recently securing us a $5.0 million revolving line of credit not strictly based on receivables which we couldn't ordinarily qualify for. Specialty construction Company."
"Belmont helped arrange a new-hire and training grant for our expanding business and we received in excess of $100,000 that we don't have to pay back, isn't a loan and went right to work improving our business! Belmont's experts have amazing contacts and work diligently to find solutions for us."
"Belmont arranged a $ 6 million collateralized guarantee for a film project we are working on which has allowed us to enter into an agreement to acquire the rights to a nearly completed film. Belmont's people are creative and connected."
"Signed up with their affiliated Search Engine Domination and website development team and the results are amazing. i would highly recommend their business and marketing solutions. These are programs that multinational companies use at prices we can afford."
"Belmont's negotiations team came in and helped us negotiate over
$1 million in debt reductions from creditors through the use of our equity. This has lowered our overhead carrying costs and will make us a stronger more profitable enterprise. Belmont's experience and dedication is amazing! -They get results!"
"Belmont is relentless. As a marketing company it's difficult to get financing. With the discipline we created through their "funding proposal" process which includes a true third party business valuation they sourced us a $3 million dollar line of credit. They work incredibly hard to get the job done. Now with their help we are exploring taking the company public."
"When it became time to sell my business I engaged Belmont Acquisitions. They worked diligently and consistently and found me just the right buyer. Their process of due diligence and preparation allowed them to obtain the acquisition financing that the buyer needed as well. I would strongly recommend their services."
"Our Company is just starting to recover from the economic downturn and our financials are not yet strong especially historically. Belmont went the extra mile in due diligence to prepare us for the appropriate lender who because of Belmont's special relationships and considerable work provided us with the working capital that we need to grow, when no one else would."
"When I needed funds for my marketing firm I turned to Belmont Acquisitions. They are the most responsive financiers I've ever worked with—I paid them a little extra for expedited service and got it. Nights, weekends and everything in between. I received my first $4 million in a little over 3 1/2 weeks and now I'm engaging their operational team to help expand the business. I would highly recommend them."
"When I needed capital I turned to Belmont. I'm glad I did. I paid them $10k for due diligence after they provided me with a term sheet from a licensed hedge fund they work with. It was the best money I ever spent as their team is relentless, and they worked incredibility hard on my behalf. My loan never would have closed without them: I now have a $5 million revolver and have already drawn down $900k.
"When I wanted to grow my fashion design firm, I contacted Belmont Acquisitions. They found an acquisition target for my company, negotiated the transaction, and convinced the Seller to sell on terms favorable to us. Then they arranged 100% of the financing needed to close the transaction. This grew my company more than 15 times! I would highly recommend Belmont's experienced team."
"After doing an acquisition, we had a number of transitional issues. I was able to call on Belmont's experienced staff to provide technology assistance, operational assistance, and marketing assistance. I don't think that we could have made the transition without Belmont and their relationships."
Home > Company Blog
Post #21: 12-20-2015 - What Investment Bankers Do
Post #19: 12-06-2015 - Selling a Public Company vs. a Private Company
Post #18: 11-29-2015 - Valuation Methods Explained (comparables, discounted cash flow, etc)
Post #17: 11-22-2015 - Purchase Price Allocation
Post #16: 04-15-2014 - Belmont Has Access to Over 15,000 Businesses for Sale in Our Database!
Post #15: 04-07-2014 - Belmont Engaged by AXLX
Post #14: 04-05-2014 - OTC Markets Group Makes Changes
Post #13: 02-20-2014 - Valuation of a Startup: 409A, Pre-Money VS Post-Money Valuation
Post #12: 02-13-2014 - Hiring Professionals – Insurance Professionals
Post #11: 02-12-2014 - David's Market Prediction
Post #10: 02-06-2014 - A Series: Hiring Professionals - Your Legal Team
Post #09: 01-30-2014 - Equity Markets View
Post #08: 12-18-2013 - The U.S. Debt Crisis: Real or Imagined?
Post #07: 12-11-2013 - Pitfalls of "Crowdsource Funding"
Post #06: 12-05-2013 - Is This Slump Permanent?
Post #05: 11-22-2013 - Short Selling
Post #04: 07-19-2013 - Asset Based Lending
Post #03: 04-26-2013 - What is a Reverse Takeover or Reverse Merger?
Post #02: 03-18-2013 - Discounted Cash Flow Method
Post #01: 03-18-2013 - Our Company Blog
Newer Blog Posts >
David's Market Prediction
In my opinion, the correction that has stalled the U.S. equities markets since the beginning of 2014 is now over. Yesterday’s market surge has convinced me that the bulls are back in control and that the fears that have recently dominated market sentiment are now water under the bridge. Yesterday’s upside market catalyst would appear to be C-SPAN’s national television broadcast of the new Federal Reserve chair, Janet Yellen’s first visit to Capitol Hill in her new official capacity.
It wasn’t necessarily what she said that sparked yesterday’s rally. It was that the transition from Bernanke to Yellen is appearing to be seamless. Why did this televised interview matter?
First, Chairman Yellen’s comments indicated that the Fed’s monetary policies remain in effect and that there were no policy changes on the horizon. Second, she appeared to be at ease in front of a mostly cooperative House Financial Services committee. In all, there was no stumble as opposed to the early days of her predecessor, Ben Bernanke.
U.S equities investors and traders fears were likely influenced by the memory of Ben Bernanke’s first days in office in 2006. Shortly after Mr. Bernanke addressed Congress in one of his first appearances on the Capitol Hill, he was cornered by that intrepid CNBC reporter Maria Bartiromo at that year’s White House Correspondences Dinner (on a Saturday night), where he gave additional color to his recent testimony. His testimony to Congress at that time led the markets to expect only one additional interest rate hike. Encouraged by the end of monetary policy tightening, the markets reacted positively to this testimony. The report by Maria Bartiromo to the markets on Monday, May 1, 2006 indicated otherwise and the markets reacted in panic during that Monday trading session.
Ben Bernanke learned quickly and thereafter kept his commentary on forward monetary policy limited to “normal” channels. Yesterday’s market reaction to Janet Yellen’s testimony would seem to indicate that the markets are buying into a seamless transition.
What does this change in market sentiment mean for equities investors and traders?
I predict that 2014 will be a positive year for the markets, but reiterate that 2014 will not be as strong of a year for equities as 2013 was. As a result, the ability to successfully pick the right stocks will determine who will win and who will lose in this year’s equities portfolio contests.
Selling a Public Company vs. a Private Company
Why do public companies generally sell at a higher earnings multiple than private ones?
It’s not uncommon for public companies to sell for earnings multiples of 20 while private companies in the same industry sell for multiples of just 3 to 6. This seems baffling on the surface, but understanding these factors will clear things up.
Showing Off the Profits Versus Hiding the Profits
Public companies want to appear profitable to investors, so the company’s earnings are maximized in financial reports. In contrast, private companies seek to reduce tax liability, so the emphasis is on minimizing the appearance of profit. The end result is that a private company that may be of equal value to a public company will appear to be a worse investment.
The Liquidity of Shares
Stock in public companies is easily sold. Your portfolio of investments in public companies can change rapidly, if you so choose. Selling shares of a privately held firm is more difficult and generally takes far more time and hassle. This is a turn-off to potential investors and negatively affects the price.
The Cost of the Investment
The average price for shares of public companies is relatively cheap compared with shares in private companies. You’ll find shares of publicly traded firms in every sector that cost less than $10. Shares in private companies have a much higher average cost. Coupled with the increased difficulty in selling these shares, the high cost creates an investment perceived to be a higher risk.
Volatility and Survivability
History shows that economic downturns, growth in competition and even regulatory changes often lead to loss of profit and failure for private companies at a rate much higher than for public firms. Savvy investors know this, and that information reduces the value of private company stock.
A public company has a stamp of approval that a private company often doesn’t have—investors have stepped forward and bought shares of the firm. This gives potential investors’ confidence. Even if the private company has shareholders, the perception that the risk is greater is difficult to overcome. Investor confidence or lack of it is a powerful market force.
The way public companies within a specific industry structure their debt and equity is very similar. Investors feel like they’re comparing apples to apples when considering price to earnings figures of various public firms.
Private companies use different capital structure methods from public firms and from one another, so the valuations may be based on pre-debt value rather than on familiar capitalization structures, for example. As a result, investors comparing potential investment in a public vs. private company often feel like they’re comparing apples to oranges.
The confusion and the lack of understanding most investors have in the way capitalization is determined for private companies is a deterrent to investment, and this ultimately reduces the sale price.
If you’re on the selling end of shares in a private firm, these factors will lower the value of the shares you hold. However, if you’re considering investment in a private company, understanding these factors and doing your homework can lead you to exceptional bargains.
Valuation Methods Explained
(comparables, discounted cash flow, etc)
There is both a science and art to the valuation of a company. The science side looks at hard performance data; the art side considers the company’s management and the valuation of comparable companies. It must also determine which valuation methods are appropriate for application to each specific company.
Here’s an overview of valuation methods widely used in this industry.
Discounted Cash Flow
The cash flow projection for a company is an estimation of the cash it will generate in the future minus the capital it will use to produce that income stream.
The discounted cash flow (DCF) model takes future cash flow projections and discounts them by employing the weighted average cost of capital (WACC) which is the time value of money. In simple terms, the goal is to find the current value of the (estimated) future cash stream produced. The formula is:
· DCF = Calculated DCF value
· CF = Cash Flow
· r = Discount rate (WACC)
What is derived is the present value (or today’s value) of that future cash. The DCF calculation is used when considering the potential return on investment. A discounted cash flow projection that is higher than the present value characterizes an investment that might be worthwhile when considered in light of the time value of money.
In the DCF model above, the present value of the future cash flows is predicted based on forecasts of what those cash flows will be. In the risk-adjusted NPV model, the net present value (NPV) is modified based on the probability that the forecasted future cash flows will prove accurate.
Complex formulas are used to determine the probability of each forecast’s accuracy. Also known as the rNPV (risk) or eNPV (expected) model, the Risk-adjusted NPV valuation method is the primary method used widely in the pharmaceutical and biotech industries.
This method of valuation starts by analyzing vital company data such as price to earnings (P/E), enterprise value to sales (EV/S),price to free cash flow (P/FCF) and R&D expenditures. The Market Comparables method then determines a valuation based on the market capitalization of companies with similar data. Note: market capitalization, or market cap, is the total market value of a company’s outstanding stock shares.
The VC method, as this approach is known, is used for pre-revenue companies. It is used to determine the anticipated Return On Investment (ROI), or Terminal Value, from a new venture. The VC method is used by those planning to make a capital investment and then get their money out, preferably with a profit attached, within several years (typically three to eight).
The true ROI of a capital outlay is the Terminal Value divided by the post-investment valuation. The Terminal Value (or Harvest Value) is what the investors are paid when the company is sold or their shares are bought. If the equation’s sum is greater than one, a profit has been made. For example, a Terminal Value of $10 divided by a post-investment valuation of $7.50 is 1.3333 and demonstrates a profit on the capital ventured. To be effective, the Venture Capital method must accurately predict the Terminal Value and weigh it against the total amount of capital required.
Purchase Price Allocation
What is Purchase Price Allocation?
Purchase price allocation is the allocation of purchase price to the assets acquired and liabilities assumed at fair value in any acquisition or business combination as of the closing date. According to the Financial Accounting Standards Board (FASB), all business combinations are required to be accounted for by the purchase method as per the guidelines in the Accounting Standards Codification Topic 805 (ASC 805). ASC 805 became effective for business combinations with acquisition dates during financial reporting periods beginning on or after December 15, 2008.
How is the purchase price allocation done?
The first step in purchase price allocation is to determine the purchase price. This includes the value of cash and/or stock consideration and payments to target company's employees for services performed in the past which have no future benefit such as severance payments to target company's former managers and stock options that vest upon a change of control. Once the purchase price is determined, it is then allocated to different classes of assets such as cash, marketable securities, accounts receivable, inventory, other assets, intangibles and goodwill. The allocation of purchase price among these classes is based on the assets’ relative fair market values determined using either income approach, cost approach, market approach or a combination of them.
What are the typical categories of intangible assets considered during the allocation of purchase price?
ASC 805 requires that all identifiable assets acquired, including identifiable intangible assets, be assigned a portion of the purchase price based on their fair values. The typical categories of intangible assets considered are marketing-related intangible assets such as trademarks, internet domain names; customer-related intangible assets such as existing customer relationships; contract-based intangible assets such as franchise agreements, royalty agreements; and technology-based intangible assets such as patents, trade secrets.
Why is it important to determine the allocation of purchase price in early stages of an acquisition process?
The allocation of purchase price is a very important part of the acquisition process because it can have a dramatic effect on the net after-tax proceeds to the seller and net after-tax cash flow to the buyer. Generally, the buyer and seller have competing incentives when it comes to the purchase price allocation. The buyer wants more purchase price allocated to assets that can be recovered more quickly such as inventory, accounts receivable, and equipment. The seller wants more purchase price allocated to assets that will result in capital gain, goodwill being the most typical example. The amount allocated to various assets is compared to the tax bases of the assets sold to arrive at gain or loss. The determination of whether gain or loss is capital or ordinary, or whether depreciation recapture applies, depends on how purchase price is allocated to each class of assets.
Belmont Has Access to Over 15,000 Businesses for Sale in Our Database!
Did you know that because of Belmont's extensive contacts and relationships that we routinely have access to over 15,000 businesses for sale across the USA? This is another way that retaining Belmont can help your company grow through acquisitions or strategic relationships. These businesses are in all types of industries from manufacturing, distribution, insurance and real estate agencies, broker-dealers, retail, online and many more. Talk to your Belmont representative today to see how these resources can be out to use in your enterprise.
Belmont Engaged by AXLX
Axiologix Inc., a $12 million in revenue and growing Cloud Communications and Mobile Payments provider, primarily catering to Indian, Pakistani and Bangladesh expat populations the Middle East, Africa, U.S. and around the world has just retained our firm to assist in capital formation, investor relations, merger and acquisitions and general advisory services. This firm is publicly traded in the OTC Pinks with the symbol AXLX. Belmont normally doesn't take engagements from "Pink" sheet companies unless there is something special about the company and we believe very strongly that they do. Axiologix have revenues and assets and an exciting future as they build out their plan. - Axiologix ticks all those boxes and is a company to watch.
OTC Markets Group Makes Changes
Recently, the OTC Markets Group changed the eligibility standards for companies to be listed or continue to be listed on the OTCQB. This includes new minimum values, and increased fees. We believe this is important information for any companies listed on the OTCQB, or considering going public on the OTCQB. For a full write-up of the changes, see the Press Release here.
Valuation of a Startup: 409A,
Pre-Money VS Post-Money Valuation
What is Valuation?
Valuation is the value of a company. Valuing startups is a different ball game than valuing established companies because of associated high level risk in many areas such as customer base, industry, patents, primary competitors, revenues, absence of industry guidelines etc.
Also, valuation at ‘early stages’ of a startup is more about its “growth potential” and not so much about the present value of the company. It means that if the company’s valuation today is $1m , it does not mean that the entrepreneur can sell it for $1m. It just means that depending upon factors like prior exits of the entrepreneur (if any), customer base targeted and many other qualitative factors the company is assigned a value.
It is usually performed to help startup companies set the strike price for any employee stock options they choose to issue. Private and startup companies need to pay special importance to a proper 409A valuation as it determines the fair value of the startup’s stock.
It’s best to have an objective and qualified third-party perform the valuation, which usually means hiring an appraisal firm. The appraisal firm usually uses one of the valuation methods as outlined in the AICPA guidelines of “Valuation Of Privately Held Company Equity Securities Issued As Compensation, “(the “Practice Aid”).
How often private companies need 409A valuation?
When more than 12 months have elapsed since the last 409A valuation.
When the current valuation does not reflect information that materially affects the value of a private company e.g. material litigation and/or recent preferred stock financing.
Importance of a proper 409A for Startups and Private companies: Generally, in the case of NSOs if the grant/exercise price of options determined by a 409A valuation is greater or equal to fair value, the “spread”(difference between exercise/grant price and market price) is included as income at the time of exercise and not at the time of vesting and the options are exempt from Internal Revenue Code(IRC) Section 409A guidelines.
However, if the issued options are at a discount (less than fair value) they are considered “Deferred Compensation” and are subject to IRC Section 409A guidelines for Non-Qualified Deferred Compensation plans. In such a case, the spread is included in the income of the employee at the time of vesting rather than exercise. Thus, the employee is taxed on shares (s)he has not yet exercised and which (s)he might not even sell for a profit.
It is company’s deemed value prior to financing. It usually appears on the first page of the term sheet and is calculated on a fully- diluted basis.
Equation for calculating Pre-Money Valuation:
Pre-Money Valuation = Post-Money Valuation - Venture Capital Investment
Price Per Share = Pre-Money Valuation / Pre-Financing Fully Diluted Capital
Example: Common stock held by founders = 1,400,000, Option pool is 600,000 and pre-money valuation is $2m, which leads to price per share of $2m/2m =$1/share. The Pre-Financing Fully Diluted Capital is 2,000,000 (1,400,000+600,000).
It is value of the company after the financing. It can be calculated in one of the following ways:
Post-Money Valuation = Pre-Money Valuation + Aggregate Investment
Post-Money Valuation = VC’s Investment/VC percentage ownership
Are HIGH pre-money valuations good?
It’s not necessary that all HIGH pre-money valuations are good.
Reason: If a startup shows a HIGH pre-money or seed valuation then it will need to grow ‘a lot’ more from seed financing to each round of financing to show the commensurate growth. If it can’t show that, there would be a “down round.” To put it simply, “down round” is when a VC funded startup raises another round of financing, (could be B, C, or D) at a pre-money valuation ‘lower’ than the prior round(s) of valuation. This is usually because in the current round the company is worth much LESS than it was after completion of its last financing round.
About The Author
Arushi Bhandari, is a licensed CPA, MBA who has helped several Silicon Valley startups at different stages with their accounting and tax related issues. She blogs regularly at www.startuptaxaccounting.com and has published an eBook which insights into the impact of JOBS Act & Dodd Frank Act on startup funding, terms like angel, accredited investors, venture capitalists, stock options, Restricted Stock, RSUs. It gives in-depth examples & templates explaining documents like Term Sheet, Cap Table, Convertible Securities plus the importance of 83(b) filing.
Links to Download Arushi’s eBook
Apple iBook: STARTUP Financing, Equity and Tax
Kindle edition: STARTUP Financing, Equity and Tax
Hiring Professionals - Insurance Professionals
It’s no secret; no professional sports franchise would ever expect to compete at the highest level possible and become champions without the guidance, experience and knowledge of the team’s head coach. In the same manner, it is without question that businesses of every kind need to engage the same approach and appoint an insurance professional when considering the various options of Commercial Insurance, which in a numbers cases are required by law; such as Workers Compensation and Commercial Automobile Liability.
Beyond any statutory requirements, many of us know maintaining the most competitive portfolio of Insurance is not only part of our “Best Business Practices”, it is in many situations contractually required by clients and vendors. Because most contracts are written by attorneys, many industry professionals would suggest that having an attorney review your contracts to maintain your interest is highly recommended. In most contracts there are specific areas that address specialized topics which are part of the insurance industry but not immediately recognized as insurance related; such as, hold harmless and indemnity provisions.
It is with that in mind, hiring the right insurance professional to secure for your businesses his or hers guidance, experience and knowledge so competing at the highest level is not only possible but expected. For many people in small or rural areas, hiring the right insurance professional is as simple as choosing between two or three people. However, for many business professionals located in larger cities, most can face possibly having unique and very complex coverage issues; such as, Directors & Officers Liability, Professional Errors & Omissions Liability, Product Liability, Completed Operations Liability, and Surety & Fidelity Bonds. Additionally, now with the Affordable Health Care Act (“Obamacare”), even seasoned insurance professionals need specialty guidance navigating these new health insurance waters.
With all that said; what is the secret for finding the right person to represent your interest in these complicated insurance waters? First and most importantly, what is your ability to communicate and have open and equal conversations regarding the specific needs of your business? Does the insurance professional listen, or do they believe based on behavior that brilliance is shared by how much they talk? Next, their professional experience should be accompanied by their individual commitment to continuing education, endeavoring to stay on top of the most current industry trends and new product announcements, while at the same time knowing which insurance carrier is trying to achieve market share in your given industry, because most of the time when a carrier is striving for market share goals this will result in the lowest premium available.
One avenue that we as a business community have become very accustomed to is the referral network that we have spent a career building. Never forget, just because you and I are very close friends and business referral associates, it does not mean that your friends will be a perfect fit for me.
Finally, never ignore your “gut feeling”! Our mothers have always warned us that if something sounds too good to be true. Well, maybe it is; what is your gut telling you? Listen to it, and include your gut feeling in any educated decision you make.
A Series: Hiring Professionals - Your Legal Team
One of the most daunting challenges for today's business person is how to hire the right professionals to help them grow their operation, finance their project or solve their problems. You want to acquire the best professionals, those with real experience but at a price that you can afford. These professionals include your attorneys, your accountants, your auditors, Investor relations and public relations firms and your finance advisers and your insurance professionals. All of these professionals are like "golf clubs"- you need the right professional in the right situation.
Attorneys. This is the area where most business people start and this is the relationship that is most fraught with pitfalls. Most business people assume that because their attorney is licensed by the bar association in their state that they can advise on almost every aspect of the law. This is completely false. There are so many nuances to the law, so many laws and so many laws modified through precedence setting cases that it is humanly impossible for any attorney to know all the laws in all areas! So you need to hire an expert in each area of the law; securities, bankruptcy, general contract law, real estate law, etc. First choose a generalist; someone well versed in general business contract law. When you interview this lawyer, get some references. The most important questions are; To whom do you refer those cases that you aren't the most qualified for- for example bankruptcy, securities, litigation. Then ask them to explain the type of case they just recently referred, why did they refer it and how did it workout for the client. Listen closely to his/her answers, as the responses will give you some insights on their thoughts about referrals. Then if you like their answers, and feel comfortable with the candidate lawyer, then go meet with the lawyers they refer cases to; as it is likely that at some point you will be interacting with these professionals too!
Two key Mistakes people often make when interacting with their attorneys;
1. Believing that your interests and theirs are in line. Remember that the bigger the mess that you get into, in any situation, the better it is for your lawyer(s)! They bill by the hour and therefore make more money! So while most lawyers work really, really hard to ethically tend to their client's needs, your interests and their interests are diametrically opposed. You want to spend as little as possible in legal fees and your lawyer wants you to spend as much as possible! I never want to bet on someone working against their own best self-interest! So when a lawyer tells you certain litigation will only cost X amount as a retainer, question that in detail. Get advice from other business people. The litigation bill will always be many times more than the original estimate. The retainer that they require is always insufficient to cover the bill.
2. Going to your lawyer for business advice. This is the most common mistake all business people make. Lawyers are unqualified to make business decisions! In most cases lawyers only have experience in the law and/or in running their own firm. Even if they are contract lawyers and have seen many, many transactions. They always do so by looking at them from the outside. It is not their deal and they don't have to live with the decisions made in regards to the business. Lawyers are trained to see risk everywhere. They are risk averse. The best way to eliminate risk is to take no risks. Therefore most lawyers advise against almost every transaction. It’s also the safest place for THEM to advise against transactions. If they advise you to do the transaction and it fails you might hold them accountable. If they advise against it and it fails they are safe. Therefore, you need to find business advisers who have been there before and can assess risk from a business person's frame of reference.
A good legal team can really enhance your business, your reputation and the quality of your transactions, when used correctly. You want lawyers who understand business, give advice within their core competencies, and are cost conscious. Learn to use their experience and advice in the right way- to advise on the law and protect you when inevitable litigation occurs and to prepare your documents to mitigate your future risks as much as possible. But remember, you are the captain of your ship and you need to reserve for yourself any and all business decisions!
A good place to start your search for a legal team is on our site in the "trusted associates" section. Belmont is made up of a team of business professionals who together have been involved in almost every conceivable type of transaction, and the legal team we have assembled "fits the bill". So if you are looking to establish your legal team, then interview our trusted associates. If you like them as much as we do, you might have your team assembled. If not, keep looking and interviewing. In addition to competency, personality is important. You want a legal team that YOU are comfortable with, one that respects you and doesn't "talk down to you". Hopefully these choices will build long term relationships for you and your business. It’s also a good idea to stake your claim to your legal team before you need them! It allows you to quickly react as needed when issues or opportunities develop.
Equity Markets View
What does the recent stock market volatility indicate about the future direction of the equities markets in 2014?
Let’s review recent market history. Most would agree that 2013 was a banner year to have invested in stocks.
· The Dow Jones industrial average was up 26.5%, its best year since 1998.
· The Nasdaq Composite was up 38%.
· The S&P 500 was up 29.6%, its best year since 1997.
· The Russell 3000 which measures a broad mix of small cap companies was up 33.5%
It would seem that making money in the equities markets in 2013 by picking winning stocks was as simple as throwing darts at the Wall Street Journal’s stock listings pages.
So far in 2014, the markets have exhibited some volatility and expressed a need to pullback. No matter what the excuses that financial headlines are offering, whether it be evidence of emerging markets currency devaluations, the potential for the US Federal Reserve to accelerate the tapering of QE forever or any of the financial headlines blamed for market sell offs, the real reason for a market pullback is that investors who had big gains in 2013 are taking profits and eyeing the future with a little caution.
It has been a relatively long time since the equities markets had a healthy pullback. Every attempt at a pullback in 2013 was short lived and it was typically a matter of days and weeks before the buyers returned with vigor to move the markets further upward. There was a sense that institutional money managers had missed the early 2013 positive market moves and were playing catch up all year long. Every dip in 2013 was another opportunity for institutional money to try and overtake their thus far poor performance metrics.
My sense is that the current market pullback is healthy for the markets. I am not expecting this pullback to be extraordinary deep or painful. US GDP forecasts have recently accelerated upward and the world economies would seemingly be on the rebound. In this global economic environment, the United States equities markets are probably ahead of themselves for now. However, signs that the economic forecasts are becoming reality will bring this pullback to a swift end. I expect that the first signs may take as long as Q1 earnings season which begins in mid-April, 2014. I am looking for signs of top line revenue growth for already profitable reporting companies.
In the meantime, I can say with certainty that 2014 will not be as good a year for equities in general as 2013 turned out to be. Stock picking as opposed to dart throwing will likely rule the day.
Stocks chosen for their accelerating improvement of fundamentals will perform the best in 2014.
The U.S. Debt Crisis: Real or Imagined?
Alan Greenspan was once asked, "What is the biggest fear you have for the U.S. economy?"
It is a common question that is often asked of any Chairman of the U.S. Federal Reserve, and unlike many other times when asked this question, Mr. Greenspan didn't answer in "Fed-Speak" ("Fed-Speak" is the term used to define pronouncements made by Mr. Greenspan that contained many words but said nothing. He used Fed-Speak so as not to interfere with the markets). This time he answered, "My greatest fear is that the people making the rules have no idea how the economy actually works". Obviously, the people he was speaking about was none other than our elected officials!
Think about that for a second... Our federal officials are mostly lawyers and lifetime politicians. The vast majority have never run a company, never had to make payroll, and have exempted themselves from most of the laws that affect the rest of us. Few if any have any experience in economics; those highly qualified people all reside in Treasury, the Congressional Budget Office, the Fed itself, and other agencies of similar type. Yet those career bureaucrats do not make the laws, nor have the right to veto them, as our elected President can - lawyers and career politicians make the laws.
Therefore, Mr. Greenspan's fears are in fact logical.
Let's look at the debt a little differently.
To accomplish this, let’s start with a typical fiscally responsible U.S. household (yes, there are many of these). Our prototypical household has a home that they purchased for $188,000, and a $ 150,000 30-year mortgage at 3.5% with monthly payments of about $550 per month including taxes and insurance. Our "typical" household has monthly income $2,200 (annual income of $26,400). The debt payments represent 25% of the annual income. The debt represents a mere 7x of the annual income.
I think everyone would agree that this household is on a solid financial footing.
Now let's look at the United States of America....
The United States has over $188 trillion in assets! The U.S. Debt is under $17 trillion dollars. That means the debt is less than 10% of U.S. assets; not 7 times the income like in our prototypical household!
Is the debt honestly really too large?
The United States collected $2.3 trillion in tax payments in 2011 alone and the interest on the debt is $151 billion in that same year representing less than 6.5% of the income.
Obviously, the US can service the debt just by conventional means.
A look at the Advantages the U.S. Has.
Now let’s look at the unique advantages that the US possesses but that our typical household does not. The U.S. Federal Reserve sets the inflation target. Currently, the Fed has a target inflation rate of 3%. This doesn't mean that the Fed policy is to keep the inflation below 3% as most people assume, but rather the Fed wants and promotes 3% inflation. Why?
Since debt is a fixed amount when we have 3% inflation, that means each and every year that debt becomes less valuable by 3%. So if we borrowed $100,000 by next year, it’s only worth $97,000 in today's numbers. Does that make sense to you?
Now let's look at the US debt over the same 30 year period of that home mortgage. Since the inflation target is 3% than over 30 years, 90% of the debt will have been depreciated away through inflation (30 years x 3%= 90%).
That means in today's dollars that debt is worth less than $1.7 trillion!
This is only 73% of the United States' 2011's tax revenue of $2.3 trillion dollars!
It represents less than 1% of our assets!
However, remember that when you have inflation debt depreciates but hard assets generally appreciate. So over the same period, the US assets are appreciating by about that 3% per year. 3% of $188 trillion dollars is $5.64 trillion dollars. To put that another way, the increase in our assets in one year is over 3 times the debt in today’s dollars!
This is why the Fed and the US Treasury promote inflation: it’s good for government!
This is why, in spite of a downgrade of US securities by certain rating agencies, money still flows into the United States. What household wouldn't want to have debt at less than 1% of its assets?
Therefore, it is quite clear that the debt crisis is in reality imagined. It’s fictitious!
At least, in the United States it is. Countries like Greece and Spain don't have the ability to dictate their inflation rate, nor to print their own money to support their target inflation rate - so they in fact have a debt crisis. They also have nowhere near the assets the U.S. has - in fact, no other country in the world does!
So what is this fictitious debt crisis about?
It is about elections - nothing more. Politicians get elected by what portion of the Federal Budget they can bring back to their constituents, who will provide them the money to run for re-election! In our opinion, our politicians, who don't truly understand the economy and the debt are in many cases unintentionally misinforming the people about the debt crisis, and are really arguing about how they will spend the money to feather their own nests! Different politicians have different visions on how to spend the money that is available for their own agendas. However, every household understands that you can't continuously spend more than you make, so by "harping" on the debt, each political party seeks to gain advantage with the voters.
In our personal lives, we have all learned through the financial crises of 2008 that debt is good if it brings appreciating assets or greater income. It is not beneficial if that debt is just heedlessly spent.
The danger here is not the debt, but rather how we will spend the monies that we do collect and that we borrow. Is it being spent to "feather" certain political parties’ agendas for reelection, or is it being invested to grow more assets for the United States and its citizens?
In future articles, we will look at this very topic.
As you might have surmised from this article, at Belmont we look at things very differently. We look at what is, not what it appears to be. It is that clear insight that allows us to look at your business as what it is, and customize solutions that work for YOU!
Pitfalls of "Crowdsource Funding"
What is “Crowdsource Funding”?
“Crowdsourcing” is a term that is commonly attributed to Wired magazine editors Jeff Howe and Mark Robinson discussing the concept in which projects are worked on by a vast team of loosely affiliated professionals and hobbyists, usually with little or no pay. The term “Crowdsource Funding” is currently generally used to identify the concept where business owners will use a website to sell very small shares or pieces of their company or start-up project to hundreds or thousands of individual investors without actually taking their company public. This methodology theoretically provides the owners with access to a much larger pool of investors than they would have using more “standard” funding sources.
How does it work?
When an inventor, artist, filmmaker or other business owner has an idea for a new concept, that person may not want to, or can’t, access business loans or investment funds through the major banks or investment firms. There are several major websites that allow these business owners to offer shares of their businesses or projects through crowdsource funding, as long as the projects meet the specific criteria outlined on the individual sites. Some of these sites allow the business owner to access the funds from the investors whether or not they meet their funding goals, but the majority of the sites require that the business owner meet their funding goal within a predefined amount of time, and if the funding goal is not met by the deadline, no funds are taken from the investors or disbursed to the business owner.
Is crowdsource funding a good idea?
Within a very tiny, strict set of parameters, it can be a good idea, but very few projects fall within that narrow set of parameters. Just like with any project, unless you have the right project, correctly presented, and are able to attract interested investors, the project will fail.
While there have been a handful of success stories using crowdsource funding (and crowdsource funding is very trendy right now), the vast majority of projects never reach their goals and therefore never get funded. The major cause of the failure of these projects is precisely the same set of reasons why the business owners couldn’t get funded through the more mainstream sources of funding: lack of business plans, lack of sustainability of the business, lack of business experience in the owners or principals, or any number of other missing pieces to a complete and sustainable business. In Michael E. Gerber’s best-selling “E-Myth” series, the author discusses the problems that good entrepreneurs face when trying to start and run a successful business: being a good plumber, good filmmaker, good database programmer, good taxi driver or a good investment banker, (essentially a good anything), does not mean the person is a good business manager; instead it only means that the person is good at what they already know what to do. Learning to successfully run a business is a different set of skills, and without the knowledge of how to run a successful business, the entrepreneur is destined to fail. Crowdsource funding tends to attract the least-experienced business managers, because it appeals to the idea of quick or easy funding for an idea that no banker will touch. Crowdsource funding allows the would-be business owner to bypass the most important steps of setting up a successful business and jump right to funding. While the business owner may be able to sell their idea to friends and family and a few other supporters, the further away from their main network the business owner gets, the colder the funding becomes, and almost never do the projects get funded.
Additionally, inexperienced business owners are almost never prepared for the task of managing investor relations and expectations, even on a small scale; when faced with hundreds or thousands of investors, the inexperienced business owner is almost always in way over their heads. Large corporations with hundreds, thousands or potentially millions of investors have entire departments dedicated to Investor Relations, staffed with experts whose only job is to interact with investors and the market (and regulators). For the small would-be entrepreneur, fielding inquiries and demands for information from hundreds or thousands of investors would be more than a full-time job, forsaking the original work the business owner wanted to do when they opened the company and thus defeating the purpose of opening the company to begin with.
How can you avoid the trap of crowdsource funding?
Whether you are looking for funds to grow your existing business, or funds to get your start-up off the ground, listen to what those who have refused to fund you have actually said. Sure, it’s disappointing and frustrating when banker after banker denies your applications, but set aside the righteous indignation and hurt feelings for a moment and reflect on the factual reasons for the rejections. In most cases, there will be gold among the painful rejection letters. “Your business plan did not show how you intend to spend the funds”, “you are missing a five-year plan”, “your expected revenue increase is not sustainable”, “at your new projected run-rate, you will be out of cash before you can fulfill the second order.” These are all fantastic pieces of news, because the banker has told you exactly where your weaknesses are. In these cases, you have not just been told where your documentation is weak, but where your business is almost surely going to fail if you don’t fix these issues right now, while still in the planning stage, and before a single dime has been spent on a mistaken and malformed folly. Instead of jumping ahead and hoping really hard that your business will get the money it needs in a crowdsource funding drive, stop, listen, fix and move forward in an educated and managed manner. Make the investment in a good business adviser (like Belmont Acquisitions), follow the lessons and advice they give, and then work your way through the various funding processes again, this time with a solid plan and foundation. Fixing the problems will help you learn the important skills to be able to run your business, not just be a good widget maker. With these skills, you have a much better chance of succeeding with the banker or other investment source that turned you down previously.
Once you have polished up the project and are ready to present the project for funding again, how do you get that project in front of qualified investors? Do you use an email campaign? Do you present to institutional investors? Do you try to take your company public? Belmont Acquisitions is an experienced partner that can help you navigate those waters by placing you in front of the right investors, helping you craft the right email campaign and send it to the right recipients, and connecting you to the right legal support for setting up your company as a public entity, and giving you extensive assistance with investor relations, SEC filings, web presence, and outreach campaigns.
Ultimately, unless you have a million close friends, family, or fans that are all willing to give $1, $5 or $10 towards your project to get it off the ground, you are very likely to not meet the goals on any crowdsource funding sites, and will only find disappointment, embarrassment and wasted time at the end of the effort. Instead, retain Belmont Acquisitions, and expect success.
Is This Slump Permanent?
On Sunday November 17, 2013, Paul Krugman published an Op-Ed in the New York Times entitled “A Permanent Slump?”, and we at Belmont Acquisitions thought we could offer some commentary on Krugman’s conclusions based on our own observations in the marketplace.
Krugman poses the questions: “what if the world we’ve been living in for the past five years is the new normal? What if depression-like conditions are on track to persist not for another year or two, but for decades?”
In the piece, Krugman notes that Larry Summers points out that the financial crisis that led to the so-called Great Recession is by most objective measures behind us and has been for years. Ask any small to mid-size business owner, and they’ll tell you that the banks largely aren’t lending, and when they are, they tend to like to push government insured products. Is this a symptom or a cause of the present economic climate?
We offer the hypothesis that the banks not lending is a symptom rather than a cause; theoretically, the banks would love to lend money to everyone;that is how banks make money. It could be that there is still a “hangover” from the crash in 2008, it could be that consumers and small businesses don’t have their balance sheets in order, or it could be a sign of more onerous regulation enacted post-2008. In reality, this is a complex issue, and complex issues rarely have simple answers. We believe that there is some combination of all of the above as well as a number of factors not listed. If there were a simple solution, presumably Congress could have agreed on it.
Krugman makes a couple of interesting points later in the piece; first, that the present state of affairs is the new normal,and, more interestingly, that “virtue is vice and prudence is folly, in which attempts to save more (including attempts to reduce budget deficits) make everyone worse off – for a long time”. The latter presents much to discuss; he is concluding that austerity is bad (look at what happened in Europe!) and that we must not only encourage government spending, but enact policies to discourage saving by consumers— that we must all spend for the good of everyone else.
We believe that everyone who even occasionally reads the financial news would agree that the austerity programs in Europe appear flawed to say the least. But Europe is not the United States. The United States has a number of advantages over any other country or block of countries in the world. Whether something worked (or didn’t) in the European theater is not necessarily indicative of whether or not it will work here. From a policy perspective, we’d be remiss not to absorb the lessons learnt elsewhere, but we’d be crazy to not look at our own situation for what it is.
Krugman mentions one possible cause of persistent depression-like conditions – slowing population growth. In this, Belmont agrees with Mr. Krugman. The United States is the only major industrialized economy with a meaning population growth rate (although it is slowing). Perhaps the lack of population growth is a major culprit in the persistent slump in Europe?
For Belmont, the bottom line is for an economy like ours, blessed with two oceans, a series of interconnected rivers, excellent transportation infrastructure, private property rights which are largely respected by the court system, and the world’s reserve currency (which does not need to follow down the path of the Europeans), enacting a policy which discourages saving not only risks creating a generation of neuveau-poor, it hampers our ability to invest in the future. We aren’t sure on which planet some of Krugman’s ideas originate, but anyone who has managed a budget can agree that it is well-nigh impossible to spend yourself into prosperity.
In conclusion, I think we can agree with Mr. Krugman that the present climate is the “new normal” for the foreseeable future, but we disagree with his conclusions as to the causes and fixes of it.
For reference, here is the original article in its entirety, originally published on November 17, 2103 in the New York Times:
Spend any time around monetary officials and one word you’ll hear a lot is “normalization.” Most though not all such officials accept that now is no time to be tightfisted, that for the time being credit must be easy and interest rates low. Still, the men in dark suits look forward eagerly to the day when they can go back to their usual job, snatching away the punch bowl whenever the party gets going.
But what if the world we’ve been living in for the past five years is the new normal? What if depression-like conditions are on track to persist, not for another year or two, but for decades?
You might imagine that speculations along these lines are the province of a radical fringe. And they are indeed radical; but fringe, not so much. A number of economists have been flirting with such thoughts for a while. And now they’ve moved into the mainstream. In fact, the case for “secular stagnation” — a persistent state in which a depressed economy is the norm, with episodes of full employment few and far between — was made forcefully recently at the most ultra-respectable of venues, the I.M.F.’s big annual research conference. And the person making that case was none other than Larry Summers. Yes, that Larry Summers.
And if Mr. Summers is right, everything respectable people have been saying about economic policy is wrong, and will keep being wrong for a long time.
Mr. Summers began with a point that should be obvious but is often missed: The financial crisis that started the Great Recession is now far behind us. Indeed, by most measures it ended more than four years ago. Yet our economy remains depressed.
He then made a related point: Before the crisis we had a huge housing and debt bubble. Yet even with this huge bubble boosting spending, the overall economy was only so-so — the job market was O.K. but not great, and the boom was never powerful enough to produce significant inflationary pressure.
Mr. Summers went on to draw are markable moral: We have, he suggested, an economy whose normal condition is one of inadequate demand — of at least mild depression — and which only gets anywhere close to full employment when it is being buoyed by bubbles.
I’d weigh in with some further evidence. Look at household debt relative to income. That ratio was roughly stable from 1960 to 1985, but rose rapidly and inexorably from 1985 to 2007, when crisis struck. Yet even with households going ever deeper into debt, the economy’s performance over the period as a whole was mediocre at best, and demand showed no sign of running ahead of supply. Looking forward, we obviously can’t go back to the days of ever-rising debt. Yet that means weaker consumer demand — and without that demand, how are we supposed to return to full employment?
Again, the evidence suggests that we have become an economy whose normal state is one of mild depression, whose brief episodes of prosperity occur only thanks to bubbles and unsustainable borrowing.
Why might this be happening? One answer could be slowing population growth. A growing population creates a demand for new houses, new office buildings, and so on; when growth slows, that demand drops off. America’s working-age population rose rapidly in the 1960s and 1970s, as baby boomers grew up, and its work force rose even faster, as women moved into the labor market. That’s now all behind us. And you can see the effects: Even at the height of the housing bubble, we weren’t building nearly as many houses as in the 1970s.
Another important factor may be persistent trade deficits, which emerged in the 1980s and since then have fluctuated but never gone away.
Why does all of this matter? One answer is that central bankers need to stop talking about “exit strategies.” Easy money should, and probably will, be with us for a very long time. This, in turn, means we can forget all those scare stories about government debt, which run along the lines of “It may not be a problem now, but just wait until interest rates rise.”
More broadly, if our economy has a persistent tendency toward depression, we’re going to be living under the looking-glass rules of depression economics — in which virtue is vice and prudence is folly, in which attempts to save more (including attempts to reduce budget deficits) make everyone worse off — for a long time.
I know that many people just hate this kind of talk. It offends their sense of rightness, indeed their sense of morality. Economics is supposed to be about making hard choices (at other people’s expense, naturally). It’s not supposed to be about persuading people to spend more.
But as Mr. Summers said, the crisis “is not over until it is over” — and economic reality is what it is. And what that reality appears to be right now is one in which depression rules will apply for a very long time.
 Especially if they could securitize the loans and push the risk off of their balance sheets while keeping some nice fees for putting the whole thing together.
 We tend to agree.
 Yes, it could be better.
 We know that household and government budgets are not perfectly analogous.
 Although the resulting spending spree might be a great deal more entertaining than saving and acting with fiscal responsibility.
 Krugman, P. (2013, November 17).A permanent slump?. Retrieved from http://www.nytimes.com/2013/11/18/opinion/krugman-a-permanent-slump.html
What is short selling?
Short selling is the sale of securities not owned by the seller. This is usually done when the investor is anticipating a decrease in the share price. The investor sells the stock at the prevailing market price and hopes to buy the stock at a lower price at a later point in time thus making a profit.
How does it work?
When an investor short sells a stock, the broker will lend the shares to the investor. The stock will come from the brokerage's own inventory, from another one of the brokerage's customers, or from another brokerage firm. Once the shares are sold, the proceeds are credited to the investor’s account. Sooner or later, the investor must close the short position by buying back the same number of shares (called covering) and returning them to his or her broker. If the price drops, the investor can buy back the stock at the lower price and make a profit on the difference. If the price of the stock rises, the investor will have to buy it back at the higher price, and he or she will lose money.
What are the requirements of a short sell?
The investor needs to have a margin account to be able to short sell. A margin account is an account with a securities brokerage firm in which the broker extends credit (offers leverage).It is mandated by regulation that the investor should hold at least 150% of the value of the short position, at the time the short is created, in the margin account. These requirements work as collateral, which backs the position and reasonably ensures that the shares will be returned to the broker in the future.
How long can you hold a short and what are the costs involved?
Most of the time, an investor can hold a short for as long as desired, although interest is charged on margin accounts for the amount of share value that is loaned. So, keeping a short sale open for a long time will cost more. However, the investor can be forced to close the position if the broker (or the lender) wants the investor to return the stock that is borrowed.
Asset Based Lending
What is an Asset-Based Loan?
An asset based loan provides businesses with immediate funds and an ongoing cash flow secured by the assets of the company. The amount advanced is based on a percentage of the value of the company’s qualifying assets such as commercial accounts receivables, inventory, business equipment and machinery or even purchase orders.
Why Asset-Based Financing?
1. Asset-Based finance can be underwritten relatively quickly and easily.
2. It's based on the quality of collateral rather than the profitability of the company which means that a lack of profitability does not eliminate asset based lending as an option.
3. It's often provided on a revolving line of credit where you draw down only what you need. This tends to give a business the greatest amount of flexibility and borrowing capacity from its existing asset base.
What is advance rate and what assets are considered eligible?
The advance rate is the percentage of the current borrowing base that the lender can make available to the borrower. Traditionally the advance rates are 80-85% of accounts receivable and 50% of inventory, although they may vary depending on the company.
Most receivables from completed transactions are eligible but pre-billing or progress billing is not considered. Other typical examples of ineligible receivables would include receivables 90 or more days past due or any intra-company receivables. In case of inventory, it is less common to include work in process, damaged goods, slow moving inventory, or certain specialized products that can only be sold to a limited number of purchasers. It is typical for lenders to seek advice regarding the appropriate advance rate from outside appraisal firms that specialize in assessing the collateral value of inventory goods.
What kinds of fees are typically involved?
Usually, there is a commitment fee and a closing fee for an asset based loan which helps the lender cover its due diligence and other initial costs incurred in putting together the transaction. The interest costs typically range from 1-4% of the amount advanced per month. Other costs that may be involved are the lender’s field examination and the borrower’s and the lender’s legal representation.
While the interest rates on asset-based loans tend to be more expensive, the overall terms are actually more flexible.
What is a Reverse Takeover or Reverse Merger?
We often get questions about the public equity markets, and how a business might become apart of them. One of the ways to do this is through a reverse merger. This article is a primer on that topic, feel free to contact us if we can further explain the topic, or stay tuned to our blog for more posts on this and other related topics.
What is a reverse takeover or reverse merger?
A reverse takeover or a reverse merger is a way for private companies to go public. Simpler and shorter than a traditional IPO, a reverse merger is when a private company acquires a controlling interest in a public company and therefore can appoint new officers and directors to the public company. This public company is often a “shell “company as they often will have nominal assets or net worth, but are already public with shares typically trading in the over-the-counter markets. There are specific regulations as to what does and does not constitute a “shell” company which can be found on the SEC’s website or by asking your securities attorney.
There are numerous structures which can be used at this point to complete the goal of taking the private company public, and oftentimes hiring the right advisors, accountants, and lawyers is the best way to ensure that the process goes as smoothly as possible and helps the company’s shareholders to achieve their goals.
Why do Companies Consider Reverse Mergers?
Reverse mergers can be faster and cheaper than conventional IPOs. It can take a company from a matter of weeks to four months to complete a reverse merger. By contrast, the IPO process can take from six to 12 months and cost significantly more.
The IPO process also requires the company to find an investment bank to underwrite the process – for smaller businesses this can be difficult or in some cases impossible to do.
Reverse takeovers sometimes allow owners of private companies to retain greater ownership and control over the new company.
How does it work?
In the reverse takeover/merger, the operating private company shareholders are issued shares of the shell in exchange for the operating company shares. Post-merger, the former operating company shareholders own typically 80-90% of the shell (which now contains the assets and liabilities of the operating company or owns it as a wholly owned subsidiary) with the remaining 10-20% owned by the existing shell company shareholders, and sometimes a portion of that minority percentage to your advisors, attorneys, and accountants who helped put the transaction together.
Discounted Cash Flow Method
What is Discounted Cash Flow (DCF) method?
Discounted cash flow (DCF) analysis is a valuation methodology which uses future free cash flow projections and discounts them to arrive at a present value. Discounting is the process of bringing the future cash flows to the present value using a discount rate to account for the time value of money and other factors such as investment risk. “Time value of money” simply means that money received now is more valuable to you than money received in the future.
When is DCF method appropriate?
DCF method works best when there is a high degree of confidence about future cash flows. Aggressive assumptions can lead to inflated values, so it is best to be conservative about the inputs. DCF also focuses on long-term value and hence not suited for short-term investing.
How does DCF method work?
The first step is to explicitly project the free cash flows for a period of 5-10 years. The second step is to find the terminal value which is a lump-sum estimate of the cash flows beyond the explicit forecast period. The third step is to determine an appropriate discount rate based on the investment risk. Then, the free cash flows and the terminal value are appropriately discounted using the discount rate to determine the present value of the company under analysis.
What is the typical discount rate used?
The discount rate or cost of equity is essentially your required annual return on investment. The higher the risk, the higher the required return. So, discount rate is lower for stable, well-established companies than for those considered at potential risk. According to the AICPA, the cost of equity for a private enterprise prior to its IPO generally ranges from 20 percent to 35 percent. For public companies, cost of equity is generally determined using CAPM method.
Our Company Blog
Why read our blog?
At Belmont Acquisitions, one of our goals is to simplify the complexities of growing your business. As you know, many topics in business and finance are exceedingly complicated – the people who come up with this stuff often have MBAs or PhDs — in fact, some of the math used in the analysis of certain financial products is quite literally the same math used in rocket science!
Admittedly, no one at Belmont Acquisitions is an actual rocket scientist. (We’ll update this post if that changes, we promise!) We are a firm consisting of professionals from almost every area of business and finance, and are people who have spent years learning, understanding and applying the best practices in business. Tap into our experience and let us help you make sense of it all for the benefit of your business.
What can I expect to see in Belmont Acquisition's Blog?
We plan to write about a variety of topics, everything from current events and how a particular event might have a macroeconomic impact, to easy-to-understand primers about various topics in finance. Our first post is going to be a brief primer on the discounted cash flow method – a very important topic to understand as it is used extensively in the valuation process by nearly every firm in our industry.
Overall you can expect our blog to provide both accessible, understandable information, and advanced commentary on a variety of financial, economic, and sometimes geopolitical topics. We will provide both high level intro posts about topics (such as the forthcoming primer on the Discounted Cash Flow Method), and we’ll also get a little technical on topics we’ve previously covered with a high level primer post. Our goal is to make the Belmont Acquisitions company blog a valuable resource for anyone who wants to grow a greater understanding of business and finance.
Common Financial Management Mistakes
(in a small business)
Knowing the most common financial mistakes small businesses make is the best way to avoid them. Learn from the mistakes of others, and put sound financial management to work in your business!
Starting Without Sufficient Capital
Sometimes the optimism and enthusiasm common to entrepreneurs get the best of them, and they under-estimate the capital required and the time needed to start making money. Capital is rocket fuel; if there’s not enough cash in your business’ tank, it might fall back to earth before it reaches the height of its potential. Consider all the one-time costs plus the ongoing monthly expenses needed to start and operate your business as well and develop a cautious view of how long it will take to become profitable, and you’ll have a realistic perspective on how much capital is enough.
Planning Poorly and Not Executing the Plan
Fail to plan, and you plan to fail, right? And bad planning isn’t any better than no planning. Success in the real world requires a sound business plan that takes into account start-up costs including advertising and branding, how long it might take to become profitable and being ready to handle the demands of growth such as additional capital requirements and the need to hire employees. Put together a business plan, run it by successful business people, tweak it in response to their critiques, and then stick to the plan once it is finalized.
Failing to Keep Business and Personal Finances Separate
The do's to avoid this mistake include documenting what you loan the business of your own money, so it can be paid back properly, and keeping separate books for personal and business. The don’ts include paying a personal bill with a business check, or vice-versa, and not documenting the cash you take out of the business as compensation. Set up your business as a corporation or LLC, so that business issues, including failure of the business should that occur, won’t harm your financial future.
Building the Business on Credit Cards
If you wait to start your business until you’ve got adequate capital, then you can avoid this common small business mistake. Credit card debt is a national plague. Interest rates are often very high, and some cards have a long list of fees associated with them.
Many business owners have driven themselves into a deep financial pit by combining these last two mistakes – using personal credit cards in an unsuccessful attempt to keep a failing business afloat. It’s important to accept upfront that your business might fail, and that it won’t be the end of the world if it does. If you don’t wreck your finances in the process of running your business, you’ll learn from the experience and have the opportunity to start again, more successfully the second time, should you want to. The list of people who failed in business before going on to huge success in later endeavors is long and impressive.
Being Lax About Getting Paid
You’ve got to keep cash flowing in order for your business to thrive. That means that you need to be serious about getting paid by your customers. Send out invoices immediately and expect payment promptly. Don’t wait long to remind customers who haven’t paid of their obligation. Be very cautious about providing credit to customers, even your best ones. Sales are awesome, but getting paid for those sales is the bottom line!
Every one of these common small business financial mistakes will probably tempt you along the way. Turn a deaf ear to them repeatedly, and soon they’ll lose the power to get your attention and derail your potential for success.
What Investment Bankers Do
While your local banker is a financial advisor and financier to individuals, an investment banker provides financial guidance and consultation primarily to corporations, though some specialize in working with governments.
What does an investment banker do? Here is an overview of investment banking services.
The Arranging of Financing
Corporations often need fresh capital to build new production facilities or retail space, invest in R&D or in other ways expand the business. Governments require money for municipal projects such as building infrastructure or expanding an airport.
An investment banker will help get the finances in place for the project. The money might come in the form of equity financing through an IPO, or initial public offering. The banking firm would craft a prospectus outlining the IPO’s terms and risks. It would help determine the price for shares offered, a crucial aspect of any public offering. Pricing the shares too low will mean that the company fails to maximize the capital it is seeking to attract. Prices that are too high will keep investors on the sidelines. Investment bankers also take care of all documentation with the Securities and Exchange Commission, the SEC, to ensure that the entire process is handled legally.
Another form of financing investment bankers assist with is bond financing. Similar to guiding an IPO, investment bankers help determine the cost of bonds in order to make them attractive and take care of all SEC compliance issues.
Financing from Private Institutional Sources
There are times when offering an IPO and issuing bonds isn’t the right direction because those routes take a significant amount of time. Finding private financing is a faster path to raising capital. An investment banker would offer the investment to a private investor such as a large pension fund, investment bank or hedge fund managers and then manage the deal’s details.
Underwriting the Capital Expansion
Large investment banks sometimes provide the capital to corporations and municipalities and then seek to turn a profit and reduce risk by offering securities to public or private investors, usually with an added premium. That markup is known as the underwriting spread. Groups of investment bankers, known as a syndicate, often work together on large capital expansion deals in order to reduce the risk by sharing it.
Acquisitions and Mergers
These practices are common in the business world. Large companies buy smaller companies; companies in the same industry often merge in order to reduce costs and maximize profit. Investment bankers are deal makers, negotiating merger details, setting a price and arranging the capital for mergers and guiding their clients through hostile takeovers, should the target company resist being acquired.
Handle Back Office Details
Every deal requires a host of behind-the-scenes functions that investment bankers do. These include financial control and accounting, compliance, risk management, corporate treasury services and operations and technology.
The reputation of investment bankers took a big hit during the 2007-2008 financial crisis. However, the investment banking services outlined here remain essential to the smooth workings of a capitalist system.
What is Factoring and when does it help?
When does it hurt?
When a company has a solid cash flow history and needs a quick infusion of capital, factoring can be an attractive option. In factoring, a business sells its accounts receivable, i.e. its invoices, at a discount. There are three parties involved in factoring:
• The Seller: A company that needs immediate cash and can show invoices it expects will be paid within 30, 60 or 90 days
• The Factor: The third party that buys the invoices at a price less than their value in exchange for immediate cash and for taking on the risk that as-yet unpaid invoices represent
• The Debtor: The party responsible for paying the invoice, that is, the one that owes the money
The debtor is typically notified of the sale of the invoice, and the factor has all legal rights to collect the money. Accounts receivable sold “without recourse” mean that the factor bears the loss for unpaid invoices. When sold “with recourse,” the liability for unpaid invoices remains with the seller.
While the details vary from one transaction to another, the seller typically immediately receives from the factor about 75% of the value of the accounts receivable. After the invoices are paid, the factor will keep 3% to 6% percent of the entire value of the invoices as its profit and return the remainder to the seller.
For example, if a company sells $100,000 in accounts receivable, it might receive $75,000 immediately. When the invoices are paid, the factor will keep $3,000 to $6,000, returning $19,000 to $22,000 to the seller.
Pros and Cons of Factoring Accounts Receivable
There are two main advantages of factoring for the seller:
• Quick cash: Having money in a week rather than in a month or more can help a company with its immediate needs such as raw materials, components, payroll, etc.
• Transfer of risk: When the accounts receivable are sold without recourse, the entire risk of unpaid invoices shifts to the factor.
When all goes well, factoring is a win-win situation for seller and buyer.
There are a few disadvantages of factoring for any company:
• Margins are reduced: The 3% to 6% of the total value of the invoices represents a bigger percentage of the profits. Factoring isn’t practiced in industries such as retail grocery and apparel, mining and metals, forest products or automotive where profits are made through volume rather than margin.
• Expenses may rise: In transactions “with recourse,” the percentage retained by the factor goes up as invoices are late or aren’t paid. In some cases, the final cost of selling to a factor might exceed 15% of the total value of the invoices which can lead to a net loss for the seller.
• Denial rates are high: Factors use the same risk-analysis methods are traditional banks, and coupled with a smaller tolerance for risk in this tight business climate, this means that factors prefer to work with well-established companies. Denial rates are quite high for smaller companies that haven’t yet established a track record.
If your company doesn’t have a robust financial history, factoring might not be an option at all or selling to a factor could come with high costs that are more damaging than helpful.
The Benefits of Hiring an M&A Advisor
A merger and acquisitions advisor is an expert in the area of buying and selling companies or merging them into one in order to reduce costs, maximize profits and create synergy. Advisors and M & A advisory firms also provide counsel and services in:
• Debt and equity financing
• Business valuation
• Preparing a sale information memorandum
• Doing due diligence
• Connecting corporate buyers and sellers
• Negotiating sale prices and terms
• Resolving issues related to acquisitions and sales
There are several rough classifications of M&A advisors. A business broker specializes in small companies, for example those with a value of $10 million or less. Middle market M&A companies handle deals in the approximate range of $10 to $100 million. The M&A firms that handle the largest deals, almost always of $50 million or more, are often called bulge bracket investment banks.
The Value of an M&A Advisor
If you’re asking, “why should I hire an M&A advisory firm?”, then these reasons should help. Let’s take a look at the benefits of hiring a mergers and acquisitions advisor or firm.
1. M&A firms specialize in mergers and acquisitions; Business owners rarely do
Building a profitable business is hard work, and succeeding is an impressive task. However, finding the right buyer for a business takes a completely different skill set, one that even successful owners usually don’t possess.
2. M&A Advisors minimize your errors
When the owner or CEO handles the sale of the company, a variety of things can and often do go wrong. These include:
• Coming to a wrong valuation of the company (too low as often as too high)
• Selling at the wrong time
• Selling to a buyer ill-suited for the industry
• Not having proper documentation of the company or mishandling the documentation
• Making costly mistakes in how the sale or merger is structured
These issues tend to become compounded. On the other hand, with an M&A specialist advising the owner or management team, proper valuation is done first. Thorough documentation is developed during the process, and an offering memorandum is produced that attractively represents the company. Quality buyers are drawn into the mix. When this happens, the seller has the confidence to wait for the right offer rather than taking the first one made, and when a deal is struck, it is structured in a way that secures the seller’s interests.
3. M&A Advisors maximize your success
It makes sense to bring an experienced M&A specialist into the equation to help determine the optimal sale price, negotiate the terms and guide the transaction to a smooth conclusion. While the business owner or CEO knows the company inside and out, a mergers and acquisitions advisor is an expert in the bigger picture – the industry, proper valuation of a company and how to get a deal done in a mutually beneficial way.
Hiring an M&A advisor protects your interests and signals to potential buyers that you are definitely in “sell” mode rather than just testing the waters. It’s the best way to get the right deal done.
What is Restructuring and Why is it Good to Hire an Advisor?
Businesses that are not getting the results desired often turn to some form of restructuring which might be:
As you can see, the term “restructuring” covers a wide range of business strategies. Each strategy requires an experienced approach using a specific set of skills, so that the proper outcome is reached without causing further harm to the company.
Reasons to Hire a Restructuring Advisory Firm
Most company management team members have little experience with restructuring. Because of the complexity of restructuring and the specificity of each type, savvy management understands its limitations and turns to restructuring advisors. When the future of the company is on the line, it is important to have the guidance of professionals with proven experience in navigating the change required.
Here are the top reasons to use restructuring advisors. Restructuring pros:
• Make a career out of guiding businesses through successful restructuring
• Understand what type or types of restructuring make the most sense given the current position of the company and its future goals
• Have relationships with investment banks and other financial institutions that will play a major role in debt and capital restructuring
• Are knowledgeable about restructuring laws, compliance and regulations
• Will bring bankruptcy experts into the process when necessary to develop a bankruptcy strategy designed to cut debt, free up capital and improve the company’s survivability
• Rely on experts for advice on technology, product development, R&D, marketing and advertising that will improve results going forward
How to Choose a Restructuring Advisor
When your company must restructure to survive and thrive, hiring the right restructuring advisory team is crucial.
Start by considering only firms with proven experience in your industry. While there are overlapping principles to restructuring, for example, a manufacturing business and a retail chain, each industry is unique enough that it requires specialized guidance to produce a successful restructuring plan.
Select a company that does a high volume of deals. There’s no substitute for experience…lots of experience.
Find out about the depth of the team. In other words, are there specialists on the team in each area of restricting your company needs?
Does the firm you’re considering have strong relationships with sources for debt and equity financing, legal advisors, investors and ratings agencies? These are the key players needed for successful company restructuring.
The restructuring advisory team you need will be able to identify the areas of your company that require restructuring. It will diagnose whether the issues are related to financing, product development, sales approach, etc. Finally, it will design strategies for healthy restructuring to create sustainable change and growth.
While time is of the essence, don’t rush your choice of a restructuring advisor. Interview several candidates, and select the one you believe has the experience and success that best matches your needs.
What is an Accretive Acquisition?
A common practice for businesses that want to increase their earnings per share (EPS) is to purchase a company that is performing well in this metric and not overpaying for it. In most cases, the target company has a P/E ratio lower than the purchasing company’s P/E ratio, which means that its valuation is cheaper and that it is a bargain at the right price.
The acquisition is accretive if the buyer’s price to earnings (P/E) goes up as a result of the deal. If it goes down, the acquisition is dilutive.
That’s the key. While the buyer’s total earnings will go up, the earnings per share must increase for the deal to prove accretive. In other words, the acquisition must demonstrate that the two companies perform better as one than the sum of their individual performances.
While the terminology might be new to you, the concepts can be understood quite readily. Here’s a fictional example of how an accretive acquisition plays out.
How an Accretive Acquisition Works
Let’s create a couple of players to demonstrate an accretive acquisition.
• Buying Company: Quinoa Brands
• Acquired Company: Spectacular Spices
Quinoa is a gluten-free source of protein and fiber, just the type of food health-conscious people are adding to their diet. The rise in consumption has led to robust growth for Quinoa Brands.
Quinoa Brands annual earnings: $10 million with 5 million outstanding shares, or $2.00 per share. Stock in Quinoa Brands is $40 per share. This means that the Price to Earnings ratio is 20:
P of 40 divided by E of 2 = 20
Quinoa is pretty drab stuff by itself. What it needs is a tangy dash of this and a savory dash of that. So, Quinoa Brands wisely targets Spectacular Spices with the intent of creating quinoa dishes to tempt any palate.
Spectacular Spices has annual earnings of $4 million. If Quinoa Brands acquires Spectacular Spices for less than 20 times earnings, representing Quinoa Brands’ P/E of 20, the deal is accretive. That is, it improves Quinoa Brands’ P/E.
So, for the deal to be accretive, the sale price of Spectacular Brands would need to be less than $80 million since $80M divided by $4M is a P/E of 20.
Of course, most deals aren’t this straightforward. For example, if Quinoa Brands doesn’t by the spice company, the cash that would have been used might collect interest in a bank. The income flowing from the time value of money must be factored into whether or not the deal makes sense for Quinoa Brands.
On the other hand, if the buying company needs to finance the purchase, then the cost of the interest expense payments must be considered when determining the wisdom of the deal.
Because of the complexities in acquisition strategy, smart management teams employ the services of an experienced M&A advisory firm to help them evaluate potential deals. Merger and acquisition advisors have the know-how and tools to determine the proper valuation of target companies, set a target price and work to negotiate a deal that will improve the value and profitability of the company that makes the purchase.
When Does it Make Sense to Hire an Advisor?
(A Consultant for General Business Purposes)
Most businesses understand the advantages of hiring a business consultant to help it navigate its way through the many challenges it faces and toward success. Here are the top 20 reasons to hire a business consultant.
1. To evaluate business operations using a fresh set of eyes. Sometimes those within the company are too close to the action to be objective about strategy, operations, development and other key business activities.
2. To reduce the time and resources needed to gain information not possessed by the management team. That is, consultants provide shortcuts to knowledge that, in turn, speed up the process of growth and profitability.
3. To deliver solutions to specific challenges facing the company including financing, growth strategy, management, technology, R&D, procurement, marketing, sales and many other areas where specialized know-how creates a more direct path to success.
4. To provide specialized services needed for a short period of time, eliminating the need to create a permanent position within the company.
5. To evaluate the quality of ideas generated within the company as to their value and feasibility apart from the internal politics sometimes found in a company’s culture.
6. To assist human resources and the management team in hiring key personnel that are a good fit for the company’s culture and goals.
7. To give constructive evaluation and critique of processes within the company at any step from concept to development to implementation.
8. To customize methods suited to the company to improve efficiency and effectiveness, cut waste and costs and improve the bottom line in a wide range of areas.
9. To help to change the culture within an organization including the development of a new guiding philosophy and the procedures required to implement it.
10. To connect the company to financial resources for infusing capital, restructuring debt and making acquisitions and overcoming the many financial challenges businesses face.
11. To provide networking to business and/or government contacts.
12. To determine strategies to minimize tax liability.
13. To assist in the development of compensation and benefits plans within the company.
14. To negotiate with union representation regarding the issues of compensation, benefits, pensions, work environment and more.
15. To handle challenging issues related to lay-offs, permanent downsizing or selling off divisions of the company. When consultants are hired to do the “dirty work,” they absorb some of the negative fallout, making it easier for the company’s management going forward.
16. To update manufacturing facilities to be state of the art in order to achieve the highest productivity and efficiency.
17. To assist in the upgrading of technology throughout the company.
18. To provide public relations guidance to create the right image for the company or to protect or repair that image in difficult situations.
19. To guide the company through bankruptcy by helping it determine the right time of bankruptcy and navigating the process to a successful conclusion.
20. To negotiate the sale of the company.
The Difference Between a CFO and a Controller,
and Why it is Important to Your Growing Company
Every small business needs to keep accurate books. They represent the bottom-line scoreboard that shows whether the business is winning or losing in its efforts to succeed. Properly kept books are also essential to determining the company’s tax liability. A skilled bookkeeper is an invaluable team member for any small business.
As the business grows, it might hire employees, add divisions, take on debts and become involved in other activities that demand excellent accounting. The mistake some businesses make is to elevate the bookkeeper/accountant to the role of CFO, chief financial planner. While the path from bookkeeper to controller is quite straight, the role of a CFO is really something quite different.
If your small business is growing, an experienced controller is the first priority. This person will keep track of where the money has come from and where it has gone, providing you with reporting you can trust.
With continued growth, new financial challenges will arise such as where capital infusion will come from in order to fund expansion and/or acquisition.
In short, a controller defines where the company’s finances are right now based on what’s happened in the past. A chief financial officer focuses on where the company’s finances must be going forward. The controller looks to the past and provides accurate financial reporting; the CFO looks to the future and develops strategies to meet the ongoing financial needs of the company.
Controllers almost always arise from the accounting ranks and focus solely on numbers. While many CFOs have accounting backgrounds, there are many others who rise through finance instead. A CFO needs a broader financial perspective than a controller.
This comparison list clarifies the differences between a CFO and a controller:
The Role of Controller
The Role of the CFO
As the company grows, the controller handles more of the same thing while the issues the CFO deals with expand in scope. The CFO must understand the complete financial picture of the company including accounting.
Strategic planning, risk management, evaluation of the ROI of tactics and technology, forecasting of costs and the management of mergers and acquisitions are part of the CFO job description too. The truth is that most of these responsibilities are outside of the controller’s skill set and experience.
If your company has grown from needing a bookkeeper to an accountant to a controller, and the growth continues, adding an additional set of responsibilities to the controller will likely lead to overload and diminished effectiveness. The wise step is to keep an effective controller doing what they do best and adding an experienced CFO to the team.
As a Small Business, How Do You Get Access to the Capital You Need to Grow Your Company?
Phoenix, Arizona Team
The U.S. Small Business Administration (“SBA”) defines small businesses based on a range of annual revenue or number of employees dependent upon the specific industry (https://www.sba.gov/sites/default/files/files/Size_Standards_Table.pdf). If your company fits into this definition, you are a "small business", and if you are reading this blog you understand that you are facing the dual challenges of finding the right capital and retaining top quality people to assist you to deploy that capital as cost effectively as possible.
As you have probably found out, banks no longer look favorably upon lending to businesses unless the transaction involves real estate. Yet real estate for most businesses is a static non-productive asset, and company resources can be better employed in growing or expanding the business. Banks are so far removed from lending to small businesses that big banks like BBVA Compass, for example, even advertise to their business depositors the services of merchant capital lenders like OnDeck Capital! OnDeck is a public company that lends to businesses at high interest rates with daily ACH repayment withdrawals and short loan repayment cycles.
The capital markets for equity have also been closed to small businesses. With all of the new regulations, many of the small broker-dealers have closed their doors or been acquired by larger broker-dealers who only cater to large companies. So unless you really understand the capital markets and have many contacts and personal relationships on Wall Street, this avenue is difficult to navigate even if you are a small public company.
There has been a lot of talk about crowd funding and crowd funding sites. It was originally thought that crowd funding could take the place of the small broker-dealer and there has been a general trend towards relaxing regulations around crowd funding. However, what wasn't understood by the regulators is that the small broker-dealers actually served an important function: they had relationships, and it was those relationships that allowed the broker-dealer to present their client's prospects to the potential investors and get them funded. The problem with the crowd funding sites and that YOU now have to find a way to generate interest in your company; the site only provides the venue.
For all of the above reasons it has been very difficult for the business person to obtain funding to grow their company. The remaining avenues are SBA backed loans, factoring, and the aforementioned working capital loans like those offered by OnDeck.
Each of these avenues have their own issues:
Are there any other solutions?
Belmont Acquisitions Corp. has many innovative solutions. Most of our partners are or were CEO's in their own right. We own businesses. So not only do we understand your challenges, we actually deal with them and have succeeded in overcoming those challenges. We can put our experience to work for you!
Put Belmont’s experience to work for you. Let us show you how to put together the best financing package for your needs.
What Toxic Debt Is & How To Manage It
Phoenix, Arizona Team
There has been a lot of discussion among business people and financiers about the subject of toxic debt. So the question is: what type of debt qualifies as “toxic debt” and what doesn't? How do you recognize it, and how do you protect your company from it?
As an officer of a company, your fiduciary duty is to "enhance shareholder value". In the simplest terms the definition of “toxic debt” is "debt that by its very nature will reduce or diminish shareholder value." The thing to keep in mind here is that YOU, as the officer, have a lot to say about whether or not any specific debt becomes toxic. It's not always the debt that is toxic, but the way you use the debt that is toxic.
For example, it is widely thought that any type of convertible debt is toxic. The rationale for that statement is that once the debt holder coverts, they will sell their holdings as quickly as they can to get their cash back plus their profit, and that will drive the stock down. Many equity lines are viewed the same way. If you look at many small public companies, you will see this downward spiral, often called a "death spiral". The important thing to remember is this: in order to fully understand what has happened, you need to look closer at the company's filings to determine what the debt was used for. The big question: "Was the debt used to enhance shareholder value?" If the answer is NO, then of course the debt becomes a death spiral.
Let's look at two examples:
Example 1: The small pubic company with no existing revenue needs to pay its auditor, attorney, and salaries for its executives. They pull down $250,000 in a convertible note. Three months later they are out of money and pull down a second convertible note for $250,000. At the six month point, the first note holder begins to sell their stock and the stock begins to drop, and by the time the second note holder gets out, the stock is trading at $0.0001, and the Company can not raise any more money. The result of this debt is that the original stockholder’s value has been reduced to virtually nothing, and this will be pointed to as an example of toxic debt.
Example 2: The small public company with no existing revenue needs to pay its auditor, attorney, and salaries for its executives, as well as make an acquisition of a private company that has $3.0 million in annual revenue. They immediately take down two convertible notes for a total of $500,000, and use that money as working capital, and in a combination of stock and cash acquire controlling interest in the small private company. Now, the public company has a subsidiary with revenue and operations. Effectively communicated to the public, this should, over time, improve the company’s stock price, all else being equal.
In continuing the second example, the company manages the new business well, cuts costs and grows the business. After two quarters of revenue growth and increasing profits, and the stock continues to go up. When the first note comes due, the company retires the note from earnings and lets the second note pay out in a conversion at the now much-higher price. This would be viewed as a non-toxic transaction, but the main difference is that the funds were used to enhance shareholder value, and THAT made it non-toxic. The same debt structure, but entirely different results.
There are certain types of debt that, even if you follow the script used by Example 2, would be non-toxic and there are some things you should look out for:
1) Is there a make whole provision? In other words, can you be forced to keep issuing stock to ensure the investor will have sufficient stock to pay themselves off?
2) Is there no "leak out provision“?
3) Does the investor have a history of destroying stock?
4) Does the investor sell/trade their own stock?
We at Belmont recommend certain strategies to combat these issues.
1) Always utilize your debt to enhance shareholder value. Don't just use debt to pay bills; discover what is wrong with the business, determine why it is having difficulty in generating sufficient operating cash from operations, and fix those issues with your debt. Acquire a company, increase marketing, streamline operations, or whatever it takes to make you cash flow positive.
2) If there is a conversion to the debt or a make whole provision, make sure that the make whole provision only takes effect after an uncured default. This gives management notice and time to attempt to ensure that this debt it handled responsibly.
3) Always require a "Leak Out Provision". This is an agreement between you and your investor that no more than a certain percentage of his stock can be sold in any given time period. Maybe no more than 20% of the weekly volume, for example. Although there is no “correct” percentage, this needs to be determined on a case by case basis.
4) Check the history of the investor. When looking at the companies that have seen their stock plummet after a transaction with that investor, read their filings. Check to see if that company used the stock the right way- to enhance shareholder value.
5) If the investor is a large company, inquire how they handle their stock. Do they trade it themselves? You would want them to use third parties so that you can ensure that they are not "shorting" your stock. If you are not sure, issue the stock in paper format and release only 20% of the weekly volume per week. That is the best insurance that the investor cannot short your stock.
Another thing to look at when deciding on the type of debt you are taking on is: Is the investor/lender interested in the prospects of the company and not just the trading volume of the stock. If the investor/lender is actively looking at your company and its prospects of repayment, and the stock as a last resort after default, that is the very best indicator that this will not be toxic debt. This kind of debt, whether in a term loan (debenture) or revolving line of credit will not be toxic unless YOU and your management team do not execute on your business plan to enhance shareholder value!
REMEMBER, DEBT SHOULD ONLY BE USED TO ENHANCE SHAREHOLDER VALUE!
Improving Due Diligence Efficiency
Phoenix, Arizona Team
Over the course of working with Belmont’s many customers to assist them in getting their funding from the various funding sources that we refer to, we have identified some practices that help our customers be more efficient in the information-gathering process for the massive stack of documents that we need to assemble an organize for our lenders. This article gives some of those methods.
1: Get a good scanner. You will be using it a lot during this process. It will be better if it has automatic feed, and if it can scan both sides of the paper without human intervention. Extra points if you can email directly from it.
2: When sending scans of multiple documents, break up each document into its own file.
If you scan 12 months of bank statements into one file, it takes more time for the analyst to break all of those out, and it’s also more difficult for you to know that you may have missed a month if you have one file instead of 12 (or eleven, if you missed one).
3: Prepare Files for Analysts. Unless the analyst asks you to use a DropBox location or other online storage, don’t put everything into an online storage location before you know what the analyst will be asking you for. Additionally, throwing everything into an online storage location, whether you were asked for it or not, is a bad idea, because the analyst may think they should be using Document A, but you may have meant for them to use Document X, and that may negatively affect the amount of your funding. By being specific, and only sending your analyst the items requested, this process can be much smoother.
4: Know Your Numbers. You are going to be asked more than once what your average monthly revenue is for the last n months, what your net profit is, what your margin percentage is, what your expected growth percentage is over the next n months will be if you’re funded, and you will need to build a Use of Proceeds that matches your projections and goals. Know these answers. Our analysts will ask you this more than once, and will talk you through it. More importantly, the lender may ask you this, and if you hesitate, they will smell your confusion.
5: Acting With Purpose. You have to know where you want to take your company, otherwise you will continue to do the same things you have done so far. Reaching out for additional capital needs to have a real purpose. That purpose, your future projections, and the elements that comprise them, are your Use of Proceeds.
6: Keep Legal Counsel in the Loop. At the beginning of this process, let your lawyer know that there may be a few items that you’ll need them to read over, and some lenders may require information from your legal counsel. Let your lawyer know this ahead of time. Surprising your lawyer with a request for a document that will take him 10 – 20 hours to prepare with a request to “have it to us this afternoon” is going to do nothing but delay your funding.
7: Expect the unexpected. Different lenders require different documents and models. There are likely a couple dozen different documents and reports that you are going to be asked for by your Due Diligence team at the beginning of the process. They’ll say “we just need these items”. But then, 3 weeks later, they will ask for some other items that you had not prepared, and you have to scramble to find those documents. Most likely the lender’s Due Diligence team will tell you to hurry, because it’s “delaying funding”. At Belmont, we have been through this process enough that we know to expect these surprises, and we let you know up front to expect to prepare these other items. That way, when the lender surprises you with the request, we can surprise them by giving them the documents right away. But, even with all this advance preparation and historical knowledge, there are still always surprises. Don’t be surprised when you’re surprised, it’s all part of the process.
8: Maintain a Proper Mindset when Signing Contracts. When it’s time to sign the closing contracts, set aside enough time to read the closing contracts and documents thoroughly; sometimes, this process will only take an hour, sometimes it can take 4 hours or longer, so make sure you book it off in your calendar. Tell anyone that needs to know that you will not be taking interruptions during that time. Really read the contracts you’re signing. Have your lawyer there to walk you through the documents if you’re not confident with the terminology. Have a notary there to notarize all of the pages that need it. Take your time, this is an important set of papers that you are signing.
Belmont Acquisitions assists our clients with all of the “heavy lifting” involved in these projects, and we work with you and the lender’s Due Diligence and legal teams to demystify and streamline the process. Give us a call to help you get your piece of the $100,000,000 pie that our lenders have available.
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