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Tip of the Spear Ventures

Venture Capital | Private Equity

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Buy a Business – How to Make Sure You Are Acquiring an Industry Leader

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The Point: In most instances, purchasing an existing enterprise is less expensive than beginning from scratch when you buy a business. However, on the other hand, purchasing a business is also frequently far more expensive than starting from scratch in almost any other industry. This is because most businesses start out small and have only a slight chance of becoming profitable before they expand beyond their initial premise. For this reason, there is a substantial risk of losing money when you purchase a business. Therefore, a geographic location is one of the most important business attributes to consider when you are deciding whether to purchase an enterprise or not.

Entrepreneurship through Acquisition (ETA)

An enterprise, on the other hand, is a company with existing assets such as accounts receivable, inventory, and franchises. A business typically generates these types of assets from customers who pay their bills by credit card or electronic check. Generally, the longer it takes to bill a customer, the more profit that the business will generate. Therefore, if your customers are able to pay their accounts receivable on time, you do not lose money when you are buying an enterprise. On the other hand, if customers run away from your company, you could be faced with a flood of checks and a loss of revenue for several weeks, even months.

The Financials Matter in Entrepreneurship

Because the amount of profit generated from each sale is directly related to the amount of cash flow that you have available, it is essential that you make sure that you can service all of your customers within a reasonably short period of time. In addition, it is essential that you make sure that you have enough cash to service all of your current accounts receivable balances. If you do not have a strong cash flow performance, you may encounter difficulty in meeting your financial obligations. Therefore, it is imperative that you do everything possible to improve your cash flow if you are going to buy an enterprise.

Financing the Acquisition

In many cases, business owners try to buy businesses even if they do not have enough financial resources to finance the purchase. It is essential that you carefully consider your ability to pay cash for the asset that you are buying. For example, many business owners are willing to spend more than ten percent of their net worth just to purchase an industry leader. It is important to remember, however, that this purchase will cost them at least ten percent of their net worth at the end of the term. Therefore, if you are willing to pay more than ten percent of your net worth just to buy an industry leader, you should also be prepared to lose ten percent of your net worth when the industry leader decides to file bankruptcy.

Entrepreneurship through Industry Leader?

If you are going to purchase an industry leader, it is important that you do not rely on your accountant’s preliminary analysis as you do with many commercial purchases. The preliminary analysis provided by your accountant will provide an overview of the company’s financial results for the last three years. However, this analysis is not a full analysis and it does not take into account all of the relevant information related to the company’s business model. This means that the preliminary analysis can be quite wrong. As a result, you should make sure that you have the final analysis from a reliable source and that you understand what the company’s liabilities and assets are.

SUMMARY

When you are looking at purchasing an industry leader, it is also important that you consider the costs associated with the transaction. For example, if the transaction is expected to result in annual recurring expenses of ten million dollars or more, you should use the services of qualified accountants who can provide you with the financial statements and other documentation that you need to make an informed decision. Also, it is imperative that you understand how the tax returns of the company impact its acquisition and whether the acquisition will have a significant effect on the company’s ability to obtain financing in the future.

Sam Palazzolo

Entrepreneurship Through Acquisition Conference Notes | February 2021

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This week we’re participating at the ETA Conference put on by The University of Chicago – Booth School of Business and Kellogg School of Management at Northwestern. If you were unable to attend, or if you did attend and wanted to compare/contrast session highlights, below is the notes that we took.

ETA Day 1

Managing a Search Fund Business – A Discussion with CEOs

Presented by Professional Bank. This panel discussion with ETA operators will focus on three key areas of operating a business – people, strategy, and finance – as well as the challenges and learnings CEOs have found.

Cybersecurity and Implementation

Presented by Mowery & Schoenfeld. “So you own a business, now what?” This panel will take a realist look at the financial, accounting, and cybersecurity challenges facing business owners. Participants will leave equipped with practical tools to help them make solid decisions during the search phase that will set them up for success as an early owner-operator.

Operating and Searching Amidst COVID-19

Presented by NextGen Growth Partners. This discussion will address how NextGen Growth Partners navigated the impacts of COVID-19. They will discuss the various ways their portfolio companies and entrepreneurs-in-residence adapted to unforeseen circumstances, and how they leveraged their ecosystem to weather the storm, innovate, and capitalize on great opportunities.

To access the notes from Day 1, please register below and you’ll have immediate access:

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9 Lessons In 9 Years at Tip of the Spear Ventures

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February 2012 – I am a 2%’er. Apparently, and I wouldn’t know this until later (much later!) that less than 2% of all entrepreneurial startups achieve successful exit. The experience of raising $8Million, launching a technology software startup that received consumer traction, and having a private equity firm acquire us was incredible! But now what? As I sat on a rock overlooking the ocean in San Diego, CA, I thought back to how it was just 7 years earlier that I had done the same to envision what was to come. “Now what?” was the question I was asking myself again, looking to the horizon where the sky meets the Pacific.

I knew that I enjoyed the private equity experience, and after a few moments determined that was what I wanted to do next. I wasn’t a total stranger to the financial space, having my formal education in Accounting and spending my formative years working in Strategic Planning and Finance. In the 9-years since that day, I’ve built something that I’m very proud of and I’d ike to share with you 9-lessons I’ve learned along the way.

Lesson #1 – Define Your “What?”

What are you made of and what do you offer? This is the “metal” that has been tested at Tip of the Spear everyday. We’ve “pivoted” over the years with different ventures, but the one mainstay was that we are “what” others should desire to be (Namely a group that puts forth A+ effort and content deliverables).

Lesson #2 – More People, More Problems

If you’ve hired as a part of your leadership journey, you know the pitfalls that can come with doing so. We’ve been at different times over the 9-years a small and big organization. I’m happy to say that we’ve settled on a model for the future that includes clustered growth. 

Lesson #3 – Think Strategically, Act Tactfully

In the heat of business, I want to win. I assume you do as well. However, and this was key for me, those “win” moments or victories that I sought to win were often at the expense of the war. I was reminded to think strategically and to act tactfully by an executive coach. The difference in thought/action appears in everything we do now.

Lesson #4 – It’s Lonely at the Top

I originally had a partner at Tip of the Spear Ventures. They were a silent partner that was low on injecting capital, but high on injecting their opinion. At about the three year mark we determined that parting company was best for the company (and us as individuals). I would rather be lonely than miserable.

Lesson #5 – It’s Lonely (but Don’t Go It Alone!)

This piggybacks off of Lesson #4… Even though you’re alone at the leadership helm of your firm/organization, you don’t need to go it alone! While opinions are like you know whats, if you tactfully align with peers/mentors you’ll achieve desired strategic outcomes faster.

Lesson #6 – Change Lives!

Opportunities to make money are everywhere, especially if you look for them! What might be even less obvious is the ability to change lives. I’ve been fortunate to receive recognition that what I was doing was actually making a difference for the people that I worked with. It is simultaneously humbling and rewarding.

Lesson #7 – Time… 

You, me, everyone only has 24-hours in a day. What are you doing with it that maximizes your efforts?

Lesson #8 – Agility

While processes and procedures form the structure of a successful business, the ability to be agile is a key differentiator. Want to stand out from the crowded crowd? Become agile!

Lesson #9 – It takes Blood, Sweat, & Spears!

I sometimes have to pinch myself… I’m a city kid from Detroit that was as my Mother says “Born in the shadow of a Ford manufacturing plant’s smokestack.” How far I’ve come has only been limited by my ability to imagine, visualize, and then take action. At one of our Boot Camps a few years back in Las Vegas, one of the participants accurately summarized that “Success takes blood, sweat, and tears!” The conversation morphed to one of “Blood, Sweat, and Spears!” which has stuck with us ever since (We’re running another Boot Camp starting 2.21.2021 for those seeking Entrepreneurship Through Acquisition). 

SUMMARY

These past 9-years have taught me so much, and I know that the next year will be even more insightful.  I’m determined to further establish in our ninth year the foundation that will drive the firm forward for the next two decades. I recognize that what worked in the past might not necessarily work in the future, so we will have to continue to evolve.  It is my goal to build an institution that outlasts me and continues serving entrepreneurs for generations to come. 

Sam Palazzolo

Do You Really Need Venture Capital?

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The Point: “Do you really need venture capital?” is a question that we’re typically asked at Tip of the Spear Ventures, regardless of the organization is lead by entrepreneurs in a startup pursuit or an existing entity. The short answer is “No!” The long answer, well that’s a “No” too… In this post, we’ll explore the question do you really need venture capital… Enjoy!

Would you be surprised to learn that the majority of companies, successful companies, never took a dime from a venture capital firm? Companies on the Inc. 5000 in the USA, the Fast Track 100 in the UK, and similar lists everywhere didn’t follow what most would be consider the “conventional” script when it came to funding their business.

What did these organizations do then to raise capital? The huge majority of them never obtained a pound or dollar or rupee of venture funds, and they did not guarantee or mortgage their houses in the process. Rather, they were able to find ways to achieve getting their businesses up and running, then growing, without pandering to VCs or groveling to their company’s CFO.

These organizations accomplished their business funding goals by simultaneously solving pressing consumer problems, or by creating delightful customer experiences that transformed the previously mundane business that was present. Most of these entrepreneurs constructed vibrant, growing businesses without increasing treasure troves of venture capital.

“Where did their business funding come from?” you might ask. The lion’s share of these got almost all of the money–initially, at least, and sometimes for the whole journey–from a much more hospitable and agreeable source: their customers.

Sam Palazzolo

If you, or your organization are exploring Business Funding options, please drop us a line at info@tipofthespearventures.com.

Business Funding – Subscription Models

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The Point: We’re often asked at Tip of the Spear Ventures, “What are the best ways to go about business funding – Should we consider subscription models?” The short answer is “Yes.” Subscription models are yet another way to accomplish business funding over a traditional capital raise. So in this article we’ll explore business funding through the use of subscription models… Enjoy!

Small business funding refers to the way in which an aspiring or already existing business owner obtains cash to launch a new business, buy an existing business or increase capital to finance future business activity. Business funding can come in many forms, but the most common sources are angel investors, venture capitalists or third party lenders. Entrepreneurs looking for startup capital should take note that all investors are not created equally and each has different goals and business needs. So it begs the question, “Why not explore customer funding options, specifically subscription models?”

Entrepreneurs should consider carefully how they plan to use any business financing options and should always have a game plan before approaching a private investor or a bank. Often it’s the case that entrepreneurs don’t even need to approach an outside funding source. A number of private investors offer startup capital at a discounted rate to entrepreneurial risk candidates who possess a well-developed business plan, a strong personal credit history and a steady track record of profit and loss repayments. To attract and qualify for such financing, entrepreneurs need to demonstrate a strong business plan with a well thought through exit strategy. Additionally, entrepreneurs should develop a set of metrics to track key metrics such as customer satisfaction, profit margins and return on investment.

When it comes to small business funding, entrepreneurs should also keep in mind that there are several options available to them. There are many different types of startup loans including bank loans, credit unions, commercial real estate loans, equity loans from family members and friends, working capital options from multiple lenders and lastly, entrepreneurs can tap prepaid credit cards as working capital. While some entrepreneurs may have better success securing business funding through more traditional means, most borrowers fail to secure enough capital to launch or expand their operations. There are several successful stories of entrepreneurs who obtained small business funding on a shoe string budget. If you have the desire and the ability to be financially secure and succeed in the entrepreneurial business environment, then you may want to consider applying for funding from a private lender. All of this said though, an avenue to pursue before doing so is the applicability of a subscription model as a way of raising capital for your enterprise.

Sam Palazzolo