Great piece by Ryan Caldbeck, CEO of crowdfunder CircleUp, on using convertible debt to grow early stage consumer product companies. Shorter version: It helps defer valuation conversations when you have solid revenue, but the current revenue does not reflect the company’s potential. For the full article, click here.
If you are interested in investing in early stage consumer product companies, I highly recommend CircleUp. They have a number of great investment opportunities.
A new study released by Ernst & Young examined 539 Private Equity deals that exited from 2006 to 2012. These are my key takeaways from the study:
Here is the link to the full study: EY PE Study 2006 to 2012
Despite sluggish M&A activity, the National Center for the Middle Market’s 2013 Q2 Middle Market Indicator report shows solid growth with optimism and hiring on the upswing. For the full report, click the link below:
I met with a middle market company last week. It was owned by two charming brothers who had grown it over 20 years into a successful $30 million manufacturing business. We were discussing preparing the company for outside investment. If you ever listen to the NPR radio show Car Talk hosted by the venerable, Peabody-Award winning Tappit Brothers, Click and Clack, you have an idea of the type of guys who owned this business and how much fun I had talking to them.
While touring the facilities, one of the owners was talking about their differing management styles and said his brother practiced what he called ‘Management By Dumpster Diving’. Each morning, he would tour the facilities and each time he passed a dumpster or waste can, he would poke his head in to see what was there. It was a 24-7 operation, so this was his primary way of determining the waste and efficiency of the operation the night before. The dumpster diving brother claimed he learned a lot of interesting information about his company and employees over the years. The other brother claimed he was preparing for a future life on the streets!
This highlights what I love about entrepreneurs and why they need to make changes when they bring in outside investors. Entrepreneurs are there everyday, doing whatever they need to do to grow the business, taking risks, getting dirty if necessary, inventing their own methods and solutions that fit their unique business and personal management style. Private equity groups are not going to go dumpster diving to determine the previous day’s waste. Larger companies with offsite ownership need systems and policies in place to measure and report KPI’s such as raw material usage analysis and production efficiency. It’s not necessarily better or worse than the dumpster diving approach. It’s just a good example of how a management process that works for a company at a particular stage of it’s development will not work as effectively as it grows and the ownership structure changes.
As an interim CFO for companies like this, I can help identify the necessary changes and implement them, before or after the change in ownership. Please contact me directly if I can help your company or private equity group in this capacity. For 7 tips on being successful as an interim CFO at private equity portfolio companies, click here. And feel free to share any interesting management techniques you’ve come across and post them in the comments below or tweet them to me @middlemarketCFO with hashtag #ManagementByDumpsterDiving.
It’s really just removing the first of two obstacles that stand in the way of crowdfunding. The 2nd obstacle, which could get lifted later this year, would be to lift the accredited investor restriction. At that point, private companies could raise equity by advertising to a wider audience through crowdfunding websites such as www.CircleUp.com and www.Fundable.com. This will make it easier for small businesses to raise the capital needed to grow and stimulate the economy, but it could also open the door to fraud and high-risk investments. What do you think will be the impact of crowdfunding?
H.R. 1105, the Small Business Capital Access and Job Preservation Act of 2013, would allow middle market investors access to capital and exempt investment advisers from having to register with the Securities and Exchange Commission (SEC). Currently under the Dodd-Frank Act, private equity fund managers are subject to time-intensive and capital-constraining registration requirements.
The Association for Corporate Growth (ACG) is in support of this bill. Their press release is attached here.
On May 10, 2013 the SEC and IRS passed final regulations under section 336(e) that provide basis step-up opportunities for non-corporate acquirers. The new regulations provide an opportunity for a Private Equity Fund (PE) to acquire a target and receive a basis step-up and tax shield, without creating a purchasing corporation or otherwise restructuring the target prior to the acquisition. Further, a PE now has the flexibility to restructure the target such that the ongoing activity is conducted through an LLC taxed as a partnership, which would allow the fund to pass on a full basis step-up upon exit and eliminate future corporate taxation on the target’s activities. In addition, the new regulations may provide the ability to separate multiple businesses post-acquisition in a much more tax-efficient manner than previously existed, thereby allowing a PE to better align its investments.
The full article from McGladrey can be found here.
This is part five of a seven-part series of tips for interim CFO’s at companies in the portfolio’s of private equity groups. These tips are intended for financial professionals who already have the skills and experience to be a successful CFO at a typical mid-market company. They specifically address the differences between being a CFO at a typical mid-market company and being an interim CFO at a growth-oriented mid-market company in the portfolio of a private equity group.
Tip #1: Be an ambassador
Tip #2: Be the advance team
Tip #3: Understand the exit strategy
Tip #4: Get to know the portfolio
Tip #5: Be an agent of change
Tip #6: Be a do-er
Think of yourself as more than just a consultant. You are not there merely to assess the situation and make recommendations. You are there to get things done and you may have little help so you need to roll up your sleeves and get to work. Not only is this often the only way to get the job done, the client will like and respect you for it. If you follow tips 1 through 6, you will have the foundation to be effective as an interim CFO at a private equity portfolio company.
This is part five of a seven-part series of tips for interim CFO’s at companies in the portfolio’s of private equity groups. These tips are intended for financial professionals who already have the skills and experience to be a successful CFO at a typical mid-market company. They specifically address the differences between being a CFO at a typical mid-market company and being an interim CFO at a growth-oriented mid-market company in the portfolio of a private equity group.
Tip #1: Be an ambassador
Tip #2: Be the advance team
Tip #3: Understand the exit strategy
Tip #4: Get to know the portfolio
Tip #5: Be an agent of change
You are not there merely to maintain the status quo or fill in the gap between permanent CFO’s. The company probably does not have adequate budgeting, forecasting or financial reporting in place. They may not have been audited and their tax strategy may need to be overhauled. You may need to implement radical changes, but you need to do it in a way that is respectful to the folks who built the company that way. Help them understand that their efforts helped the company get where it is today, but changes need to be made to get to the next level. Embrace your role as an agent of change.
The Middle Market CFO 