Do you really understand the impact of the coming tax hikes on capital gains and income?

Our office has been working on a five-year business plan for a client that has really exposed the impact of the tax increases coming in 2011 and 2013.

Not only are increases in capital gains taxes going to take a bigger bite out of the proceeds of the sale of a company, but coming increases in income taxes and health-care taxes will take a bigger bite out of the income to owners who continue to own their companies.

We are all aware that the expiration of the Bush Tax Cuts will increase capital gains rates in 2011. For a company owner who is a resident of Minnesota, this will cause a 6.5% reduction in the after-tax proceeds the owner will take away from a sale.  Not everyone has noticed that the new Health Care bill also increases capital gains beginning in 2013.  When this kicks in, owners will take home 11.4% less compared to today’s tax rates.  This means that the company must be worth 6.5% more next year and 11.4% more 2 years later, just to stay even. Read the rest of this entry »

It’s no secret banks across the country have tightened their lending standards, and in many cases actually reduced the size of their commercial lending portfolios, as my recent newsletter article “Banking On an Old Model for New Loans” points out. Over the last eighteen months, many business owners have found their banks unwilling to support them beyond their present lending level, regardless of their strong lending history, current condition, or the length of the relationship. However, as banks recognize that the economy is slowly recovering, some are beginning to make new commercial loans. While capital for senior debt financing is once again beginning to flow, it does so within a new set of realities: less leverage, more collateral required, stricter covenants and higher pricing spreads. This new environment requires borrowers to find collaborative ways to work with the few active albeit cautious lenders.

We have experienced success participating multiple community banks in deals that are attractive with a solid sponsor, but too big for any one lender to take on alone. Why community banks? While many large national and regional banks are in holding patterns, the smaller community banks that have survived in this environment have done so due to traditionally conservative credit standards and a local market focus. These banks are lending, but with stricter guidelines than in the past, and at maximum loan amounts that are down from their historic levels.

Partnering on loans is not an every day practice for community banks, and the process is different than closing a deal with a single lender. Choosing the right combination of lenders is critical, and requires strong relationships with each one. These multi bank loan structures take creativity to develop and longer to close than single-lender loans, as multiple stakeholders are involved. Having an experienced adviser to quarterback the deal from application through closing is critical to successfully combining lenders.

posted by Peter Ventre

Today’s Wall Street Journal included an editorial (see below) that reports that the Financial Reform bill now in Congress will likely disqualify 77% of private party investors who have historically capitalized small, private companies.  This will have a major impact on capital formation for private companies with less than $20 million in revenues.

Angels Out of America – How the Dodd Bill Harms Start-Ups

Senator Chris Dodd’s 1,400-page financial reform bill contains many economic land mines, and here’s one of the worst: Provisions that would make it harder for business start-ups to raise seed capital. Read the rest of this entry »

As a business owner, at some point you will want to extract some, if not all of your wealth from your business. You need to determine not only how to achieve, but maximize liquidity in terms of your personal wealth.

The first step in this process is to become educated; a thorough understanding of your options is essential. The most typical liquidity options for an owner of a middle-market privately held business include:

A SALE
A sale to a public, international or large private company provides immediate liquidity and advantageous tax structures however it can sacrifice important personal considerations if you are not ready to exit or relinquish control.

A PARTIAL SALE
A strategically identified investment group can provide premium value and liquidity as well as financial resources to further the company’s growth. However you must be ready to share or relinquish control of the business.

GOING PUBLIC
Initial Public Offerings (IPO) are designed to provide capital to promote growth and can generate significant market value. However, it may be some time (years) until you can generate liquidity.

PRIVATE MARKET RECAPITALIZATIONS
Recapitalizations are often thought of as one of the best liquidity options, but are the least understood by business owners. Properly structured with a private equity group, a recapitalization can provide you with flexibility and a range of personal and financial advantages.

• Immediate Liquidity – Read the rest of this entry »

Mezzanine Debt

Today’s economy has put many private companies in a tight spot.  Companies end up with too much bank debt as business volume and profits contract.  But lower earnings mean that company owners who would have been ready to sell their companies now can’t do it because they end up with too little after paying off their banks.

So, how can you reduce your bank debt, improve your cash flow, and stay tough while you wait for the outside economy and your earnings to recover?  One answer is mezzanine debt.

Mezza-what?  Mezzanine debt gets the name because it’s half way between senior bank debt and equity.  Because it’s kind of both, it serves really well in the right situation.  Mezzanine is semi-permanent capital, like equity, so the company does not have to make monthly or quarterly payments of principal.  It usually has a 5 to 7 year term. Read the rest of this entry »

It comes as no surprise that some early stage companies get started with a bang because they are flush with capital from family, friends and early stage angel investors.  The excitement is palpable when some of this money has created “buzz” – articles in major newspapers and technical blogs, or TV coverage – all expounding on their products or services and how they will change our world.  By now, the management team, punch drunk on the good publicity, is convinced they are on the right track and expect the phones to ring off the hook from venture capitalists and other investors all clamoring for a piece of the action.  A major hiring and spending spree ensues, driven by the belief that outsized growth is quickly going to take over.  Forecasts and valuations are revised upwards to account for the fresh new optimism.  Concepts like “managing cash burn” and “increasing revenue traction” are fleetingly discussed at team meetings or around the water cooler in this “anything is possible” environment.

Reality Sets In

In 1999 or early 2000 at the height of the dot-com boom, this scenario may have ended with a happy outcome.  Venture Capitalists, having read all the publicity and anxious to get on the train, fund a Series A round based on generous pre-money valuations, little to no due-diligence and guidance that the money is to be used to expand hiring and spending at an even greater rate.  That was then – now we are in a different world. Read the rest of this entry »

In the current market, we are faced with companies and governments requiring the expansion or renovation of their capital intensive assets in various related infrastructure market segments.  Whether expanding manufacturing facilities, implementing new infrastructure capacity or leveraging existing assets for expansion into different regions or market niches, innovative financing is often at the core of long-term projects to transform a company’s strategy.  The ability to transform and execute upon one’s corporate strategy in capital intensive industries (like energy, oil & gas, transportation, government concessions and/or heavy equipment and manufacturing) is dependent upon the access to capital required to deploy existing and new capital assets that are critical to the long term recurring cash flows of a company’s or project sponsor’s(s) operations.

Akin to the underlying transformation in corporate objectives, the challenge with the project finance strategy is that the investment is made upfront while the anticipated benefits of the initiative are realized in the much longer term.  It is imperative to identify and prequalify sources of funds that can thoroughly understand the underlying changes being implemented by the prospective borrower(s) and project sponsor(s), and to achieve a comfort with the future cash flows arising from the collateral package of project investment or captive acquisition. Read the rest of this entry »

If You Want Funding This Year

Several CFO’s have recently asked me “When will the capital markets “return to normal?”  My answer is:  Not this year.  Therefore, if you are a C-level executive that wants to obtain funding for your company, you might consider leveraging your company’s top-line gross revenues with a new form of financing structure from Entrex, Inc., based in Chicago, and Bank of New York/Mellon, and made available to you through your corporate finance investment banker.

The current reality is that talk by traditional banks about low interest rates is not solving your cash flow needs, particularly when stricter lending requirements have reduced the amount of your working capital line or term loan.  Also, selling or giving up equity at a today’s reduced valuations is not attractive, which explains why raising equity capital in the types of private placements typical a few years ago, are not getting done.  As a result, unless your company is distressed (and, therefore, attractive to vulture investors), then you are most likely frustrated with your inability to access capital for growth and recapitalizations.

One attractive and innovative financing solution that middle market companies might consider is obtaining lump sum capital in exchange for giving the investor a monthly fixed percentage Read the rest of this entry »

As of January 2009, many banks and non-bank lenders are caught in a ‘liquidity trap’ where they must fix their own balance sheets before they can resume lending to customers. Getting buyout financing is harder than ever and new loans are secured by both cash flow and hard assets. On Wall Street, there’s a big slowdown in mergers & acquisitions.

Wall Street’s train wreck is Main Street’s opportunity.  Smart business owners and their advisors will certainly use these changes to their advantage.  Here are some ideas for owners considering a capital transaction in 2009:

1. Cash is king. Instead of an illiquid investment in a private company, this is probably a good year to have cash.  Consider a buyout or recap if you have another use for money. There are many opportunities in financial investments and real estate, for example.
2. Debt is cheap. For borrowers that qualify, interest rates are as low as they have been in a lifetime.  If you have good credit and debt-free assets, consider recapitalizing with low-cost debt.  Ask for an estimate of your secured debt capacity. Read the rest of this entry »

With all the news about the difficulties the Big Three auto executives had in securing financing from the U.S. government, it is good to know that middle-market business owners do not need an Act of Congress to get funded. However, you can be assured if you are looking for financing in today’s market — every aspect of your business will be examined in detail, including your business plan.

Even with a great product or service and a long list of customers your business may not receive the desired funding. Prospective investors receive so many business plans each year that weeding through them with only a cursory review has become a standard practice.  In order to ensure your business plan gets read by investors, it will need to stand out. From the investor’s point of view, some of the more common problems with a business plan include the following:

Unrealistic Claims About Competition or Risk

Everyone has competitors, so to claim that you have no competition will almost certainly cause investors to conclude that you do not have a firm grasp of the market. The “Competition” section of your business plan is your opportunity Read the rest of this entry »