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Why is Colorado Springs such a great city for startups?

I love Colorado Springs.  And not just because it has great weather, great outdoor activities, great people, or because it’s the home of the United States Olympic Training Center.

I love Colorado Springs because for a region of just over 600,000 people, we have a surprising amount of innovation and new business support.  For example, head over to the Colorado Springs Business Journal and read about the mentoring program Peak Venture Group has been offering for years.  Business advisors, successful entrepreneurs, educators, and seasoned investors all come together to support new business ventures and guide them toward growth, funding, and on to the next stage of their life cycle…nearly for free.

Check out the Middle Market Entrepreneurs, an exclusive program for executives of companies with either revenues of $5 million or more; or more than 50 employees.  These semi-monthly breakfasts are generally packed, which should give you an idea of the number of businesses based in the Pikes Peak Region that meet those criteria.

Shaun McNerny, a successful entrepreneur in several ventures including BitWeld, is running CXO Connect where executives of high tech companies can come together for a high caliber presentation and networking, again, typically for free.

I don’t even need to get into the Technology Incubator, Leadership Pikes Peak, Center for Creative Leadership, Tri-Lakes Business Incubator, High Altitude Investors, Manufacturing Task Force, the Bachelor of Innovation program at UCCS, Small Business Development Center, or a host of other groups, organizations, and programs all directed at fostering innovation, supporting small and mid-sized businesses, and developing the next market leaders in just about every industry.

If you’re an entrepreneur looking for the support of your community, come to Colorado Springs and we’ve got more support than you can handle.  If you’re already here, please get plugged in!  We have access to more knowledge, business acumen, and entrepreneurial power than most places in the world.  At the very least, give me a call and I’ll try to point you in the right direction.

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Etienne Hardre is a Senior Associate with BiggsKofford, P.C. specializing in helping entrepreneurs buy, grow, and sell businesses.

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Calling all Government Contractors

I know it’s been several months, so this is “old news”.  BiggsKofford is excited to announce a strategic alliance with McNew & Associates, a local leader in government contracting consulting.  Our relationship with McNew makes BiggsKofford the leading accounting firm in Colorado Springs when it comes to government contracting with solutions in accounting, contract management, bid identification, small business set aside qualification, and quite a bit more.

If you are a large government contractor and need to make sure your small business partners are meeting their contract requirements, give us a call.

If you are a small business just getting into government contracting, give us a call.

Check out our government contracting services and the press release on the BiggsKofford & McNew alliance.

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Today’s Economy Demands Increased Profitability

This is an excerpt of an article I did for the Colorado Springs Business Journal

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It wasn’t long ago when it seemed that the answer to every business challenge was to “get out and sell more.”

Now, business owners are scrutinizing their operations for ways to squeeze out every last drop of profitability.

This is a healthy exercise for any economy to undergo, and the surviving businesses tend to emerge from difficult times as leaner, more disciplined enterprises poised to take advantage of every opportunity as  general market conditions improve.  Let’s look at four ways to increase your profitability and grow your business:

  1. Increase Average Price
  2. Increase Transaction Size
  3. Increase Transactions
  4. Reduce Costs

Head over to the Colorado Springs Business Journal to see the rest of the article.

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Lessons from the Shark Tank: Season 1 Finale

Season 1 of Shark Tank came, went, was resurrected, and has gone again.  Please head over to ABC and tell them to continue the show!

Send A BallQubitsPillars of Slippers
Llama BrewNubrella

This week was actually fairly average as far as the dollars invested, but it felt like a train wreck for most of the show.  Daymond was the only Shark really interested in any of the pitches and he convinced Kevin H to join him on one venture.  Together, they invested $290,000 in two companies for an average stake of just over 50%.

The night looked like it was starting off strong with Send A Ball.  These two ladies will ship an inflated ball with a message printed on it through the mail by slapping enough postage on the outside.  Cool idea and it seems to be popular enough to make them a living.  I do give them kudos for being among the few entrepreneurs pitching the Sharks who could actually explain why they needed $86,000.

Unfortunately, their killer phrase was: “We are slammed with orders!”  Seriously?!  Then why are you selling your equity?  Didn’t your CPA tell you there are factoring companies who will gladly finance those orders for you at a fraction of the cost of equity?  Heck, even a bank might do it!  Barbara said it best that Send A Ball just didn’t need the Sharks and Kevin H pointed out that there really weren’t any barriers to competition so the risk was too high.  Do they have a ball that reads “Research cheaper capital”?

Next up was Qubits who initially put the Sharks on their guard by voluntarily offering 51% of his company for $90,000.  Mark is from my old stomping grounds in Bend, OR, so I won’t be too hard on him.  Although he’s been marketing his construction toy product for over 2 years he’s only made $8,000 in sales, which in itself is a bad sign.  Kevin O asks if he’s approached the four major toy companies for licensing.  When the answer was no, the Sharks began dropping out one by one.  When Daymond was the only one left, he offered Mark the deal he was asking for but contingent on striking a licensing agreement with one of the big four.  Now why didn’t anyone else think of that?

Pillars of Slippers was dynamically presented by Nicole Jones with a pink Hummer and choreographed to hip hop music.  Definitely one of the most confident entrepreneurs, Nicole is hoping to franchise her home shoe party business and asked $150,000 for 15% of her equity.  That’s an initial valuation of $1,000,000.  So is this the next Mary Kay or Tupperware?  Unfortunately, while $64,000 in party-based shoe sales is nothing to laugh at, the $100,000 she was planning on charging her franchisees just doesn’t add up.  Why would someone shell out that kind of money just for the chance to work more than 150 parties a year for a normal salary?  And could a less outgoing person really expect to book almost half of every week with parties?  What makes any of that worth a million dollars?

Last but not least, what stops someone from doing shoe parties on their own for much less start up cost?  All Pillars of Slippers offered a potential franchisee was the car, the name, and their initial inventory.  Unfortunately, none of that is proprietary and all of the Sharks dropped out.

The trend of high valuations continued with Llama Brew whose request for $125,000 for just 10% equity puts their company at $1.25 million.  Seriously now, call a valuation expert or even your accountant and just ask for a simple estimate of your company’s worth before you make any kind of pitch to investors.  This couple may have a potentially good idea, but $4,000 total sales is almost worthless no matter how you slice it.  Needless to say, all Sharks were out.

At BiggsKofford we can do full business valuations but generally that’s more than our clients need.  We often do simple income value calculations based on a multiple of weighted average historical net cash flow or EBITDA.  Comparing that to net asset value is usually enough to give our clients an idea of what an investor might be willing to pay for their business.

The final presentation came from Alan Kaufman of Nubrella, whose completely redesigned umbrella allows for hands-free use in high winds, even when riding a bicycle.  At first, the style looked awkward and I wasn’t optimistic but the design works, it’s patented, and hey, most new ideas look strange to someone entrenched in the old ideas.  That doesn’t make them bad ideas.  Alan started by asking for $200,000 for 25% of Nubrella and ultimately struck a deal with both Daymond & Kevin H for 51%.

One of the things that sent off the warning sirens in my head is that he has invested $900,000 in this company to date.  What in the blazes have you spent that much money on?!  And why do you only need $200,000 now?  I would have been much more rigorous with my due diligence of his operations to date and would have required a clear schedule of how he expected just $200,000 to do what $900,000 could not.  My guess is that he’s not good at managing his financials and will likely be a money sink for Daymond & Kevin.  Experience tells me that design work and patents don’t cost that much and if his product makes a gross profit, manufacturing doesn’t lose him money.  I’m glad the Sharks negotiated a controlling interest because they can replace him with a more competent manager.  Of course, that’s all speculation and Alan did land the deal.

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Lessons from the Shark Tank: Episode 14

This week Kevin H. makes up for many episodes of limited investing by putting $235,000 to work in both of the successful pitches.  He also takes Kevin O by surprise and undercuts Robert in a deftly handled negotiation maneuver.  All together, the Sharks invested $305,000 and snagged an average stake of 50%.

Lipstix Remixcaptainicecreamcaffeindicatorlegalgrind
Tonight’s first casualty was the unfortunate Captain Ice Cream.  Although it was very hard to criticize his whimsical business, there was unfortunately barely enough to sustain a meager living and definitely not enough to attract franchisees.  Franchisors make their money from an annual franchise fee charged to the franchisees for the right to continue to use the brand name, business model, and other support for the business in their localized market.  Captain Ice Cream could only produce about $25/hour as a wage so how could an owner afford to pay a franchise fee out of such limited returns?  Tim Gavern has indeed built a job for himself but unfortunately does not yet have a highly profitable, attractive business.

Another lesson comes courtesy of Legal Grind, the curious merger of low cost legal services and coffee house.  Yet another attempt at franchising, these poor folks have been working for 14 years and still had to come crawling before the Sharks to drum up capital.  If that isn’t a bad sign in itself, Barbara asked what the money would be used for and there was initially no answer.  Finally Jeff Hughes says he would hire legal counsel, even though he is a licensed attorney!

The real lesson comes from Daymond, though.  He mentions that he’s skeptical the franchise will attract interest and Jeff responds that they already have over 200 franchise requests.  An incredulous Daymond responds with an easy solution: take $20,000 down payments from 10 of the requestors and they would have the $200,000 they’re trying to get from the Sharks.  Indeed, if you already have orders, there are far cheaper sources of capital than selling equity.  See my post on Innovative Funding Strategies for a few ideas, including asking customers to prepay or borrowing against purchase orders.

One final suggestion for Annie and Jeff Hughes: it’s the Shark’s money, treat them with respect.  Whether Annie was nervous or angry at the way things were turning out, neither is an excuse for arguing with your potential investors.  These people are buying something from you, taking a risk on you, and tying their financial future with yours.  They have their reasons for joining you or leaving you and you will have to accept them or change their minds.  Trying to beat them into submission is not a good negotiating tactic.

On the positive side, Caffeindicator was one of the most polished business plans I’ve ever seen.  He narrowly targeted an extremely structured industry and planned to pit the four most common sweetener brands against one another in a war to either increase their own market share or suppress their competitors from increasing theirs.  He didn’t even care if people used the actual sweeteners!  By using the caffeine indicator on the packet, the customers would waste a packet that would increase the amount purchased by the restaurant and in turn increase sales for the sweetener manufacturer.

His presentation clearly indicated how he planned to leverage his patent in this space and it left the Sharks free to calculate their risk of success and return on investment, which is precisely where you want them to be.  Kevin H. pulled an amazing negotiation trick by rushing an answer from Michael Schiavone before Kevin O. had a chance to make an offer and while Robert’s offer was still on the table.  Pushed for an answer, Michael accepted Kevin H.’s offer which was the best on the table.

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The next episode of Shark Tank airs Friday, February 5 at 9/8c on ABC

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Often Overlooked Steps to Take Before Selling Your Business

If you’re not already aware of Matt Barrett of the Colorado Springs Small Business Development Center’s Small Business Blog, go on over and check it out.  His most recent post is on a few of the often overlooked steps an entrepreneur should take before putting their business up for sale.

  1. Assemble a team to help you sell
  2. Get your family out of the business
  3. Report all income for at least three years
  4. When trust is involved in a decision, it’s always better to be trustworthy
  5. Begin to document everything

Please check out the full article for all the details.

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Etienne Hardre is a Senior Associate with BiggsKofford, P.C. specializing in helping entrepreneurs buy, grow, and sell businesses.

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10 Benefits of Using a Business Intermediary When Selling a Closely Held Company

So you’re thinking of selling your business and you’re wondering whether you should engage a business intermediary, broker, or mergers & acquisitions professional to help you through the process.  Why should you?  What value will they add to your transaction?

Here are 10 reasons to engage a business intermediary:

  1. In-depth knowledge of the tax consequences. There are many ways to sell your business and each structure can have very different tax consequences to you and to the buyer.  Knowing what the tax man will require of you under each scenario is critical to your negotiations and to your ability to pay all your obligations and still have cash left over.
  2. Knowledge of your business and its industry. If included in the preparation process prior to the actual sale, a business intermediary can provide insight into your industry and help you find ways to maximize the value of your business.  Most value maximizing strategies will take time to implement.  Therefore, it is important to communicate with all of the experts you plan to use during the transaction as early as possible.
  3. Awareness of market conditions. An M&A professional is constantly involved in the market and learns when the timing is right to buy or sell a business in a variety of industries and to a variety of buyers.  Sometimes private equity groups are extremely active while other times corporate strategic acquisitions are more popular.  As the economy surges in certain areas, some industries will benefit from higher valuations and more M&A activity.  Other times, it will be wisest to stick it out and wait to sell your business if at all possible.
  4. Marketing your business for sale. Marketing a business for sale involves preparation, analysis, and a unique mix of technical and creative skills.  Unfortunately, it is nothing at all like marketing your goods or services.
  5. Exposure to create competition for your business. You will receive the maximum value for your business when several buyers are competing with each other to acquire your company.  A good business intermediary will know who the players are in your market and will be able to craft this competitive environment through research, skillful timing of marketing materials, and deft negotiation.
  6. Confidentiality. Many times, even the news that you might be interested in selling your business can cause ripple effects that are far reaching and uncertain.  How will your key employees react?  What will your key customers think?  A professional M&A advisor can be engaged in a confidential manner and control who receives information about your interest in selling and with whom they can communicate that information.
  7. Removal of distractions. Selling your business will not happen overnight and you will be needed to keep your business profitable and growing.  If you are spending too much time mired in the details of selling your business you will not be effective at managing it and vice versa.  Having a dedicated advisor to work on selling your business will free up your time and energy to continue to run it.
  8. Emotional buffer. Most of the time, buyers and sellers of businesses will not agree on everything.  When that happens, an emotional buffer in the form of a designated negotiator can be extremely helpful to keeping the deal on track.  In addition, since the M&A advisor has less “skin in the game”, he or she can be more objective and help you to make decisions based on the facts and not in the heat of the moment.
  9. Facilitation of the process. The process of selling a business is incredibly complex and involves many moving parts.  A qualified business intermediary can successfully bring together attorneys, bankers, accountants, insurance agents, key customers, suppliers, employees, buyers, sellers, and everyone else who may be a stakeholder to make sure their needs are met and the process can move forward.  Not having this point of contact generally means the task is up to you.
  10. Negotiation ability. Almost anything can be negotiated during a business sale.  How much working capital will you leave in the business?  Will this be a stock sale or an asset sale?  Will the buyer assume any debt?  Which ones?  What is the final closing price?  How will the closing price be allocated among the assets?  The best M&A professionals are tirelessly working to produce the best possible outcome for you, knowing your goals and needs.  They have the skills to negotiate in your favor.

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Etienne Hardre is a Senior Associate with BiggsKofford, P.C. specializing in helping entrepreneurs buy, grow, and sell businesses.

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SBA Lending when buying a small business

Everyone knows the housing market has tanked and that “banks aren’t lending”.  What is less commonly known is that the lack of debt financing has been a key factor in making it more difficult to buy or sell a small business.  Recently, I had the privilege of sitting down with Melissa Knutson, a business banker from Chase in Colorado Springs and asking her about the state of small business lending in Colorado Springs.

NextExit: Let me ask you the obvious question: is Chase still lending?
Knutson: Yes!  Throughout the “credit crunch”, Chase never stopped lending to small business owners.  In fact, we recently announced that Chase plans to increase its lending to small businesses by up to $4 billion in 2010, boosting expected new lending to about $10 billion to this vital segment of the U.S. economy.  Obviously, our new loan volume will reflect demand from qualified businesses. Total outstanding loans and lines to this segment are currently about $29 billion.
NextExit: If you’re still lending, how has business acquisition loan criteria changed in the last year?
Knutson: There have been significant changes as recently as October 1, 2009.  For example, Chase can only utilize preferred lender program (PLP) authority if:

a)      The amount allocated in the business valuation to intangible assets is less than or equal to $500,000 OR

b)      The amount of intangible assets exceeds $500,000 but the borrower or borrower and seller inject at least 25% equity into the project (seller financing is considered equity if it is on complete stand-by, with no principal or interest payments allowed for at least two years).

President Obama has announced new proposals that would be added to the Stimulus Plan approved earlier in 2009.  One of the most interesting is a proposed increase of the cap on 7a loans to $5 million (from $2 million).  All of these new proposals require Congressional approval and then implementation time by SBA.  We are hopeful that the changes will occur soon.

(Note: Here is a press release from the SBA on Obama’s proposals)

NextExit: What are the key features you will look for when making an acquisition loan?  In other words, if I am a potential purchaser of a small business, how should I structure the transaction to get financing from you?
Knutson: The first requirements we look at are the 3 C’s: Credit, Collateral, and Cashflow just like we do for any other loan.

Credit: We look at both the borrower and the business to determine if there has been positive credit and management history.

Collateral: Is there sufficient collateral as a secondary source of re-payment? Collateral requirements are highly effected by the industry of the business.

Cash Flow: Does the business (and the borrower) have sufficient cash flow to support the business as well as the additional debt payments?

Specifically for the SBA program, there are additional restrictions on the structure of the transaction:

  1. The Small Business Applicant must purchase 100% of the ownership interest in a business.  For example:  Individual A, who currently has no ownership in the business, wants to buy out Individual B (50% owner) and Individual C (50% owner).
    • The individual CANNOT buy into an existing business.  For example: Individual A, who currently has no ownership in the business, wants to buy out Individual B (50% owner).  Individual C will retain 50% ownership.
    • An existing owner CAN purchase the stock of another owner resulting in 100% ownership by the purchasing owner.  For example: Individual A, who currently owns 50% of the business, wants to buy out Individual B (25% owner) and Individual C (25% owner).
    • The existing owner CANNOT buy less than 100% of the other ownership interest. For example:  Individual A, who currently owns 50% of the business, wants to buy out Individual B (25% owner).  Individual C will retain 25% ownership.
  2. The seller can remain as an officer, director, stockholder, or employee of the company for up to 12 months.
  3. Loan cannot be made solely to the individual purchasing the business.  The business must either be the borrower or a co-borrower on the transaction.
  4. The business must also be included as a buyer on the executed purchase contract.
  5. The borrower is required to have a conversation with the seller regarding the seller’s willingness to finance any intangible assets being purchased (i.e. goodwill).

On a personal note, I want to know that the buyer has done their homework on that business.  It is critical that buyers take the emotion out of their decision as much as possible and truly understand the business, its financials, obstacles and what effect they will have on that business.

Melissa Knutson is Relationship Manager with Chase Business Banking RM Channel in Colorado Springs, CO.  Melissa can be reached at (719) 227-6497 or by email at melissa.j.knutson@chase.com.

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BiggsKofford.com has a new look!

As many of you already know, I went to school initially interested in computer information systems and ended up finishing a bachelor’s degree in computer science (in addition to accounting).  That led to me starting a web design company and building websites for a few years. I know I’m probably the first accountant you’ve ever heard say this, but sometimes I miss the creative process.

So it was a lot of fun to get the opportunity to be part of BiggsKofford’s website redesign process.  That’s right, if you haven’t seen it already, BiggsKofford has a completely redesigned website.  We’re planning on keeping the new website current with news articles, helpful resources for businesses and entrepreneurs, links to our team bios and LinkedIn profiles, and eventually a company blog.  Please head over to www.biggskofford.com and let me know what you think!

Kudos to Dan Decort of Decort Interactive and his team for their excellent design and template coding work.

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Innovative Funding Strategies: Alternatives to Injecting Cash into Your Company

Although dragging myself out of bed to attend the Peak Venture Group’s breakfast by 6:30am was a challenge at first, the experience proved to be entirely worth the effort.  Today’s topic was designed to offer alternatives to the traditional funding path of Friends & Family – Angel Investors – Venture Capital – IPO/Strategic Buyout.

This morning’s panelists:

The moderator for today’s featured presentation was Jeff Chapman of Pivotal Path, LLC.  Each of the panelists was asked about creative ways for entrepreneurs to fund their companies.  Below is a brief list of their suggestions.

Investor-backed Bank Lines of Credit: Although this is a traditional line of credit from a bank, the difference is that a business that might not otherwise qualify on its own can achieve the same result by getting an investor (or investors) to sign a guarantee for the bank.  Provided the investors qualify for the line of credit, the business owner can generally get approved.  In exchange for the guarantee, the investor usually receives stock warrants.

Strategic Investments: These are investments made by other companies, generally strategic partners such as a key supplier or customer.  If your business is critical to another business or vice versa, consider exploring a strategic investment to support one another.  Another way to structure a strategic investment is for a manufacturer to build your first shipment in exchange for equity.  After that, cash flow can keep them paid.

Letters of Commitment: So, Wal-Mart is excited about putting your product in 500 stores as soon as you can produce 10,000 units.  Unfortunately, you’ll need a large amount of cash to ramp up manufacturing operations.  If your key customer will sign a commitment letter promising to purchase a certain amount of product, investors and others will generally loan you the money to get started.

Factoring Accounts Receivable: There are investor groups and factoring companies that will purchase your accounts receivable at a discount in exchange for giving you cash up front.  For example, if customers owe you $500,000 over the next six months, a factoring company may give you $400,000 in cash now in exchange for the cash flow from the customers as they pay off the receivables.  Factoring has a bad reputation with most business owners because it is extremely expensive.  However, it is ultimately less expensive than giving up equity and you may have few other options if you need cash.  Be careful with factoring: one of the panelists related a story of a client factoring their receivables and then offering a discount if customers paid early.  Unfortunately, the client ended up receiving no additional benefit from early payment but was forced to reimburse the factoring company for the cost of the discount for a double whammy.

Patriot Express Loans: This is a guarantee program through the Small Business Administration (SBA) for veterans and their spouses.  One interesting note about these government guaranteed loans is that banks still have the ultimate authority over whether they will lend you the money.  In most cases, banks are most interested before the business is actually formed and after the business has at least 2 years of history.  If the business is less than 2 years old it is considered much higher risk.

What about Grants? In general, the SBA offers no grants.  There are other government organizations that have grants available, but they are usually for very specific uses and have strict qualifications, such as the business being located in a rural area.

Enterprise/HUB Zones: These only apply if your business is located within an area defined by the U.S. Census.  Most of the time businesses are incentivized to relocate to otherwise underserved parts of the country in the form of tax credits or other reduced fees.

Alternatives to Cash: All of the above options are creative ways of producing cash for your business.  Below are several ways to achieve the same effect without actually using cash at all.

  1. Joint Advertising: Perhaps you own a fresh new technology or product but lack the cash to advertise properly.  Joining with a larger company that has a well established marketing budget that may benefit from being associated with your “freshness” and “newness” can get publicity for you while the larger company still spends the same marketing dollars.  For example, if a startup condiment manufacturer teams up with Wells  Fargo Bank, the bank’s new ad could read “We’ve got the special sauce” and a free bottle of sauce for all new accounts.  The startup benefits from a national ad campaign while no additional cash is actually spent or transferred.
  2. Equity in Lieu of Salary: Often, a startup is selling stock to raise the capital to hire top talent.  Why not give that equity directly to the new hire instead of salary for the first year?  The effect is the same but the business avoids the hassle and expense of preparing presentations for investors and managing diverse groups of stakeholders.

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Etienne Hardre is a Senior Associate with BiggsKofford, P.C. specializing in helping entrepreneurs buy, grow, and sell businesses.

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