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Financing Options For Small
Businesses
Jennifer Lucas, MBA, CBV, ASA
Managing Partner
Evans & Evans, Inc.
2
Evans & Evans, Inc.
Our expertise ranges from start up organizations in the process of developing their business plans and strategies to well established multinational corporations. Since 1989 we have worked with clients in a broad range of sectors locally, regionally and internationally, delivering timely, accurate and cost-effective corporate finance solutions.
EVANS & EVANS, INC 1610 – 400 Burrard St. Vancouver, BC V6C 3A6 T:(604)408-2222 F:(604)408-2303 [email protected]
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Who Am I?
• MBA, CBV, ASA with over 17 years of experience in valuation, due diligence, fairness opinions and strategic planning
• Supported numerous go public and M&Atransactions
EVANS & EVANS, INC 1610 – 400 Burrard St. Vancouver, BC V6C 3A6 T:(604)408-2222 F:(604)408-2303 [email protected]
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Financing EcoSystem
• Multiple private and public options available
• Which option is best for you depends on:
▫ How much you need
▫ When you need it
▫ What you are using it for
EVANS & EVANS, INC 1610 – 400 Burrard St. Vancouver, BC V6C 3A6 T:(604)408-2222 F:(604)408-2303 [email protected]
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Sources of FundingIncreasing Levels of Due Diligence
0$ $50K $100K $500K $1.5M $3.0M $5.0M $10.0M
Self –Fund / Grants
NRC / IRAP
Angels / IRAP. SR&ED
Angels,, Series A, VC
PR, Series B, Go Public
PE, M&A
Friends & Family
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Private Financing
• Pros
▫ More flexibility – no need to seek regulatory approval
▫ No exchange / reporting costs
▫ More autonomy for management
• Cons
▫ Ability to attract and retain larger investors can be limited
▫ Limited ability to use stock for acquisitions
▫ Lack of liquidity for investors
▫ Need a clearly defined exit strategy
EVANS & EVANS, INC 1610 – 400 Burrard St. Vancouver, BC V6C 3A6 T:(604)408-2222 F:(604)408-2303 [email protected]
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VC Math
• Earlier stage deals than Private Equity
• Venture Funds Returns in 10 deals
▫ 2-3 winners providing 3x – 10x return
▫ 4-6 break even or limited to no liquidity
▫ 2-3 complete loss
EVANS & EVANS, INC 1610 – 400 Burrard St. Vancouver, BC V6C 3A6 T:(604)408-2222 F:(604)408-2303 [email protected]
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Private Equity
• Invest directly or though limited partnerships
• Typically a 5 – 7 years investment horizon
• Generally looking for established companies with positive cash flow or EBITDA
• Considered “financial buyers”
• Some may bring management expertise
• Equity return expectations of >25%
EVANS & EVANS, INC 1610 – 400 Burrard St. Vancouver, BC V6C 3A6 T:(604)408-2222 F:(604)408-2303 [email protected]
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Public Financing – IPO/RTO/CPC
• Pros▫ Access to Capital beyond cash flow▫ Use stock for future acquisitions▫ Public valuations can exceed private▫ More liquidity▫ Generally more leverage available▫ Increased credibility▫ Incentives for employees
• Cons▫ Takes time (9-12 months)▫ Management commitment to process▫ Expenses – audit, legal, continuing disclosure▫ Public scrutiny▫ Supporting the stock in the market
EVANS & EVANS, INC 1610 – 400 Burrard St. Vancouver, BC V6C 3A6 T:(604)408-2222 F:(604)408-2303 [email protected]
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Costs of Financing
• Legal
▫ Subscription agreements, offering documents, shareholder agreements
• Audit
▫ May be required for funds, VCs or larger investors
• Finders’ Fees
▫ % paid out to advisor
Depending on transaction can be 10% - 15% of gross proceeds
EVANS & EVANS, INC 1610 – 400 Burrard St. Vancouver, BC V6C 3A6 T:(604)408-2222 F:(604)408-2303 [email protected]
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What do you Need?
• Business Plan / Executive Summary
▫ Clearly articulate the opportunity
• Clean Structure
▫ Established company with ability to issue shares
• Use of Proceeds
▫ What are you using the money for
▫ Milestones if appropriate
EVANS & EVANS, INC 1610 – 400 Burrard St. Vancouver, BC V6C 3A6 T:(604)408-2222 F:(604)408-2303 [email protected]
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Money vs Smart Money
• Some investors bring only money
▫ Institutions, friends, family, some funds, Angels
• Other Investors bring expertise / assistance
▫ Angels, VCs, some PE firms
▫ Business, marketing or technical expertise
▫ Help grow the business in more ways than working capital
EVANS & EVANS, INC 1610 – 400 Burrard St. Vancouver, BC V6C 3A6 T:(604)408-2222 F:(604)408-2303 [email protected]
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What are you worth
‘Nothing is more difficult then figuring out what a
small business is really worth.
After all these years it remains a very difficult problem for me”
Mr. Warren Buffet, October 2003
EVANS & EVANS, INC 1610 – 400 Burrard St. Vancouver, BC V6C 3A6 T:(604)408-2222 F:(604)408-2303 [email protected]
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PRICE IS WHAT YOU PAY, BUT VALUE IS
WHAT YOU GET”
• Price is what is negotiated in the actual market
• Value is a theoretical (notional) calculation of the net benefits of the investment
• Only time tells if the Price was right!
Mr. Warren Buffet, October 2003
EVANS & EVANS, INC 1610 – 400 Burrard St. Vancouver, BC V6C 3A6 T:(604)408-2222 F:(604)408-2303 [email protected]
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Value Drivers
• Unique product / service / technology
• Early customers / revenue
• Protection (IP/Patent/Contract/User Base)
• Management team
• Deal structure
• Promise of quick exit
EVANS & EVANS, INC 1610 – 400 Burrard St. Vancouver, BC V6C 3A6 T:(604)408-2222 F:(604)408-2303 [email protected]
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Price Considerations
Bargain Prices Higher Prices
• Vendor has to sell
• Limited funding available to purchaser (i.e., limited leverage of asset)
• Lack of knowledge/poor negotiations by vendor
• Market conditions
• Strategic purchaser that enjoys synergies
• Non-cash consideration
• Contingent consideration
• Market conditions
• Lack of knowledge/poor negotiations by vendor
EVANS & EVANS, INC 1610 – 400 Burrard St. Vancouver, BC V6C 3A6 T:(604)408-2222 F:(604)408-2303 [email protected]
Questions?
EVANS & EVANS, INC 1610 – 400 Burrard St. Vancouver, BC V6C 3A6 T:(604)408-2222 F:(604)408-2303 [email protected]