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Challenges in Raising Capital

Challenges in Raising Capital
Bill Merrow - Sun Jul 29, 2012 @ 06:57AM
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What do you do when your business needs additional working capital?

If you are like most business owners, you start with your local banker. Unfortunately, as Mark Twain said, a banker is someone who will gladly lend you his umbrella when the sun is shining, but wants it back (with interest) as soon as it starts to rain.
 
You could reach out to your family and friends. You could search for an angel investor or venture capital. If you do, you'll need to follow the SEC's Private Placement rules, which prohibit advertising.
 
You could also take your company public, which brings a basket full of challenges.
 

The Liquidity Challenge to Raising Capital

Investors define liquidity as the degree to which an asset or security can be bought or sold in the market without affecting the asset’s price. Accountants define liquidity as a measure of the ability of a debtor to pay his debts when due. It is usually expressed as a ratio or percentage of current liabilities.
The Liquidity Challenge
 
 
We define liquidity as the ability a business owner has to leverage their equity and convert it to cash. What could your business do with increased liquidity?
  • Additional working capital for payroll, inventory and other operating expenses
  • Expand your business with investments in marketing and equipment
  • Pay down debt or enhance your financial position to finance other assets
  • Acquire other businesses to increase your market share and control
  • Attract key employees with enhanced compensation packages
  • Buyout initial investors, like the Uncle who got you started but just has to go!
  • Access your financial and sweat equity and finally take some cash home
  • Allow your current shareholders to sell their stock
  • Provide an exit opportunity for founders and investors
If cash is king in your business, liquidity is the path to the throne.
 

Going Public and Raising Capital

An initial public offering (IPO) is the first sale of stock by a company to the public. When the company lists its securities on a public exchange, the money paid by investors for the newly issued shares goes directly to the company.
 
Once a company is listed on a public exchange, it may issue additional common shares via a secondary offering. The business can thereby create additional capital. While there are many benefits to going public, the most vital is the ability to raise capital without incurring debt.
 
There disadvantages to going public include significant legal, accounting and marketing costs, ongoing requirement to disclose financial and business information, meaningful time, effort and attention required of senior management, public dissemination of information which may be useful to competitors and public market volatility unrelated to business performance.
 
There are over 30 million businesses in the United States. Just 30,000 – less than 1% – are public companies. Either the disadvantages outweigh the advantages of going public or many businesses are simply too small to go public.
 

A New Path to Liquidity and Raising Capital

Independent Stock MarketWhat if … your business could realize the advantages of going public … while mitigating the disadvantages? What if … your business could go public and attract both accredited and non-accredited investors? What if … your business could go public and advertise your investment opportunity to investors?
 
What if … your business could go public and your investors could utilize their IRA qualified funds and only make a small minimum investment? What if … your business could go public and your investors had an immediate exit opportunity to sell their stock? 
 
What if … your business could go public without significant legal, accounting and marketing costs? What if … your business could go public with minimal requirements to disclose financial and business information? What if … your business could go public without meaningful time, effort and attention required of senior management?
 
What if … your business could go public without public dissemination of information which may be useful to competitors? What if … your business could go public on a buy-sell only marketplace, eliminating public market volatility that was unrelated to your business performance?
 
What if … your business could go public on a new Independent Stock Market? The Independent Stock Market provides two distinct programs for businesses looking to raise capital by going public:
 
Phase One
  • Two (2) Years in Business
  • $2.5 million valuation
  • Generating revenue
  • “Fan” Base (Family, Friends, Employees, Customers, Suppliers, etc.)
  • Less than 2,000 Shareholders (500 of whom can be non-Accredited)
  • Minimal Filing and Reporting Requirements
  • Annual Audit
Phase One is currently available in 38 states. It is not available in California, Illinois, Kentucky, Louisiana, Mississippi, Missouri, Montana, New York, Pennsylvania, Tennessee, Vermont or Virginia.
 
Phase Two
  • All of the requirements of Phase One, plus:
  • Unlimited Shareholders
  • Full Public Filing and Reporting
  • Sarbanes-Oxley Compliance
Phase Two is available in all 50 states.
 

Your Hidden Liquidity

Certified Valuation professionals consider many factors when establishing a value for your business. Obviously, they will look for financial indicators, such as your historical sales and earnings results. They’ll evaluate your margins and your overall financial structure, comparing your business to others in your industry.
 
They will also look for diversification of your product line, customer base and suppliers. They know that circumstances change and want to ensure your business is resilient in response to changes. Most importantly, they will look at your management team and key personnel. The quality and depth of your team and the absence of reliance on one or just a few key people are critical factors in mitigating risk for investors.
 
In establishing a value for your company, Valuators will also consider the liquidity of your stock. If your stock can be traded in a public marketplace, you will receive a valuation that reflects the full value of your company.
 
If you are a private company, your value will be downgraded by 20% to 40% as a result of an IRS provision called the Lack of Marketability Discount (LOMD). What could that mean for your business?
 
  • Public Company Value $7,000,000
  • Private Company Value (30% LOMD) $4,900,000
This hidden liquidity is available to your business as a public company through the Independent Stock Market.

 
If you are interested in learning more about taking your business public with the
Independent Stock Market, contact:
 
Bill Merrow
 
Bill Merrow
602.821.7340
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