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By: Kent Bernhard Jr
October 15, 2013
The UpTake: Senate leaders say they’re on their way to a deal to raise the debt ceiling and reopen the federal government. That’s a good thing for the startup ecosystem, where Washington infighting is causing hesitancy for investors.
Editor’s Note: This story was modified to reflect today’s developments in the U.S. House of Representatives.
A deal to end the government shutdown and raise the debt ceiling can’t come too soon for the startup ecosystem, say experts.
But it looked early this afternoon as though the wait will be longer. Though Senate leaders have come close to a bipartisan agreement to reopen the government and raise the debt ceiling, the House is in disarray. House GOP leaders this morning floated their own plan to do the same, but apparently couldn’t sell their idea to a majority of their Republican colleagues.
“You have uncertainty right now,” Barry Sloane, the chief executive of Newtek, which provides small business lending and services, told me. “If you are an investor today, looking to invest in an early stage business, you’ve got to hesitate. There’s a lot of stuff on hold.”
Add to that “stuff” bipartisan negotiations in the Senate. Senators had appeared close to an agreement, but put their talks on hold to wait and see if a plan would emerge from the House of Representatives. As of late this afternoon, House leaders had come up with a plan and a vote was slated for tonight.
The dithering in Washington led to nervousness on Wall Street, where the Dow Jones Industrial Average fell more than 188 points. An auction of short term government bonds drew scant interest, as traders weighed the risk of a debt ceiling breach Thursday.
The agreement Senators were negotiating would raise the debt ceiling through February 7, removing the threat that the government could default on its obligations as early as Thursday. It would also reopen parts of the government that have been shut down, and fund federal agencies through mid-January.
The possibility of funding drying up is the biggest impact the drama in Washington has on startups, said Erik Kantz, a dealmaking lawyer at Arnstein & Lehr in Chicago. He said a breach of the debt ceiling, because it would shake the confidence of markets worldwide, could have a trickle-down effect to the wealthy angel investors who feed startups their early-stage cash.
“It dries up the capital that’s available,” he told me.
Some of that’s already happening with the shutdown, Sloane said. He pointed out the Small Business Administration-backed lending is at a standstill because of the shutdown. And investors are already acting more cautiously.
“What everyone’s doing…you’re continuing to line up business it’s a question of whether you’re closing things,” Sloane said. “I think it’s a small but significant subset of the investment community that is doing nothing.”
And if the Senate leaders fail in their effort to get a debt ceiling deal, or that deal is rejected in the House, things could get really bad, really quickly.
“You could wake up one morning, if this is all pushed out…and the markets don’t accept it anymore,” he said. “You could have a 10 percent correction of the stock markets in a day.”
And if something like that happens, it can’t help but trickle into every form of finance, including the bets investors make on startups.
James Cassel of Miami investment bank Cassel Salpeter was more blunt.
“I think it will have worldwide long-term impacts,” he said of the possibility of a debt ceiling breach. “I think it’s going to have a devastating effect. They’re playing with fire. I think someone needs to hit them over the head with a baseball bat.”
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By James S. Cassel
October 20, 2013
Now that the government is back in business, it’s time to think about interest rates. With interest rates having recently begun to rise and currently expected to climb higher than today’s historically low rates, it’s important for middle-market business owners to begin planning and preparing for the likely impacts on their businesses and finding ways to lock down the most favorable long-term rates. A little strategic action now can go a long way to help put their companies in the best-possible financial position.
Many business owners do not understand all of the potential impacts that rising rates may have on their businesses, including affecting their profitability and value, and how serious the impacts can be. Higher interest rates mean higher costs for borrowing money and financing equipment. They affect almost everything, including the interest rates charged on lines of credit that have floating rates as well as both the interest rates and the coverage ratios that affect the ability to refinance term loans when they become due.
Interest rates also can have significant impacts on the valuations of businesses. Although rising interest rates won’t affect Earnings Before Interest and Taxes, they will have an impact on business cash flow. Most significantly, however, they can affect potential buyers of businesses, as they will probably have to pay higher interest rates when they borrow money to the leverage their purchases of businesses. This may cause valuation gaps or discourage them from making the acquisitions. In a nutshell, the higher interest rates affect debt service coverage ratios. The higher the interest rates, the lower the amounts that may be borrowed. As a result, there’s a good possibility that business valuations will be affected as interest rates rise.
With all this considered, now is a good time to begin taking steps to ensure that you can secure the lowest-possible interest rates for your business over the long term. How should you go about this? Some strategies:
• Take advantage of today’s historically low rates. If you’re planning to take out any new loans or can renegotiate existing ones, there’s no time like the present. Aim to lock in long-term rates or hedge the rates whenever possible.
• Get liquid. Use your excess cash flow now to pay down as much of your debt as possible, provided you do not see a need in the foreseeable future to borrow the money back.
• Get creative. Approach different lenders, such as trying community banks rather than national banks. Both have their pros and cons, but it might be in your best interest to work with a smaller lender that’s hungrier and more flexible for your business in order to lock in lower rates and more favorable terms.
• If you choose to expand your business credit line, owner-occupied real estate loan or any other type of loan, use your newly found capital wisely to penetrate new markets and invest in the right people, technologies, equipment and other resources to support your business.
• Government programs like SBA-type programs might offer lower fixed rates that are more favorable. Although it’s not always a good idea to put up your house as collateral for your business loans, if you do find yourself in the position of having to do this, you should consider locking in those interest rates for the longest-possible terms.
• Keep in mind that some loans that are based on using cash flow as collateral might be good, less expensive options if you can provide acceptable collateral. You might consider converting some of your loans and/or changing lenders to take advantage of better terms offered by different lenders. Be careful when getting unsecured loans: Giving up the collateral is not always ideal.
• Consider specialty lenders. Look for lenders who specialize in specific areas, as they may help you secure better terms. If you can pit multiple lenders in a bidding war against each other, you probably can get better deals.
In addition to ensuring that you are borrowing money at the most favorable long-term rates, it’s always a good idea to consult qualified, trusted advisors, such as attorneys, investment bankers and CPAs. By doing some smart planning now and taking the right strategic steps, you can strengthen your business and put it in the best position for both the short and long term.
James Cassel is co-founder and chairman of Cassel Salpeter & Co., LLC, an investment-banking firm with headquarters in Miami that works with middle-market companies. www.casselsalpeter.com
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By James Cassel
October 17, 2013
A little planning can go a long way toward helping you to obtain the maximum value for your business. The sooner you begin, the better.
Throughout my career in leading the sales and purchases of middle-market businesses nationwide, I’ve found the following 12 tips to be the most helpful for business owners planning to sell. The further in advance of the sale that these recommendations are implemented, the greater the value that can be created. They’re also generally good business practice for anyone in business.
- Make sure that your financial and accounting records are in order so that you can readily give potential buyers a clear, accurate snapshot of your historical financial results and condition. This is critical to ensuring that you get top value for your business. It’s also a good idea to prepare a budget and maybe get audited financials.
- Review and/or restructure your agreements with customers as necessary. Do your contracts have special terms, such as change of control provisions or requirements that you personally provide services, that may affect the longevity of the contracts when you’re no longer involved with the business?
- Review and, if necessary, restructure your leases. Often, long-term leases for excess space and high rates can be roadblocks to completing deals, while the opposite is true for long-term leases at favorable or below-market rates. Do you have a long-term lease that new buyers will have to continue or any special clauses that will create issues for potential buyers?
- Review and/or restructure agreements with your suppliers. As in #2 and #3 above, you should determine whether you’re locked into agreements that may not appeal to potential new buyers or reduce value. Now would be a good time to try to modify or terminate any agreements that you don’t consider favorable to avoid turning off potential buyers.
- Review your insurance coverage. Consult a trusted insurance agent to evaluate your current coverage and fill any gaps that may exist. For example, depending on your business, liability coverage and tail coverage might be critical.
- Do your personal tax and estate planning. Consult with qualified lawyers and accountants to ensure that you have structured your ownership in the most tax-advantaged way in the event of a sale. Doing this now vs. just before a sale can be very advantageous.
- If you have a family-owned business, talk with your family. Make sure that your family members and other key stakeholders fully understand the possible impacts of the business sale on everyone involved. Especially if your family members either work at or are dependent on your business, it’s critical to have their buy-in.
- Evaluate your intellectual property. Work with qualified attorneys to make sure that it’s well protected and owned or licensed by the right entities. Also, make sure that you have proper licenses for all of the software you use.
- Evaluate management. Ensure that you have appropriate management in place and that there are no gaps that you should fill before you put your business on the market. Also, examine your employment agreements to ensure that you have the necessary noncompete, confidentiality, and other provisions.
- Determine whether there are environmental issues. Either remediate them or at least develop an accurate understanding of what will be required to do so.
- Get organized. This gives a good impression and strong comfort level to potential buyers, which is a priceless intangible.
- Hire an effective public relations and marketing firm. Positive news coverage in credible media outlets that reach potential buyers as well as current and potential customers can help to elevate firm and brand awareness, secure credibility for your business, and even generate inquiries from potential buyers. Depending on the nature of your business, social media might be an appropriate tool to leverage as well.
Without a doubt, the tips listed above are general good business practice, even if you’re not thinking of selling yet. The key is to work with qualified advisors, including attorneys, accountants, and investment bankers, who can give you the strategic counsel and guidance you need to put your business in the best possible position. It is a good idea to assemble the team far in advance of a contemplated sale. By minimizing the weaknesses and playing up your strengths now, you can help to ensure that you get the best value for your business whenever you’re ready to sell.
James Cassel (firstname.lastname@example.org) is cofounder and chairman of Cassel Salpeter & Co., LLC (www.casselsalpeter.com), an investment banking firm with headquarters in Miami that works with middle-market companies. Before founding Cassel Salpeter & Co., Jim was co-founder and chairman of Capitalink, an investment banking firm that was acquired by Ladenburg Thalmann & Co., a New York Stock Exchange member firm where Jim continued and served as vice chairman, senior managing director, and head of investment banking. He also was chairman of a significant company that owned hospitals.
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By: Kent Bernhard Jr
October 09, 2013
The UpTake: Janet Yellen isn’t expected to change the Federal Reserve’s easy money policies much, and experts say that’s good for the upstart economy.
Janet Yellen brings arguably more expertise and experience to the job of Federal Reserve chairman than anyone before her. But what does her appointment mean to the upstart economy?
“My big picture view is that stability and the Fed’s recent accommodative policies are good for the startup ecosystem,” said Stash Jacobs, an attorney with Miami-based Greenberg Traurig who works on mergers and acquisitions and funding deals for startups.
President Barack Obama nominated Yellen today to the post being vacated by Ben Bernanke. The first woman appointed to the most powerful economic post in the world, she comes to the job with a wealth of experience.
Most recently, she has served as the Fed’s vice chairman. She has held previous posts as head of the San Francisco Federal Reserve Bank and the Council of Economic Advisors.
If the Senate confirms her, she will take over at a time of continued economic duress, with the Fed pumping money into the economy through low short-term interest rates and a mechanism called quantitative easing to try and stimulate the economy and ease unemployment.
Don’t look for that to change, at least in the near future, and that’s a good thing for startups and entrepreneurs.
That’s because the Fed’s easy money policy drives down the attractiveness of such traditional investments as CDs and bonds, leading more money to enter the stock market—good for companies like Twitter that are going public—and even to direct investments by institutional investors in venture capital funds, the feeder system for startup investment.
Such investments as venture capital are more attractive, if riskier, because they offer a higher rate of return than traditional investment vehicles, especially at a time of low interest rates.
“When IPOs are happening, that’s great for startup companies because it builds confidence,” Jacobs told me. And with other investments perhaps less attractive, “It can cause investors to be interested in venture capital and early stage investing as well.”
James Cassel, co-founder of investment bank Cassel Salpeter, said the Fed’s policies could also have a more direct impact on entrepreneurs and would-be entrepreneurs. The lower interest rate policies of the Fed have a positive effect on the housing market, which can encourage someone thinking of entrepreneurship to take the leap into it.
“If the fed can encourage growth and keep down inflation, it can be good for the ecosystem,” Cassel told me. “You’re willing to invest…or take that business risk of starting a company without getting paid for a while.”
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