Three Options for Finding Capital

Where there once were two options for finding capital, now there are three.

Staying Private

A company can stay private and attempt to acquire capital through private placement memorandums (PPMs), venture capitalists, angel groups, or loans.

PPMs have been difficult to obtain lately, as the requirements for being an accredited investor have increased, and non-accredited investors cannot, for the most part, participate. PPMs are time consuming in their creation. A company that is trying to access capital through a PPM cannot by law advertise that the PPM is available. It is strictly through a business owner’s warm leads (friends, family, and business associates) that a PPM can be offered.

Venture capitalists and angel groups will often invest in ideas and businesses that they believe in. However, extensive business plans and PowerPoint presentations are often requested in order to get an audience with them. Once business owners find a venture capitalist or angel who is willing to invest, agreements of ownership and interest rates must be made. Often, these investors request a significant amount of the company to participate and/or a significant amount on interest. However, business owners who feel desperate and who believe that this is the only way to obtain the capital they need often take this route.

Many banks today are not investing in businesses that do not have the collateral to secure the loan. Business owners that do not have assets to cover the amount of capital that they need cannot, in most cases, get a loan. If you are a business owner that has sufficient assets to use as collateral to secure a loan, and you need to raise capital, this is a viable option.

Going Public

A company can pay hundreds of thousands, if not millions of dollars to have the privilege of participating in the traditional stock market arena. The Securities and Exchange Commision requires extensive state and federal filings and reports for publicly held companies. Often, the waves of trading (whether high and then low, or low and then high and then low again) in traditional markets have not reflected the comparative state of the companies being traded.

These factors and others, such as the risk of losing control over the direction and orchestration of the now public company has made private business owners hesitant to take part in the traditional public markets. In fact, out of more than two million companies who could qualify to post with NYSE or NASDAQ, less than ten thousand companies are actively being traded.

Being Independent

The Independent Stock Market provides a marketplace for business owners to offer their personal stock for sale. Owners no longer need to look at PPMs as options, as ISM allows the advertising and the use of accredited and non-accredited investors to participate. Owners no longer need to seek out venture capitalists, angel investors or banks for loans to find capital, since with ISM they can access the capital they need without giving up a significant portion of their company, without paying interest, and without having assets to use as collateral.

The Independent Stock Market provides a venue for private business owners wanting the benefits of the traditional markets without many of the risks and additional reporting they require. Owners can find the capital they need and receive the liquidity they want in a marketplace that provides a simple buy/sell model without the twists and turns of outside influences.

Increase the Market Value of Your Privately Held Company by Removing the Lack of Marketability Discount

Certified valuators determine the value of a company by reviewing several risk factors. When their assessment is complete, one of the last questions they ask is if the company that is being valuated is a privately held company, a publicly held company, or if it is a company that shortly will become public or return from being public to become privately held again.

Privately held companies that have no plans in the near future of becoming publicly traded receive what valuators refer to as a “Lack of Marketability Discount.” Over the last 40 years, the average discount valuators have given privately held companies is 30%. This means that a ten million dollar company that is private, on average, would only be valued at seven million dollars.

The reason why valuators make this significant discount is because the purchaser of the company has limited opportunities were he or she to try to sell the company at a later date.  If the company were publicly traded, the buyer could simply sell off a portion or all of his stock in the company to the general public and thereby retake his investment – hopefully at a profit.

Privately held company owners would have to wait for another buyer in order to retake their investment.  The Lack of Marketability Discount protects the buyer from paying full price for a company that he might not be able to sell when and if he ever wanted to sell it.

One way to increase the market value of your privately held company is to go through the processes available to make stock in your company available to the public. Some companies are afraid, unsure about, or opposed at the idea of taking their business public in the traditional markets. Even those business owners that understand the Lack of Marketability Discount are often unwilling to take that step into the public trading realm.

Sometimes cost is a factor. Other times it is all the files and reporting that they dread. Sometimes they fear the traditional markets themselves with the waves of changes in stock prices that are often unrelated to the actual stability and growth of the business itself.

If you are a business owner of a privately held company who would like to remove the Lack of Marketability 

Discount without all the worries of the traditional markets, call the Independent Stock Market today.

The Pros and Cons of Private Placement Offerings

Sometimes business owners need money and they think private placement memorandums are the best choice. Private Placement Offerings (PPOs) have their time and place, but some business owners are unsure of when and where that is.

If your business is just getting started, a PPO might be a legitimate option. Although preparing PPOs by oneself is time-consuming and stress producing, preparing PPOs can help your business if you have family and friends that know that you need money and have the ability and desire to help you. PPOs probably can’t help you if you have no family members or friends who do not have the desire or the means to help you. This is because PPOs require that the people involved know you. They must be associated with you or your company personally. They are called Private Placements because you must keep the information about the need for capital within your primary market and cannot use the general public to fulfill your needs.

If you are able to use friends and family, be as conservative as possible in your projections. One of the negative aspects of PPOs is that if you don’t do what you say you’re going to do, you might get a talking to at the office – but the heated and downbeat conversation also might spill over into family reunions.

If your friend or family member wants to invest by using a PPO, try to make an arrangement to return his investment that you will be happy with too. If he is asking for a high percentage of the company, for example, might not matter to you when you sign the contract – because you are getting the money you need. However, it will matter to you if he decides to sell it, or get a new manager, or introduce a new product that you are against selling. 

For PPOs, most investors must be accredited. That means they need to have a net worth of more than a million dollars not including their homes. With today’s economy the way it is, accredited investors can be difficult to find.

If you have been in business for more than two years, and your business is worth more than $2.5 million dollars, posting your business with the Independent Stock Market (ISM) is a much better option than a PPO. With ISM you can use accredited and non-accredited investors. You can advertise that you are looking for capital to the general public. You can use your sweat equity and initial investment to get the capital you need, without paying interest or giving up control of your business.

If you have a smaller business though, or have not been around long enough to qualify to post with ISM, the ISM Business Development Group can help prepare your company for a Private Placement Offering so that you do not have to try to perform the process for yourself. Contact an ISM representative today.

Second Market and SharesPost Are No Competition for Independent Stock Market

Second Market and Shares Post are companies that offer shareholders an opportunity to sell their privately held stock without the consent – and often without the acknowledgement of the privately held companies. In order to participate, shareholders contact Second Market and SharesPost and let them know that they would like to sell their private stock to accredited investors. 

An accredited investor is someone who has a net worth of more than one million dollars. This year they made the distinction of being an accredited investor a little more difficult by stipulating that the total net worth of the investor cannot include his or her place of residence. Individuals can qualify as accredited investors if they earn at least two hundred thousand dollars a year. Couples can become accredited investors if they earn at least three hundred thousand dollars a year combined.

At times, the seller has a hard time finding a buyer, with these companies, because only accredited investors can participate. There is a hefty transaction fee for performing this service that both the buyer and the seller pay Second Market and SharesPost. The fee is hundreds of times what you would pay online for publicly traded stock.

The independent Stock Market (ISM) works with private business owners and their shareholders to provide them with a marketplace to sell their stock.  Instead of sneaking around behind the business owner’s back to trade stock like Second Market and Shares Post do, ISM works with the business owner to ensure the trading remains at the level the owner desires. One wrong move from a seller with Second Market and SharesPost and the once private company could be thrown into public status with all the state and federal filings and reports that public status requires.

Unlike Second Market and SharesPost, accredited and non-accredited investors can participate in the buying and selling of stock with ISM. This means that you don’t have to be a millionaire to get access purchase shares in a company that you believe in.

Instead of paying exorbitant transfer fees for each transaction like Second Market and SharesPost, the Independent Stock Market has a minimal fee while allowing purchasers the opportunity of being significant partners in businesses that they believe in. In many cases, shareholders will be one of less than 500 total shareholders in companies whose stock is available on the ISM marketplace.

ISM has the consent of the business owner in making the trade. ISM allows both accredited and non-accredited investors. ISM’s transaction fees are significantly lower than Second Market and Shares Post. It’s easy to see how the Independent Stock Market performs head and shoulders above its competition.

How to Determine the Value of Your Company

Various factors come into play when third-party certified valuators are assessing the value of a privately held company for the Independent Stock Market. Here are some of them.

Quality and Depth of Management When a company has competent, well-trained managers, and many of them, the business is likely to run smooth. If your business has an established training program and strives to promote from within the organization, you are likely to rank high in this area.

Importance of Key Personnel   If there is only one key player (the CEO, for example) that is holding everything together, without a realistic replacement, you will likely score low in this risk area. Especially if the purpose of the valuation is to sell the company so that the key player can retire.

Stability of Industry Some industries that have been stable in the past are having issues with this area currently – such as the real estate and motorized vehicle industry. If your industry has continued to move forward throughout the recession, there is a good chance you will score high here.

Diversification of Product Line    Do you stick to one product? Do you stick to several products?  In most cases, valuators are looking for a happy middle ground. One product might be overtaken by an competitor. Several products might not give you the ability to concentrate on its efficiency, improvement, or marketing.

Diversification of Customer Base    In this instance, the broader the customer base, the better.  I have seen several instances where companies have been purchased for the value of their customer base alone – regardless of poor inventory and management. Of course happy customers are worth more. Often this can be determined through testimonials, percent of return customers, and percent of complaints.

Diversification & Stability of Suppliers        Relationships with key vendors and the probability that those suppliers will continue their relationship with the company is a key ingredient in the valuation process. Having back-up vendors is critical as well. If your only vendor goes out of business, or raises his prices significantly, it could hurt your business.

Geographic Location     The real estate slogan “location, location, location” refers to the importance of this risk factor. Were a solid and productive company in one location to open its doors in a non-receptive place, it would go out of business.  This can be determined by the number of customers, and potential customers.

Stability of Earnings     If you have had steady increases in revenue throughout the years, at least in the last three-five years, you will rank high in this area. Stability in revenue shows the potential to continue that trend in the future. Companies bringing in significant revenue consistently should seek a higher price when selling their company than those who do not.

Earnings Margins     Bringing in lots of revenue is one thing – but making a profit consistently is just as or even more important. Breaking even is not seen as big of a negative factor as losing money is. Continuous quarters in the red will bring in a lower sales price, even if the company purchasing the company has the tools and resources to reverse the negative trend.

Financial Structure    There are many factors that could determine whether businesses score high in this area. Some of which, regrettably, are subjective in nature instead of objective. Are key personnel spending “too much” on wages or perks? Is the cost of goods over 30% of revenue? What is the cost of your building and maintaining it? Are their loans with significant interest rates that will not be paid soon? These are some of the questions valuators ask about a company’s financial structure.

When determining the value of your business, take a good look at where you stand regarding each area discussed. If you have questions, call the Independent Stock Market. Perhaps there is an area where you can improve the processes, increase the quality of staff, or decrease expenses before you have a certified valuator tell you what your company is worth.

Disadvantages of Companies That Choose to Stay Private

There are several reasons why business owners decide to stay privately held.  One reason is that they enjoy the non-public nature of their business dealings. It is not that they are doing anything wrong; it is just that they are not thrilled with the idea of having to explain every little expense to the public.

The other reason that business owners choose to stay private is that they are hesitant to join the public market arena. They might not want to pay the costs involved, or they might not understand how it all works. They might worry about losing control of their business model. Most of them are not familiar with the Independent Stock Market, and how these and other hesitancies of going public are removed.

So, rather than learn about the safe, inexpensive, easy-to-understand ISM marketplace, they stay private and continue to work against all its disadvantages.

In this article, we will discuss two of the disadvantages of remaining privately held.

 Difficulty in obtaining capital

Private business owners use several methods in their attempt to get capital. Some use Private Placement Memorandums or Offerings. These are difficult to obtain, because business owners cannot advertise that they are looking for capital and because accredited investors must provide the majority of the capital brought in. Another means of trying to obtain capital is through banks. This has become increasingly difficult because most banks require collateral and most business owners need the money because of their current lack of collateral.

Some business owners of privately held companies have sought after venture capitalists. The large majority of these investors require either a significant amount of interest on their money, a significant percent of the owner’s company, or both. Because business owners that need capital find it difficult to find capital elsewhere, they often make this choice, often regretting the decision later.

Lower market value upon sale or merger of the company

When privately held companies receive valuations before a sale or merger, the market value, on average, is 30% lower than a company of the same size and value whose stock is publicly traded. This is because the stock in a private company isn’t marketable, and therefore cannot be traded easily.  Someone buying a public company has an exit strategy that private companies do not, that is why owners of public companies receive full value for their businesses.

For private business owners who want the benefits of public companies without the challenges of the traditional markets, contact the Independent Stock Market.