Funding Growth Through Franchising

As a small business owner, the question near the top of everyone’s mind in almost any market and particularly today’s is when do I fund the development of my business? A growing business maybe being a fine Italian fancy car, it looks great and drives well, but if there isn’t gas in a vehicle it’s not going very far.

1. Debt. Using Debt to finance your growth can be as high of an opportunity to build capital in today’s market as is available of discovering a sunken pirate ship with your neighbor’s swimming pool. Unfortunately, all the “leg work” created by our friendly politicians to improve lending to small business owners hasn’t exactly panned out yet. It still is pretty tight in the bank. Expect to be required to have a minimum of 30% in collateral for the loan and also over a 700 credit history. SBA loans possess a bit more opportunity, nevertheless, they cap the limits from the loan amounts.

2. Private Investors. Targeting private investors in today’s market has brought on a new light with all the difficulty in the credit markets. It still is difficult, a good investment package should have a clear, concise, and targeted business plan that identifies experience, growth potential, investment, return on your investment, and timeline for that return. Don’t get fancy, don’t fudge and turn into simple. If you aren’t creating a profit inside your business now and also you haven’t hit home runs inside past it will likely be a good road, but always worth a trial.

3. Venture Capital. Looking for Venture Capital funding to develop your business has lost a lot of its luster within the last several years. Possibly since the faucet has switched off for new deals, and also maybe because businesses started realizing that the terms to VC deals are about as friendly like a badger with hemorrhoids. You need to possess a pretty tight concept with a background to get VC funding generally, and typically these deals won’t help you even though they do work.

4. Franchising or Licensing your Business. Franchising remains to be a viable expansion tool depending on the business concept and model these days. How does this connect with funding? Franchisees purchase a business structure from the structure of the franchise relationship. The upfront franchise fee and royalty payment time for the franchisor (you), substitute because of the investment with your business. That, as well as new locations of your respective operations, bigger brand, marketing capability as well as other attributes of a growing franchise system, equals higher sales and opportunities for strategic partnerships.… Read More

How to Calculate Liquidation Preference in a very Startup Business Venture Capital Financing Term Sheet

What is liquidation preference?

Liquidation preference identifies preferred shareholders’ rights for a specific amount for your preferred shares they hold in preference to common shareholders in case the business retreats into liquidation.

The scope of liquidation preference varies between different term sheets. Some may be extremely favorable to investors, some could be less. However, the goal of liquidation preference is really that in the event a business goes into liquidation, preferred shareholders will always get something back for their preferred shares before common shareholders get anything. In simple terms, they will always read more than common shareholders. Common shareholders may be certain to get nothing if the company won’t have enough assets to stay the preference amount.

Example A:

Venture Tech Ltd. has 5,000,000 common shares outstanding.

In a Series A financing, Investors A invests $2,000,000 in substitution for 2,500,000 Series A Preferred Shares (i.e., final cost per share = $0.8).

The term sheet of this Series A round provides that:

In case of your liquidation event, the preferred shareholders are going to be entitled to get instead of common shareholders a sum comparable to 2 times the price per share, plus declared and unpaid dividends (the “Initial Payment”). After the Initial Payment has been made fully, any assets remaining shall be distributed to the preferred shareholders (on an as-converted basis) and common shareholders over a pro-rata basis.

NOW, Venture Tech Ltd. switches into liquidation and the sale costs are US$6 million.

Assuming no declared and unpaid dividends, and all other senior debts, e.g., employees’ wages, secured debts, etc., have got all been settled:

How much will the most preferred shareholders get?

They first get US$0.8 x 2 = US$1.6 for each preferred shares they hold.

Therefore, the Initial Payment is US$1.6 x 2.5 million = US$4 million.

This gives US$2 million ($6 – $4 million) remaining, which shall be distributed to preferred shareholders and common shareholders over a pro-rata basis.

Therefore, preferred shareholders are certain to get a further US$2 million x 2.5 / 7.5 = US$666,666.

I.e., an overall total of US$4,666.666.

The common shareholders will get a total of US$2 million x 4 / 7.5 = US$1.333,333.

Total = US$4,666,666 + US$1,333,333 = US$6 million

Example B:

Following example A above, let’s imagine this time around the sale costs is US$10 million.

They are certain to get an overall of $4 million (the Initial Payment) + $6 million x 2.5 / 7.5 = $6 million

The common shareholders are certain to get an overall total of $4 million.

Example C (company favored):

Let’s provide a twist. This time everything is similar to above apart from the exact amount the preferred shareholders are certain to get per preferred share they hold is capped at 4 times the price per share.

In simple terms, they first get 2 times the cost per share ahead of common shareholders (i.e., the Initial Payment as in Example A and B). All remaining assets might be distributed one of them and common shareholders … Read More