Jay Sachetti joined Jeff O’Brien, partner at Husch Blackwell and Dyanne Ross-Hanson, president of Exit Planning Strategies talked about the market for mergers and acquisitions, exit planning opportunities for companies that don’t end up for sale and how companies can maximize their eventual sale price during an early October panel at the first Upsize on Tap event at Summit Brewing Co. in St. Paul.
When the state Legislature passed a law requiring employers to provide paid leave and safe time for employees, Justin Bieganek started hearing differing details from friends, colleagues and peers.
UPSIZE STAGES: THE EARLY YEARS
03 :: Conducting market research.
Corporate structure
matters, to you and
investors, so get advice
S-Corps and limited liability companies (LLCs) are attractive to investors who want to use start-up losses to offset other earnings. S-Corps are good for businesses with a traditional hierarchy, and they?re viewed favorably by the Internal Revenue Service.
C-Corps are preferred by venture investors because it allows them to take preferred stock.
S-Corps can be converted easily to C-Corps. C-Corps are subject to two layers of taxation ? those at the corporate level and on dividends at the shareholder level ? not a problem if the profits are put back into the business and not disbursed to shareholders.
The corporate structure of your business is very important. And with the aforementioned details, clearly the distinctions are complicated. It?s not something an entrepreneur should worry about alone.
Typically small, young companies will be one of the above ? and not a sole proprietorship ? because such structures allow for the greatest protection of personal assets.
A business lawyer and accountant will know what the best entity is. And it?s important for entrepreneurs to make sure they find these experts for these and other decisions, including where to incorporate. Investors tend to favor Delaware because it is corporate-friendly ? another issue for the business lawyers to help with. An accountant who specializes in working with businesses is a must as well, to assist with tax and other implications of your chosen structure.
Once you?ve narrowed your corporate structure you can begin figuring out how to raise money. There are several options. Start-up companies often go to the three Fs, friends, families and founders (or as some wags call it, friends, families and fools) at least for the first round.
A company?s financial needs will change over time. So match capital requirements to the stages of development and the achievement of risk-reducing milestones.
If you are an invention-heavy company that isn?t going to have a lot of cash flow, you probably will need equity financing. Be prepared to give up some control. You?ll need to establish some milestones and figure out about how much money you?ll need at that given point.
For example, a company might need $5,000 in seed financing to establish viability, $2.5 million to do research and development and technology, and $7 million to do initial product development and manufacturing. Angel investors will typically lead deals between $100,000 and $1 million; venture capitalists and private equity investors will take control of larger rounds. Remember to take into account having six to nine months of cash on hand.
Depending on who you go to for outside money, consider their needs for return on investment, duration and how they will gain liquidity. Assume venture capitalists will want 40 percent to 50 percent compounded rates of return over three to five years.
If you want to maintain control of your business and you will have the cash flow to repay debt financing, you can opt for a line of credit or loan from a bank. You might need to provide a personal guarantee. And if you go this route, be prepared to bootstrap, although that?s not a bad strategy anyway, given that investors want to see entrepreneurs develop frugal habits and find creative ways to stretch a dollar.
You also could consider applying for grants or offering a potential customer exclusivity to your product in a certain market in exchange for a large enough prepayment to take your company to the next level. These latter options are strategies that some observers think are underutilized and not widely enough considered.
As the name suggests, Owatonna-based Kamp Automation looks for customers with a process they’d like to automate. It could be a small, inconvenient, tiny part that people can’t assemble. It could be a high-volume product so needed that the customer can’t find enough labor to produce it in the necessary quantities. “We’ll work anywhere from medical device companies to the seed industry for corn and soybeans,” says Kent Patterson, co-founder, president and CEO. “We just jump all over wherever there is custom automation.” The company started in his garage. Patterson and his partners built a machine. The company started to grow to the point where now it has 48 employees — and had a bunch of people and stuff in different locations. “We went from a garage to a shop to a shop and just kept moving to new places and signing leases,” he says. “We got to a point where it’s like, OK, this is getting big enough and sustainable — we felt that we wanted to look for our own space.’”
