SHOW ME THE MONEY!!!! Many people will remember this catch phrase line from Tom Cruise’s blockbuster movie, “Jerry Maguire.” Raising money for your business is critical for all entrepreneurs. In this column, the Shark will discuss the different methods to raise capital for your business.
An equity raise simply means that a business owner sells shares (voting shares in most cases) in his or her Company to third party purchasers in exchange for cash. The first step in the process is to obtain a fair market valuation of the Company’s business and assets. Secondly, how much capital is required for the business and for what purposes (ongoing operations, sales, general and administrative purposes or for the purposes of acquiring a competitor)? Third, how much control is the entrepreneur prepared to give up in their business.
Many decisions in a business can be made with majority shareholder approval (51%). Other significant decisions require a special or super majority of shareholder approval (75%). If you give up too much control, then you may be handcuffed or restricted from making effective business decisions in the future. Equity raises can take many forms. Capital can be secured from: (a) family and friends; (b) angel investors; (c) sophisticated or accredited investors; or (d) from the general public in the form of an IPO (“initial public offering”) or crowd-funding.
Another method to raise capital is to secure debt financing. Debt financing can take the form of a conventional business loan or through issuing bonds in the public markets. Most start-ups will not be able to issue bonds in the public markets due to a lack of investor interest and historical performance. Bank loans can be secured from banks, credit unions or large investment banks such as Goldman Sachs and Morgan Stanley.
The latter requires an established track record of profit, cash-flow and market success. The former can be obtained if you satisfy the bank’s criteria for business loans. The typical criteria are a history of profit, strong cash flow and growth. The bank will require a comprehensive business plan, budget, financial statements, corporate tax returns and sales plan. If approved, the Bank will take security over all of the Company’s shares and business assets.
Financial covenants must be complied with, debt/equity ratios must be maintained and remember that the bank could “call your loan” at any time (demand immediate payment) if the Bank feels that it’s investment is at risk or in jeopardy in any way.
A combination of equity and debt financing can also be utilized in any business. Before you begin this journey, do your homework, get organized and talk to some experienced business, financial and legal professionals. There’s a lot of moving parts that require attention if you are going to successfully raise money. Reserve a complimentary coffee consultation with the Shark if you have any questions about the contents of this column or business or legal questions.
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*The content of this article is intended to provide a general guide to the subject matter and should not be relied upon as legal advice. Custom legal advice should be sought about your specific circumstances. © Bal Bhullar, Founder of C2K Law Corporation.