Archive for the ‘Financial’ category

Global Cash Flow Analysis Now Used to Justify Bank Loans

October 29, 2009

By John Riley

 It wasn’t too long ago when a bank loan could be obtained by an individual demonstrating his ability to repay that loan. Then came the recession and the government began taking steps to shore up the financial system.  Now the rules have changed.

 Global cash flow analysis (GCF)  is the new mantra that bankers follow in analyzing a candidate’s loan worthiness. To most, it may seem an arcane process, but in fact it’s more of the same you’ve experienced in the past when applying for loans. It means all your debt instruments, rather than just the loan you are applying for, are reviewed and an assessment made of your ability to meet each of those obligations.

 Until now, lenders in the commercial market  have relied on cash flow from operating  businesses or income producing properties as their repayment  sources for a loan. With private bankers, an individual’s personal cash flow has been the measure. With individual loan requests, bankers prepare a cash flow statement  (PCF) which is widely used.

 Global cash flow is a modification of personal cash flow.  Business debt service and business income are added to personal cash flow creating a new instrument.

 a cool fifty thousandAccording to Michael Sabetta, Senior Vice President, Goldwater Bank, a  family’s income and spending habits are detailed by the PCF, but does not take into account  how much the family takes in or how much it pays out. However, the GCF analysis considers all sources of cash flow and all debt service related to personal debt and debt that has been personally guaranteed by business holdings or investments in a Limited Liability Company (LLC).  It’s important that business cash flow represent the amount of money the family could have withdrawn, spent or transferred to their personal account. (Many bankers differ on this point)

“As a process, it is not much different from banking in the 70’s or 80’s,”Mr. Sabetta noted.

 The global cash flow analysis needs to be used when a borrower’s obligations include a company as lender and the person who owns that business as borrower or the other way around. In this situation, the PCF and business cash flow represent the two main repayment sources. This is essential because neither the PCF nor the business cash flow individually give a fair picture of the borrower’s ability to repay.

 More and more, banks are being required to adopt the GCF. No doubt this is being influenced by bank examiners who are looking at the GCF as the most reliable tool to gauge loan worthiness. Although the GCF process has not been universally adopted, it is receiving much more attention within the industry. That means, you can expect a broader and more thorough analysis of your next loan request.




Regulators Ponder Boost in Capital Requirements for Banks

October 5, 2009

By John Riley

 The word on the street has been confirmed: FDIC regulators are considering an increase in the capital reserve requirements for banks.  No effective date has been set yet.

 Currently, the reserve requirement is 12%. If the new regulations go into effect, the reserve requirement would move up to 12% and then a year or so later, it would go to 14%.

 Following the financial crisis of the past year or so, federal regulators seem intent on taking steps to tighten financial controls on banks. While the increase in the capital reserve requirement would normally seem appropriate,  these are not normal times and such a move can be a serious impediment to the economy’s recovery.  Banks will need to take more of their money that would normally go for loans and investments and set it aside in their reserve fund.

5 Tell Tale Signs to Know if you’re buying a Good Business From a Business Seller

September 18, 2009

ByTed E. Sanders

When buying a business there is really no way to tell if you have gotten the deal you expect from the seller until after closing. You can do all the due diligence in the world and the seller could still be hiding major latent defects. Heck, unless you can tell the future you really don’t know the outcome of your business purchase until after closing. Due diligence, research, and a proven management team help increase your chances of success, but they don’t guarantee it. I’ve found after good and bad experiences in buying businesses you can actually read the sellers by closely studying how they react close to closing. Please be aware that these “telltale signs” by no means should be considered a substitute for due diligence, however if you see these signs you know you may have a good seller.

1. The seller repeatedly expresses concern over the employees – I’ve worked with some business sellers that frankly do not care about the employees. I’ve also worked with some business sellers that are selling the business because they want what’s best for their employees. If the seller is seriously concerned about the status of the employees that is a GOOD sign.

2. The seller has remorse shortly before closing – If the seller begins to seriously question the sale before closing then you may have a good deal. I had a really bad experience where the seller was trying to get to the closing table faster than we were (the buyers) because the bank was about to call the credit lines due.

3. The business broker has done a large carry back of a commission – Any experienced business broker is going to try to get as much cash down on a business sale as possible. The logic behind this is that if the buyer (you) chooses or is unable to fulfill your obligations on the purchase then obviously the business broker may never get paid. An experienced business broker that has enough faith in the buyer to carry back a large portion of their commission contingent on the buyer’s completion of the purchase is a GOOD sign.

4. The seller continuously negotiates the post closing priorities- I feel have the business seller involved post closing through a carry back of the purchase price or involved in management (either permanently or temporarily) is imperative for your success. If the seller’s first priority is to get as far away from the business as possible, you may want to double check everything. At times sellers will use retirement or new ventures as a reason to get away from the old business. This doesn’t mean the seller has done anything fraudulent; however you may want to make sure you have all the accurate contact information for them.

5. The seller cries at the closing table – I’ve never personally experienced this, however I heard this from another business buyer. He stated that the seller felt more attached to his business than he did his own children! Handing the business over to a new owner was definitely an emotional process for this seller.

Do you want to learn more about how to buy a business? I have just completed a brand new guide in buying a business “The Corporate Raider’s Guide to Creatively Financing Your First Business.” Download it free here:

Starting a Business? How Well do you KNow Yourself?

September 5, 2009

By John Riley

Starting a business can be an exhilarating experience. It’s your vision, your company and your bountiful legacy for the sons or daughters who follow you. But there’s another unintended course that your efforts might take and that’s the one you want to avoid. So the purpose here is to try and minimize the chance your energies and assets might follow the latter path.

 Before you spend a lot of time and money on pursuing your dream, some self examination is in order. If you can objectively evaluate four areas of your personal standing, the answers will give you a strong indication if you have a realistic shot at starting a company successfully.

 Business Skills:  Most likely, the business you have in mind is going to be a reflection of your experience and training over the past few years while you have worked for someone else.   Pre-existing contacts in the industry are an important result of that association.  Your business and market knowledge, and/or that of your associates, help establish your credentials.  Now you will need to assess how well you qualify in this category.

 Business Plan    A business plan is essential to your success for two reasons. First, it forces you to think about all aspects of your vision and the strategy you will employ to achieve that vision. Second, the plan will be a necessary requirement to get the attention of an Angel investor or venture capitalist. At this stage you probably have not written a business plan so you need to obtain a recommended outline of one from the many internet, academic or professional organizations that offer them free. With an outline in hand you can take each heading and ask yourself how you would deal with that subject.

 Financial Resources   In general, an entrepreneur should have enough funds to survive for six months to a year without personal income. It takes time to develop accounts and convert them to customers so you need to be prepared to operate for a few months without income. If you are selling a technology product or an engineered product, the time elapsed before you receive an order will be longer because of all the up-front specification and prototyping work that has to be done prior to a sale.

 Commitment    The brutal fact is that an entrepreneur who does not believe in his product or service will not have the fortitude to withstand those bad business cycles or customer indifference.  Some will think they are committed and can deal with adversity, but when the first difficult moments arrive, they bail out.  If you don’t feel the passion for what you want to do, then you should reconsider what you are about to do.

 When talking to a prospective entrepreneur, these are the four measures I use to assess if or not he or she has a realistic shot at starting a business successfully.  If nothing else, the entrepreneur will be much better prepared to meet the venture capitalist.


How to Raise Money from Angels and Venture Capitalists

September 1, 2009

By John Riley

In representing a group of venture capitalist firms in the western states not so long ago, I learned just how important the business plan process is in raising money for a business. My responsibility was to look for young companies that showed promise, do some due diligence and then if the company still looked promising, I would select one or two venture capital firms interested in the market involved and turn my recommendation and report over to them.

 It’s important to realize we are talking about a process, not a single act of writing a plan and submitting it. The decision to finance or not finance can occur at any point in the process. So understanding the process can make the difference between success or failure.

 Your objective is to create sufficient interest in your business that the investor will consider your plan viable and want to meet with you.  The business plan alone won’t get you the money.

 In general, venture capitalists are reluctant to fund start-ups that have no financial history. After a company has been in the market for three or more years, they have a record of success or failure in the marketing of their product or service. At that point, the venture capitalist can learn enough about the company and its product or service to evaluate the degree of risk.

 When you’re looking for seed money to start a business, the most likely source, other than friends or relatives, is the angel investor.  They are ready to invest with limited or no business history, but  the amounts of money are usually smaller than what the venture capitalist is willing to invest. If you decide to seek out an Angel, you can go to the Internet and post information about your company on  Angel investors visit the site often.

 But, there is an exception.  When a company comes up with a product or service that is truly a breakthrough in design or technology and stands alone in the marketplace, investors, with checkbooks in hand and minimal concern for their business history, are ready to deal.

 When the company is ready to go to the market for capital, the need for a business plan comes front and center.  While there is no shortage of Internet and professional sources of information on the recommended outline for a business plan, the important thing is to have the information the investor wants in creditable form. While some entrepreneurs have written their own business plans, if the money involved is substantial, hiring a consultant to write the plan seems to be the preferred course. Depending on the size of company and the complexity of the business, costs for the plan can run from $4,000 to $35,000 or more.

 While there are many important information needs that must be provided in a business plan, there are four questions that are a good place to start:

  1. Why does the market need this product or service?
  2. How big is the market and what will your share be?
  3. What’s your competitive edge; how will you protect your intellectual property or technology?
  4. How much money do you need and how will you spend it?

 All business plans should have an Executive Summary up front to summarize the most important  information/data in the plan. It must be very well written because investors are usually swamped with business plan submissions so  they read the Executive Summary first and if it doesn’t capture their interest , the plan will probably go into the recycling bin.

 Among the reasons business plans fail, three are the most common:  1) the data and or information presented is exaggerated or unrealistic. Keep in mind, most venture capitalists work in firms that often have professionals on their payroll who know the markets they target very well and can quickly spot misleading or inaccurate information.

 2)  You don’t want to minimize or omit your plan’s weaknesses. No plan is perfect and the investor expects to see a problem or two that might threaten the accomplishment of your goals.  The key is to recognize the problem and then tell how you plan to deal with it. 3) minimize or eliminate opinions and present sourced data and professional or expert commentary on the market situation.

 Although there are many business plan structures, I use this one:

0.1              Background

1.0               Executive Summary

2.0               Financial Plan

3.0               Company profile

4.0               Products and services

5.0               Manufacturing

6.0               Market Analysis

7.0               Market Plan

8.0               Contingency plan

9.0               Addendums

 When your business plan is in hand, you may opt to contact your banker before considering a venture capitalist since the banker is primarily interested in interest income while the venture capitalist focuses on equity in the enterprise. Entrepreneurs often make the mistake of contacting only one or two banks and if that is unsuccessful, they give up and go looking for a venture capitalist.

 That’s a mistake.  Banks, like other businesses , target the markets they want to pursue. So if you talk to a bank about giving you a loan for your software company, the bank may not be interested in that market. However, other banks may be looking for software opportunities. The rejection may not have anything to do with you or your plan. The point is, contact five or six banks to give yourself better odds for success.

When you finally meet with the investor, he may tell you to redo part or all of the plan and suggest you format it his way. No need to be alarmed. Every investor has a way they like to have information presented and if they do want you to revise the plan, that’s actually a favorable reaction because you know he’s interested.

 Now that you have met the investor, she will have answered four basic questions about you in her mind… Does he:

  1.  know this business and the market he wants enter?
  2. have good business skills
  3. have good people working for him?
  4. really have commitment to his business?

 If you pass that test, chances are you are about to enter a serious negotiation for money.

 On average, approximately four to six months will have passed from the time you start the business plan process until you get money from the investor.  Don’t forget, this is a process and you can succeed or fail anywhere along this timeline.

AZ State Training Grants on Temporary Hold

August 12, 2009

By John Riley

MPj04387460000[1] Up grading personnel skills should be among the top priorities of business managers if companies are to weather the significant structural and economic changes brought about by the near financial collapse. Intellectual skills have always been the ‘coin of the relm’ but never as important as they are today.
And the training should start now. But with the squeeze on budgets over the past few months, money may not be available now. However, a number of states provide state training grants to help companies deal with this need.
Arizona has one of the better programs, but facing over a $ 2 billion debt, it is on hold. Nevertheless, they are still accepting requests which will be held on a first come, first serve basis, for when money is again available.
The maximum grant available  is $1.5 million. That is based on a two-part submission: one grant to train new employees for a new position and another grant to train incumbent employees.  A company can submit one or both requests depending on how the grant is to be used.
The program is very flexible.  Within reason, any job title can qualify for training. When a grant is received, the company has up to two years to complete the training. Once a grant is completed, the company may reapply for another grant.
If personnel to be trained are new employees for newly created positions, the State will reimburse up to 75% of the training costs. For incumbent employees the reimbursement rate is up to 50%.
For an employer with 100 or more employees in an urban area, the grant can range from $2,000 to $5,000 per employee.
For an employer with less than 100 employees, the range is from $5,000 to $8,000 per employee.
Temporary or contract employees cannot be trained under this grant program.
Employers interested in learning more details about the program or wanting to intiate a grant request can call John at 480-286-2300.