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Tip of the Spear Ventures

A Family Office that behaves like Venture Capital | Private Equity | Business Consulting

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Private Equity’s Lean Into Business Transformation

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The Point: Private Equity-backed businesses outperform their business counterparts in periods of economic uncertainty and/or business transformation because their leaders are more involved in leading. If you’ve read anything about Private Equity or Business Transformation — or Business in general over the last few years, it’s likely that you’ve heard a lot about leaning in. Recently, we’ve encouraged clients to “lean in to business transformation,” or told leaders to “lean in on innovation,” or “detail the future by leaning in.” So we pulled-up recently and asked ourselves at Tip of the Spear Ventures and our Business Transformation Consultancy, The Zeroing Agency, “What’s with all the leaning in going on here?” When business leaders actively accept challenges and seek more responsibility — especially in order to progress towards goal attainment, the “lean in” movement makes sense. And in no other area of business ownership does leaning in on business transformation play out better than with Private Equity. So in this post, we explore Private Equity’s Lean In To Business Transformation… Enjoy!

Private Equity's Lean Into Business Transformation

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Private Equity’s Business Transformation Performance

It is well-known that the top private equity firms have the highest returns on equity by using financial leverage to improve the strategy and operations and then exiting at higher multiples. PE advocates also argue that strong board governance, management incentives, and a concentrated shareholder pool are essential for long-term success.

Nothing represents business transformation than those industries faced with difficulties, like in oil and gas, as well as mining, in the wake of falling commodity prices. McKinsey conducted a study to determine if more disciplined PE practices would make a difference in difficult economic times. They compared the performance over a period of nine years amongst 659 PE-backed enterprises and public companies in different sectors. They found that PE-backed businesses outperformed public peers in business transformation efforts and those recovering from business distress. This was even after taking into consideration a higher probability of bankruptcy.

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Is Private Equity Just Better At Business Transformation?

PE ownership has some advantages over public ownership in business transformation. Based on our experience with both types (full disclosure, Tip of the Spear Ventures is a Private Equity firm), we have found that PE boards are more active in setting ground rules and willing to hold management accountable for a business transformation or turnaround. For example, the most successful PE-backed companies boards quickly change the rules of engagement, communicate performance targets clearly, establish a timetable and determine if the CEO and the leadership team are capable of executing the plans. We have observed that these successful PE boards are also very adept at shifting organizational behavior away from “normal” working mode and into “overdrive” mode when planning progresses to execution.

The Lean Into Rules for Business Transformation

These lean into rules — or requirements — for business transformation are not mandatory for all leaders and their companies boards. Others may not have the time or motivation to follow these guidelines. We believe boards and leaders of public companies can benefit from the urgency, energy, and hands-on involvement in rapid owner-assisted business transformations. PE governance offers clear benefits during difficult times as well as the tangible benefits of active board leadership, and direct owner accountability. These are able to truly transform the game and provide the perfect setting for “lean into” moments for business transformation.

SUMMARY

In this post, we explore Private Equity’s Lean In To Business Transformation. While there is much success provided for PE-backed organizations success during business transformation, it’s important to realize that Private Equity does not own the exclusive rights to business transformation success. The key underlying concepts of urgency, energy, and hands-on involvement regardless of ownership structure are elements of success for those seeking business transformation.

Sam Palazzolo

30 Days to ETA | Day #11 – ETA Entity Formation

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If you’ve been reading this 30 Days to ETA series, you know that in the Day #10 post I stressed the importance of creating an ETA Culture (You can read the previous post by CLICKING HERE). In today’s 30 Days to ETA post, we’re going to discuss how choosing the right type of business entity at a company’s creation can effect its liability and its ability to sell when it comes time (i.e., ETA Entity Formation). Many people believe that in business exit planning, the idea of preparing a business to sell, occurs just prior to the owner’s desired exit time. This couldn’t be further from the reality of what should happen. Acquisition Entrepreneurs know that in their Entrepreneurship Through Acquisition journey that the time to prepare their future company for sale is at the onset, not as you’re contemplating your exit. Some of the planning we business owners need to do should be done five to ten years before the sale ever occurs, so starting at the beginning with the end in mind should make sense… Enjoy!

30 Days to ETA - ETA Entity Formation

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ETA Entity Formation – 4 Types of Business Entities

If you’re starting up a business now or if you’re already in business, choosing the right type of business entity matters a great deal. I’ll provide you with a list of the types of business entities you can create. To know which entity is best for your company, though, you’ll want to consult your own professional team that includes a good attorney, a seasoned financial planner, and a strong CPA.

Here are the four basic types of business entities:

  • C Corporations
  • S Corporations, a.k.a. Sub-Chapter S Corporations
  • Partnerships
  • Limited Liability Companies, a.k.a. LLCs

There’s actually a fifth type of business, but it’s not an official business entity, so I didn’t include it in my list. If you don’t form your company as a C Corp, an S Corp, a Partnership, or an LLC, then you’re operating a sole proprietorship by default. While it’s a business, it’s not a type of business entity for our purposes here in your Entrepreneurship Through Acquisition roadmap.

With so many ETA Entity Formation options available, identifying the proper formation at the beginning of your Mergers & Acquisitions strategy is the best decision you can make!

Sam Palazzolo, Managing Director @ Tip of the Spear Ventures

Which ETA Entity Formation is Right?

Each type of business entity has advantages and disadvantages. Ultimately, business owners choose to operate as an entity for one, or several, of the following reasons:

  • Personal Liability Protection – Operating your business under a corporate veil will protect your personal assets should your business run into problems. Additionally, running a company as an entity can reduce personal exposure to risk and act as a hedge of protection over and above what business insurance can provide.
  • Transference of Stock or Membership Interest – Within C Corps or S Corps, you can divide stock, move stock or transfer stock among owners or investors with some limitations. You can even give certain types of stock to employees. In an LLC, members (the owners) can re-arrange, divide, re-allocate, or transfer membership interests.
  • Flexibility – Vital to entrepreneurs, business entities allow owners to manage their companies as they see fit. They have flexibility over the ownership structure that allows the company to move and flow as individual owners’ circumstances do.
  • Tax Reduction Strategies – With the help of a professional CPA, business owners can take advantage of tax-free fringe benefits available to business entities. They can also prevent double taxation issues or plan how much they’ll pay in taxes by operating as an entity and by getting help from an accountant.

Documents Business Entities Should Have

Let’s say you’ve talked to your team of professionals. With everyone’s help, you’ve decided that you’re operating under the right type of business entity. Well, you’re not off the hook yet. No. You’ll need some documents for added personal and business protection. Here’s where a good attorney can help you.

A popular document within partnerships and corporations with multiple owners is a Partnership Agreement or an Operating Agreement. This document addresses how your company will deal with owner disagreements. It specifies who will fill which role and how the company will be managed. Additionally, it outlines how and where the company will handle lawsuits. Written with vast detail or in relatively simple terms, the agreement protects business owners should crisis ensue.

Additionally, many lawyers will recommend that their business owner clients draw-up a Buy-Sell Agreement. Whether you have multiple owners or majority and minority shareholders, you’re all working toward the eventual sale of the company. With this type of document, you can dictate how the company will be sold, for what minimum price it will sell, and under what arrangement it will sell. This agreement can also address what happens to the company in the event of an owner’s death or disability. While not required by law, if you’re building a company to sell it, the very title of the Buy-Sell Agreement seems to recommend its use.

ETA Entity Formation Records

So you’ve settled on an ETA Entity Formation type, now what types of records should you keep? In my experience, the following is the short-list of ETA Entity Formation Records you should keep:

  • Selling stock shares
  • Issuing stock shares
  • Loaning the company money
  • Borrowing money from the company
  • Placing the company in debt

From legal issues to meeting minutes, you might want to write down anything that happens as it relates to the company’s operations. Consult books, CPA’s, lawyers, and other advisors out there to figure out what types of records your business needs to keep.

The last thing you want as a business owner is to find yourself destitute, trying to win a legal battle without protection and without documentation. Like I’ve mentioned in other posts, I’ve gone through legal battles in business. One of the things I’ve learned is that “he-said-she-said” doesn’t cut it a courtroom. Documents that everyone signed before turmoil arose will be what the attorneys and the judge peruse and use. Hearsay doesn’t win cases; evidence does.

SUMMARY

The type of business entity you choose matters. The way you operate the entity and maintain records for the company will also matter. If you are as a part of your ETA in 30 Days journey looking to acquire a business on the road to getting your business ready to sell, you want to make sure that the business entity you ultimately choose is positioned to help you minimize your personal risks and tax liabilities. Not only that, but you want to know which documents you can put in place to make the business’s transition go smoother between you and the buyer or between company owners themselves and the buyer.

Sam Palazzolo

Why Raising Capital Might Not Be Your Best Funding Strategy – 6 Tips!

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I recently met with one of our holdings – a technology-software startup in Las Vegas, Nevada USA (Headquarters for Tip of the Spear Ventures) and we reviewed why raising capital might not be your best funding strategy. Let me be frank… While being an “entrepreneur” is fashionable these days, Las Vegas was never/is not now a major powerhouse in the tech industry. However, even with its limited entrepreneurial scene Las Vegas would appear to be awash with more capital for funding entrepreneurs than it has ever seen before. Investors are doling out money to promising startups, and major corporate Acquisition Departments at Google, Facebook, and MSN are ready in the wings to acquire interesting technologies and more importantly the smart teams that work therein.

Bootstrapping Your Business

I am an entrepreneur who bootstrapped his first company more than two decades ago, and it has been interesting to see the Las Vegas startup scene mature since forming Tip of the Spear Ventures in 2012. Similarly, the tech-software entrepreneur previously mentioned also bootstrapped his startup. Since we invested and began mentoring the organization five years ago, they now garner more than 40,000 visitors a day to their website, generate revenue of seven figures a year, and are extremely profitable. As such, they’ve had quite a investors and private equity firms approach them with funding, ready to invest in a business with a positive cash flow and pristine reputation in exchange for equity.

Capital Funding Sources

I remember the first time I had the conversation with the leader of the organization (There have been many approaches over the years, all of which seem to follow the same pattern – We’ll give you $XMM in exchange for XX% Equity). As the startups strategic partner, we reviewed each and everyone of the approaches, but elected not to accept any. While most would look at this as unfashionable (Shouldn’t you look at raising capital and ensuing Series A, B, and C rounds of funding as “right of passage” on the road to exit?) While congratulations are in order because most entrepreneurs would consider this as recognition by the business community as having arrived. Most entrepreneurs mistakenly believe at these moments that they’ve got it made (They’ll take a few million, expand the operations, juice up revenue and, within a few years sell out and cash an eight-figure cheque – WINNING!) Isn’t this the 21st -century success story – launch something, build it (They’ll come, right?), gain a bit of traction in the marketplace, get an infusion of cash and then sell, sell, sell as you get on the infamous train!

So why did we not recommending and why did the startup leaders not take any offers of funding? Simple… They retain complete ownership of their company and have never taken a cent in investment money. You see, it’s easy to get swayed by the upside but few entrepreneurs look at what they give up in exchange.

Why Raising Capital Might Not Be Your Best Funding Strategy – 6 Tips!

While in no way against funding (I mentioned that we were one of their original investors, and this is how we make our money at Tip of the Spear Ventures by investing in entrepreneurs), here are six considerations (or tips) that you should similarly consider before accepting funding:

  1. How badly do you need the cash? If you’ve successfully bootstrapped to profitability, perhaps your company is not in a situation that it cannot meet its financial obligations. You have money in the bank for those rainy days (Hopefully a year), so ask yourself “Do I even need the money?”
  2. What’s the endgame? The startup world is abuzz about moonshots and unicorns (Those companies valued at a minimum of a billion dollars). But is that something you really want? Do you want to build a disruptor? Or do you want to build a small company that does what it does best and serve the market for a long period of time?
  3. Are you willing to lose control? As the majority owner of your company, you don’t need to worry about anyone else’s opinions (for better or for worse). You don’t need to worry about keeping investors happy or making sure the board is happy. Keep in mind that the early-days of funding-marriage soon become cantankerous and almost divorce-like as demands placed on the entrepreneurs for ROI and other OKR metric attainment begin. No funding means you are the decision-maker.
  4. Is your share of the pie big enough? Raise enough capital (especially when your own company’s value is low) and have enough co-founders, and the threshold on how much money the company has to sell for before you make back your money goes up. I think it was one of the Beetles that when asked if they thought they’d ever reunite snarled “and split this tour 4 ways?!?” Sure, 10% of a $100Million exit is bigger than 100% of $5Million, but the reasons unicorns are unicorns is because they are extremely rare! You hear about the moonshot and unicorn success stories, but companies are far more likely to fail in achieving those levels.
  5. How much time do you have? Venture Capital backed startups are notorious for sucking time. As mentioned in #3 above, control also equates with time. You’re probably already wearing multiple hats as an entrepreneur. Will you be able to wear them all as effectively with less time to do so?
  6. What are your goals? What do you really want from your business? For most it’s freedom. The ability to go for an hour long walk with your dog during the middle of the day or sneak in that round of golf is appealing. While most entrepreneurs dream of time today it actually is in exchange for time tomorrow because the goal of why they became entrepreneurs in the first place was so appealing.

At the end of the day, most entrepreneurs operate their business to help provide for their lifestyle. Taking external funding would bring into play external forces that would make it harder for entrepreneurs to enjoy their lifestyle.

SUMMARY

While most entrepreneurs are content realizing that they can/are here to make a dent and don’t need to dominate. Taking external business funding will limit those lifestyle choices and freedoms in making those dents.

Sam Palazzolo

Now Investing in Innovative Offerings

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Tip of the Spear Ventures is a Venture Capital & Private Equity firm that looks for investments in disruptive innovative offerings from startups in the following areas:

  • Consumer Products
  • IT software, IT services, and IT infrastructure
  • Music
  • Real Estate
  • Retail

We look for innovative offerings of proven methodology with multi-year operating history and extensive customer bases as well as revenue streams. As with all Tip of the Spear Ventures’ investments, these firms must have the potential to be the dominant company in their respective markets. Additionally, these companies must have unique, patentable IP to ensure long-term leadership. We consider ourselves to be “smart” money, as we not only provide capital for early-stage seed funding initiatives but share our network/business methodology as well.

Begin by filling in the form to the right with your email address, call us at 855.97SPEAR | 855.977.732Seven, or send us an email to info[at]tipofthespearventures.com to get started.

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