Raising the Bar Through Outsourcing!

“Outsourcing and globalization of manufacturing allows companies to reduce costs, advantages consumers with lower cost goods and services, causes economic expansion that reduces unemployment, and increases productivity and job creation.”

~~ Larry Elder — “The Larry Elder Show”

Raising The Bar Via Outsourcing

The stereotypes connected with outsourcing are frequently highly negative in temperament. That said, it is indeed reasonable to make use of the idea of outsourcing to obtain the highest quality of labor achievable. Outsourcing no longer solely refers to overseas sweatshops where employees slave long hours for beggarly pay. Outsourcing now also occurs domestically and frequently at prices which are more than bounteous. Thanks to savvy entrepreneurs who understand the advantages of submitting their services on a “per contract” basis, outsourcing has become the wave of the future. This article will examine how outsourcing can in fact lead to superior work and increased profitability.

Top Quality Labor from Industry Experts

One of the most beneficial aspects of outsourcing is the capacity to hire industry experts for the fulfilment of specific tasks. This becomes favorable in situations where a company is faced with a intricate problem which is beyond the mastery of the in-house staff members. Outsourcing gives the company the possibility to outsource the duty of clearing up the problem to a tremendously skilled prospect. Even if the company may pay a large sum for the person’s services this fee will most likely be considerably less than what it would have cost them to clear up the problem with their in-house employees. The amount of time it would have consumed paired with the potential for costly mistakes makes it totally clear outsourcing is the suitable choice in this predicament.

An additional scenario where tasks may be outsourced to an industry authority is when the company is faced with the duty of accomplishing more work than they are actually capable of handling in-house. Under aggressive deadlines or sudden delays, outsourcing can be used to complete projects according to strict deadlines.

“The other part of outsourcing is this: it simply says where the work can be done outside better than it can be done inside, we should do it.”

~~ Alphonso Jackson — Secretary of the United States Department of Housing and Urban Development

Flexibility In Scheduling

A great number of businesses choose the workload they take on based on the number of employees they retain on staff capable of assisting in each particular job. That said, outsourcing gives businesses the power to think about accepting more work orders than their in-house staff members are capable of accomplishing. An instance of when this is beneficial is when consultants are awarded more projects than they had foreseen and are of the sudden in a predicament where they are not able to meet their deadlines due to larger than foreseen workloads.

An extra advantage to outsourcing is the capacity to take on bigger projects than normal. One of the most simple factors frequently considered when presenting projects to consultants is the number of staff members who are on hand to work on the job. Customers evaluate this number with their job needs and time schedule to decide whether or not they believe the consultant is capable of accomplishing the job on time. Consultants who outsource portions of their projects are by and large able to increase the number of stafff members they can afford to have working on a specific job.

Lower Operating Costs

Lastly, outsourcing can help companies to generate higher quality work by enabling them to lower their operating costs. Outsourcing can save companies a huge amount of money because they frequently do not have to pay advantages such as social security, workers’ comp and Medicare to those who work on a “per contract” basis. Furthermore, those who accomplish the outsourced job normally do the job from their own office meaning the company does not have to supply resources for the freelance worker. Even if these costs appear trite, they can definitely add up especially if outsourcing is used on a routine basis.

Combined with the lower operating costs, a great number of companies discover that productivity is increased on account of outsourcing. By outsourcing work orders to experienced freelancers, the in-house employees are freed of additional responsibilities and can concentrate extensively on the tasks they were hired to accomplish. This is notable because without outsourcing these exact staff members might be tasked with attempting to accomplish complex tasks for which they are not fittingly qualified or trained. When this happens there is a correlating decline in productivity as the staff members take longer than needed to finish the more complex tasks and do not have time to finish the simpler tasks.

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Raising Finance For a Small Business

Raising finance for a small business involves striking a balance between the various forms of funding to ensure that they are suitable for the business. There are several funding opportunities available for small businesses, ranging from a straight business loan secured against some form of collateral, to a business angel, or dragon if you like, willing to invest in your business in return for a share in it.

You have a number of options to choose from, and whether you choose one or a combination of alternatives depends on how much you need and what each source is willing to offer. Although it is possible to use a number of different sources, it is important that you are crystal clear with each exactly what you want from the investment or loan, and also the repayments terms involved or the equity share required by the investor.

When determining the form of business finance that is most suitable for you, you should take into consideration not only the sources of finance, and how much you want to secure, but also what you intend to do with it.

Prior to seeking money it is important that you have a proper business plan prepared in order that that you can clearly communicate your ideas for the business: your objectives and how you intend to achieve them. A business plan is also useful in showing you where your weaknesses lie, and enables you to address these before requesting finance.

Try and maintain a good share capital, if relevant, without exposing yourself to excessive debt. Here are some possible options to consider if you need money for your business.

Friends and Family

Some people have sufficient interest in their business from friends and family to borrow all the money needed from them in return for an interest in the company or even under a straight repayment with interest. This is generally a good option if the sum required is not large, although failure could be disastrous for your relationship with them. It is a good idea to put your agreement with them in writing.

Loans

There are several different types of loan available for small businesses, secured over medium and longer terms on assets and under various terms of interest. Security can involve the asset being purchased, or another asset owned by you or the business under a chattel mortgage deal. With these the money is secured either on the equipment being purchased, or another asset owned by the company.

Venture Capital

Venture capital is a means of financing a business by offering shares in return for capital, and largely intended for fast growing businesses with large profit potential in the future. There are a number of venture capital funds to choose from in the UK, but only go for this type of finance if you are prepared to offer a large share in the business.

Angels and Dragons

Why not try to find an angel – or even a dragon? These are investors that are offering risk capital without security, usually in return for a share in the company. The British Business Angels Association offer further information, although you could try Messrs. Bannatyn, Caan and company on Dragon’s Den. An angel will typically help you to promote the business and secure customers for your product.

Grants

There may be government or local authority grants available, or even grants from the European Union and development agencies for setting up your business in specific development areas. Grants are available for acquiring equipment and other assets or for offering jobs and training. There are a large number of Trade and Industry initiatives you could also check out.

Other Funding Sources

Other sources include a straight bank overdraft secured on assets, available for short-term use, or mezzanine debt, offered where you have very little security left. The rate of interest available is from 4% – 8% higher than the base rate. Your loan might be partially secured on any equity you have left. This is advised only as a last resort, and should not be your first port of call.

Leasing Options

There are also various lease arrangements possible for vehicles and plant, and many enable you to keep the asset at the end of the agreement, or to do so after making a small payment.

The two fundamental ways of raising finance for a small business involve either debt or equity. Unlike debt, where interest payments will be required and capital repayments made, offering equity or shares to investors involves a higher degree of risk-taking, and the investors only benefit when the business does well. It is therefore in their interests to help the business.

Accountants will likely be called in to check out your business plan, so be sure to have this professionally prepared. You should be fully aware of your repayment terms and the terms of agreement of any stocks or shares that are offered for the finance. As long as you take the advice of a professional accountant and financier you should be successful in securing finance for your small business under terms that are acceptable to you.

Raising Venture Capital: How to Reduce the Risk Factor for the Investor by Reuben Buchanan

Anyone who has raised or tried to raise venture capital for their business will tell you it is no easy road. There are lots of obstacles and reasons why investors won’t invest. It’s hard to pinpoint just one obstacle but if I had to narrow it down, I’d have to say that risk is the biggest one.

Investors just have a hard time believing that the entrepreneur is going to make anything of their idea. A lot of investors are tending to lean towards established companies or listed companies because the returns are great (at the moment) and risk is much lower.

So the key is to lower the risk for the investor. This will greatly increase the chance of getting funding.

How to lower the risk factor for the Investor…

In a typical situation, the entrepreneur or promoter has had little prior experience building a successful company. If they had, they probably would not need an outside investor. It’s sort of a catch 22 situation, therefore the most successful approach for start-ups is to:-

1. Take their idea/concept as far as they can with their own funds (if possible get some sales or at least pre-commitments of sales from worthy buyers)

2. Raise small amounts of money from people who are close to them at a reasonable valuation (most promoters value their idea too high which is a turn off to investors). Say $10k or $20k each from a number of friends/family who are close to them and believe in the promoters vision.

3. Use those funds to get the product into the market and get one years trading/sales behind them.

A year’s trading gives them a couple of things. Firstly it proves up the business idea and demonstrates that there is a ready market for it. Secondly it proves that the promoter can start/run a business to some degree, and thirdly it gives some figures by which a basic valuation can be done from (for the next capital raising).

All of this lowers the risk for the next investor, who may be asked to put up $250k or even $1m if the opportunity/technology is great.

The next round of funding may come from a wealthy individual, professional angel investor, or even an early stage VC fund (the latter is the hardest to get funds from). The next investor may also take out the first couple of investors giving the first group an exit.

There are many other factors which can affect the promoter’s ability to raise funds such as:-

• General capital market conditions (at the moment, they are pretty good – most investors have a bit of spare money to play with)

• Appetite for their particular idea (i.e. anything in the green or clean energy sector is pretty hot at the moment).

• The promoters ability to ‘sell’ their idea or concept

• The promoters track record

• The investors personal situation (they may like the idea but have funds committed elsewhere or may be about to go on holiday)

• Luck (promoter may by chance stumble across right investor at right time)

Typical criticisms of the Investor versus the Promoter/Entrepreneur…

Investor criticisms:-

• Poor investor presentation (sometimes no presentation at all)

• Too early stage – still an idea on a piece of paper

• Poor business planning or lack of

• Business model is wrong

• Promoter does not have the skills required to make it work

• Idea is not scalable – limited market opportunity

• The sector is not favorable

• Idea/technology is easily copied (no trade marks/patents in place)

• Projections are too high

• Value entry point is too high

Entrepreneur criticisms:-

• Investor does not understand their idea

• Investor does not get back to them with an answer

• Investor wants too much of the company for their investment

• Investor wants control of the company (more than 51%)

• Investor terms are too tough (i.e money comes with many stiff terms and conditions)

The best advice is for entrepreneurs to get as much knowledge on raising capital as possible. There are many books including many by Professor Tom McKaskill (www.tommckaskill.com).

Also, get a mentor involved in your business who has a track record of raising capital and building businesses. They may not invest into your business, but knowledge is far better than capital. This is because knowledge will attract capital.

© Reuben Buchanan, Integral Capital Group 14th August, 2007

www.integralcapital.com.au

Why Consider Accredited Investors When Raising Start-Up Capital?

Accredited Angel Investors as a Viable Alternative to Business Financing

By: Margarita Damianova

Many entrepreneurs today face the dilemma of finding feasible sources of capital to fund their start-up ventures. In today’s economy more and more people lose their jobs and look at entrepreneurship as a possible avenue to provide for their families. And, why not? We all learn at a young age that entrepreneurship is the key to true wealth.  We are taught that we can all come up with a big idea, become a business owner, build a successful business and live the American Dream. And we see this happening all around us where some ordinary people build empires at a young age: the folks at Google, You Tube, My Space, Mark Cuban etc. America certainly has many examples of young people becoming millionaires and they are not necessarily a movie star or a lucky musician. Most achieve their wealth through hard work in business and embracing the concept of entrepreneurship.

At the same time, we all know that to make it big in business and to build true wealth, we need to make significant cash investment in our business. So how do we come up with the cash? Do we save, use our credit cards, apply for a business loan, borrow from friends and family? Well, all of these are actually viable alternatives to get started. Yet, once we get started we learn that the business expenses could be overwhelming and at least double what we expected: we end up always having to purchase new equipment, our rent goes up, we end up needing more employees than expected, accidents happen, advertising money never seems to be enough and when it comes to expanding our business, remodel, open a new location and making it big, we learn that we are going to need an even larger infusion of capital. Some are lucky to get a business loan or a second mortgage on their home. Nowadays however, we are in a credit crunch and banks just don’t want to hear how great our business is. So what do we do? We start looking for angel investors that can help our business take off. In fact, according to the Small Business Administration (SBA) most start-up businesses (over 90%) are funded by angel investors.

So how do we find angel investors? Do we run an ad in the New York Times telling the world about our great investment opportunity available to angel investors who can act now? This could actually be highly effective in today’s environment where public stocks just keep crumbling with no recovery in sight. Private opportunities start getting more and more attention from angel investors. Unfortunately, the regulations set by the Securities and Exchange Commission (SEC) prohibit private businesses from advertising to the public using public media such as newspaper, TV, radio and even most internet sites. Private companies are actually required to qualify for a Private Offering Exemption in order to be able to legally approach angel investors. Finally, private companies are not allowed to accept the money of every single person interested in making an investment or if they did, they would lose their private offering exemption and respectively their ability to further seek capital from angel investors.

So what kind of angel investors can entrepreneurs approach? According to the SEC, private companies relying on the private offering exemption can only sell to “accredited investors”. The objective of this rule is to make sure individuals who do not have sufficient experience in business, cannot afford to bare the potential loss of their investment or are simply not capable to evaluate the risks and merits of an investment would not end up investing in a private business opportunity that is associated with high risk. Therefore, accredited investors (individuals making over $200K per year or having a net worth exceeding $1M) are in high demand by entrepreneurs. These individuals are also highly experienced in financial and business matters so that entrepreneurs need to be well prepared when ready to approach accredited investors. Well developed business plan, good track record of likeability of the entrepreneur, proper filings with the SEC and possibly a business valuation by an accredited appraiser are a must. The good news is though that if the entrepreneur is ready to make a good impression, many accredited investors are ready to join the game and make money with you! Best of all, an accredited investor can be a very experienced counselor helping you to take your business to the next level and make it big! 

This article brought to you By BreadStreet Investors’ Union at http://BreadStreet.com

“Bringing Investors and Entrepreneurs Together for Profit”

Also see http://www.PrivateBusinessInvestments.com

 

Raising Equity Capital in Australia

All Businesses Need Capital

Capital is the lifeblood of a business.  It is true that to make money you have to spend some – and to spend it you have to have it. Without capital you can’t buy the equipment you need, lease the factory/shop/office you need or hire the people necessary to help you do whatever it is you do. New capital underwrites innovation and the take up of new technology and the development of new ideas.

It is commonly thought that lack of capital is one of the major reasons for small business failure in Australia, yet access to capital has always been difficult for Small to Medium Enterprises (SME’s) and a limiting factor to their growth.

What is equity capital?

Equity capital is the money, time and other assets that the owners contribute to the business.  Generally the originators of the business put in what they can, they borrow against personal assets and work very hard to build the business up over a long period of time by reinvesting profits as they go.  The idea of bringing others into the business to provide a stronger asset backing (more money) is foreign to most.

A large percentage of Australian companies are set up under the advice of accountants and Solicitors to save tax and protect assets but the issue of share ownership and share management is rarely discussed.

The use of share issues and share management (equity capital) is a significant business strategy for growth that is understood and used by the big listed companies. Most think that it is beyond SME’s, but it is not.  It is a powerful tool that can provide significant benefits to SME’s as well – if you get the right advice and the process is managed properly.

Why raise equity capital?

Does your business have the potential to grow?

What could you do with another $500k?  What about $1 or $2million? Would this give your business the ability to get to the next level? Would that be enough to double the business? Maybe more than that?  If there is this possibility, you should be thinking about how bringing in new investors can help to make it happen. Maybe you can develop that new product, add capacity to the production line, open more outlets, expand interstate or overseas, and build the prototype you’ve been dreaming about.

Equity capital is not repayable; it demands no provision of security (other than issued shares) and bears no interest. In essence, a business can print its own currency by issuing shares not unlike the way that Barrack Obama and Kevin Rudd are printing money.   In one sense you can even think of it as being another  product line that you create and sell.

 Where do you get it?

Early stage funding is “relationship” based and generally comes from family, friends, relatives or clients and/or suppliers wishing to firm up their relationship with the issuing company.

Even amongst these groups it has traditionally been difficult to attract investors as there has been little or no liquidity, returns are uncertain and there is often little transparency in the way the business is operated.

A well structured offer however can address all these issues and provide potential investors with demonstrable capital gains, a planned exit strategy, regular company reporting and communications. Couple this with a secondary market platform and many of the obstacles to finding investors disappear.

Corporations Act restrictions

It is illegal for any person (or company) to ask a number of people to invest in a shared business venture, property or other investment without following the fundraising rules set down by the Corporations Act 2001, or without utilizing the exemptive relief such as that provided by an independent ASSOB Sponsor.

The commonly referred to 20/12 rule stipulates that it is an offence to issue or transfer securities without disclosure to investors once 20 issues or transfers have occurred or $2million has been raised (Subsection 727 (4).  Disclosure means an expensive Prospectus – which could cost as much as $100,000 to prepare and might take as long as 6 or 12 months to be completed.

Section 708 defines offers that do not need disclosure – no expensive prospectus!  These are defined as small scale offerings made as personal offers (they can’t be made to the public!). A personal offer is one that can only be accepted by the person to whom it is made, and made to a person who is likely to be interested in the offer, having regard to previous contact, some professional connection or statements or actions that indicate they are interested in receiving offers of that kind.

The following investors are classed as “excluded” from the 20/12 rule – overseas investors, direct family, executive officers of the company, gifted shares for nil consideration, existing shareholders on a pro-rata offer, sophisticated investors and professional investors.

Penalties for breach

Failing to consider the consequences of non-compliance can lead to a fine of up to $22,000 for individuals and $110,000 for companies and up to 5 years jail.  Further, ASIC can place a stop order that prevents the offer, issue, sale or transfer of securities and is likely to make an application to wind up the company.

More scary is the fact that if one investor complains (say 2 years later) and it is found that the capital raising was inbreach of the Act, ASIC will request that ALL the money raised be refunded.  Given that a disgruntled investor is not likely to emerge when the business is booming, the repayment direction probably means a very nasty situation for all concerned.

Class Order 02/273

Class Order 02/273 provides an exemption from the fundraising provisions of the Corporations Act for persons involved in making or calling attention to offers of securities through a business introduction service.

This increases the limit of personal offers to $5million and allows considerably more scope in promoting the offer.  The exemption allows, under certain conditions, an offer to issue or sell securities to be advertised in ASSOB’s subscription-based publications. By appointing an ASSOB Sponsor the issuer is then also covered by this exemption.

ASSOB

The Australian Small Scale Offerings Board was formed in 2004 to originate, aggregate and sell securities for unlisted companies so they can raise capital.

The proven ASSOB platform is a sophisticated system of documentation, policy, procedures, operating processes and infrastructure developed specifically to comply with Section 708 of the Corporations Act and the exemptions available under Class Order 02/273.  ASSOB operates 3 Boards for the listing of Offer Documents:

Primary Issue Board – for the origination, aggregation and sale of ordinary shares to investors on behalf of issuers to enable them to raise capital; Secondary Sales Board – which facilitates the sale or transfer of existing shareholdings to other investors; Disclosure Board – under which Offers under Prospectus, Offer Information Statements or Product Disclosure Statements are distributed to its list of private investors and the general public.

ASSOB Sponsors are highly trained individuals who play an important role in capital markets.  The ASSOB Sponsor is the “originator” of debt and equity securities for the SME client.

An ASSOB Sponsor provides the SME with 2 main facilities – the legal exemption to issue or sell securities or scheme interests and the appropriate framework for doing so without breaching the share hawking provisions of the Corporations Act 2001

Valuation

The real key to finding investors for your business lies in being able to offer them realistic value in return for the risk they are sharing with you.  One of the reasons for the difficulty of raising equity capital has been the over-optimistic valuations that many owners place on their business.

Typical valuation metrics include a range of 6 to 8 times earnings for an Initial Public Offering on a stock market listing, or 3 to 5 times earnings for a trade sale.  In other words, if a company has an EBIT of $1m, then in a public float it might be valued at $6 to $8million, or $3 to $5 million on a trade sale.

These are the valuations that you expect to achieve in say, 3 or 4 years time. Investors will pay a premium over today’s valuation if they have confidence that the business will grow significantly.

These are the maximum valuation ranges and investors won’t pay that sort of valuation 3 or 4 years in advance.  They want to see a substantial discount in return for the risk they carry, or to put it another way, they expect to earn a much higher return from this investment than they would get from other competing investment options. 

On a 3 year time horizon, these types of investors will typically pay 1/4 or less of the valuation that is expected at the point of exit.  In the above example, this would mean a company valuation of $1.5 to $2 million on an expected IPO or $750k to $1.25m on a trade sale exit.

Note that without an exit plan, they may not be interested at all!

Investor Ready Businesses

Before investors can be approached, the business needs to be investor ready. This means that it should have a clear and concise business plan, which is then translated into an easy to understand Offer Document. It needs to convey to potential investors just what the business is all about, where its customers and revenues will come from, why it is better than its competitors and how it will achieve the growth necessary for the positive results that everybody is hoping for.

It should be a public unlisted company as this means 3 Directors (more eyes watching the shop), an auditor (an independent expert checking the books), with regular reporting and guaranteed share transfers.

A proprietary limited company lacks transparency and is not a suitable investment vehicle.

Management processes and reporting/compliance procedures need to be implemented to accommodate the requirements of multiple shareholders. This includes a Shareholders Registry, quarterly reporting and use of funds reports as well as audited accounts.

Finding Investors

There is an art to sourcing equity investors – an art that specialists such as Transition Capital and ASSOB are well practiced in.  In begins with a viable, vibrant business and enthusiastic, energetic owners and management.  Add some expertise to structure an attractive offer to investors and the funds can be found, all within the requirements of the Corporations Act.

Most companies will only have one chance at this – so doing it right the first time makes a lot of sense.

 

 

Written by David Shelton, Director of Transition Capital (www.transitioncapital.com.au).

 

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