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Tip of the Spear Ventures

Venture Capital | Private Equity

sam palazzolo

Is Your Structure Prohibiting Business Entity Transformation?

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The Point: Business entity transformation can mean big results for business owners, regardless of entity size. Transforming a small company into a larger company with bigger revenue and market share can be a daunting challenge. It can also be time-consuming, costly, and ineffective if the owners don’t know what they’re doing. So in this post, we’ll explore a simple — yet insightful — framework for helping business owners understand their obligations to inform themselves as they prepare for, and successfully execute, a business entity transformation… Enjoy!

Business Entity Transformation

It’s All About Entity Transformation… But Where Do You Focus First?

Business owners — For our purposes, those that lead and own the business entity initiatives, regardless of if they are actually equity owners — are required to inform themselves about any and all changes in their business structure, product mix, or market shares through whatever means necessary. For example, a business may have recently incurred new technological breakthroughs and may now face new regulatory requirements. They may face changing market demands as customers demand more products and services with less money. Or they may have recently entered into an acquisition deal and now need to comply with new reporting and disclosure regulations. Each of these examples requires careful and detailed communication with key stakeholders. Failure to communicate properly and fully can result in fines or penalties, and can also result in potential harm to the business entity itself by diminishing its ability to protect and grow the business.

Business Entity Transformation Is More Than Strategy and Communication

It is not only the business that must be notified and informed of changes in its structure, product mix, or market shares (i.e., Strategy). Organizations engaged in transforming their business must also notify employees, officers, and other key executives. Business transformers should always remember that the first person in the chain of command, after the CEO and board of directors, makes the final decisions. Employees will likely be hesitant to question the new policies regarding pay and working conditions. Executives may also hesitate to raise questions regarding their own bonuses and stock options. By providing early and accurate notification of changes to all employees, the business can avoid this sort of crisis.

Business Entity Transformation From New Technological Breakthroughs

The business must also be aware of the potential impact that any new technological breakthroughs or regulatory requirements may have on its ability to operate and compete effectively. A major change in one technology can eliminate or reduce the need for certain functions, and require the development of new or additional technologies. Similarly, a change may make it necessary to retool the business’s methods to take advantage of the new technologies. The methods by which a business operates can change over time as well, if it is pursuing a strategy focused on market segmentation. Both of these scenarios can result in significant disruptions to a business’s operations and may require adjustments to business processes and employee routines.

Business Entity Transformation Is Change

Businesses also face the challenge of integrating changes with current practices. If the business has been successful in the past in the formation and execution of its strategies, it may prove difficult to change the same strategies and execute the same processes. For example, if the business has successfully established a balanced mix of internal and external resources, it may prove difficult to change to a new sales and marketing strategy if it is based on the same internal resources and practices. Likewise, if an existing procurement strategy is effective, changing to a new procurement process could result in a loss of competitive advantage.

Another difficulty faced by a business that wishes to convert to a different legal entity is that of change management. There are many issues involved in change management, such as identifying who will manage change activities, evaluating the impact of any new regulation, and ensuring that the new regulation complies with the corporate governance standards already in place. Changing the makeup of a board of directors or personnel to include new members while maintaining key personnel may prove difficult, if not impossible, once regulatory requirements are implemented. Moreover, there may be an added administrative cost involved in tracking personnel changes and making any other personnel changes necessary to implement the new regulation. Finally, the implementation of new regulations can have a negative impact on cash flows and liquidity and the need to obtain additional capital in order to support the new regulation. This risk could be reduced by better aligning company objectives with business governance standards.

Business Entity Transformation – Where To Get Help?

Businesses should seek assistance when they are in danger of changing their legal structure. The legal documentation for incorporating a new corporation, limited liability company, partnership, or corporation varies from state to state. It is important to identify the requirements of the state in which one wishes to incorporate and make sure that the legal documents are current and comply with the requirements. A business that wishes to convert from a C-corp to a S-corp will have to register the corporation, obtain special certificates, and pay taxes on the transfer of shares and assets. Business owners may feel overwhelmed by the rapidly changing corporate governance requirements and the potential costs and risks associated with these changes. Hiring a consultant can help reduce the stress and complexity of navigating the complexities of incorporating a new business entity.

SUMMARY

The most important thing that a business owner should remember is that a business entity is often very different from the “person” that owns and controls the business. A business is often a complex legal structure that consists of many different parties and relationships. Business governance is often referred to as “business code”, and this code is often very difficult to understand and follow. Consulting an attorney who specializes in business law can provide insight into the current requirements for incorporation and a review of the possible future changes that may affect a business’s structure and management. When incorporating a new business entity, it is important to hire an attorney who understands the complexities of incorporating and knows how to navigate the ever-changing business terrain.

Sam Palazzolo

Startup vs Acquisition – A Comparison of Two Entrepreneurship Models

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Often, when entrepreneurs ask the difference between startup vs acquisition, they are confounded by the differences and can’t make up their minds about which choice is right. They often think that there are clear winners and losers in terms of an entrepreneur’s success or failure. The truth is that there are subtle differences between startups and acquisitions. For starters, it’s not the size of the company that makes the difference between a startup and acquisition; in many cases, it’s the lack of a market or the size of the market that makes the difference.

Startup vs Acquisition

The differences between a startup and an acquisition vary primarily based on the size of the target market. A startup may be started to fill a need in the marketplace; that is, it was created to address a problem that existed in a segment of the population that had not been well served by established companies before. For instance, many new food stores started as franchises that expanded to meet the needs of a local market. In such cases, the company’s success came from its ability to serve a specific segment of the population.

The Acquisition

With acquisitions, on the other hand, the objective is much different. Buyouts are done primarily to acquire control of already mature companies with long-standing operating systems, market shares, and patents. While these companies may have the necessary attributes to be attractive targets for a startup, they are unlikely to have strong market shares or a profitable business model.

Sustained Growth & Profitability

An acquisition occurs when a business owner takes control of a company that is doing well in the market but lacks the ability to sustain growth and profitability. As the buyer, you typically don’t acquire a startup with the intention of developing it into a successful business yourself. Instead, you look for a business that can help you realize your financial goals. This can mean developing the company further to bring it closer to the goal you’ve set, or it could mean acquiring a company with complementary assets.

Startup vs Acquisition: The Key

The key to both startup and acquisition is finding the right partners. Acquiring a startup is easier when you purchase a successful company because you already know what it’s capable of. On the other hand, you’ll have a lot of work to do when buying an established business. Take for example the purchase of an organization (and we see this all the time at Tip of the Spear). At the time when the purchase was made, Company #1 was the largest company in their sector and had already demonstrated its ability to grow and profit. Therefore, making Company #2 in a desirable position to purchase/acquire Company #1.

SUMMARY

Because of the Startup vs Acquisition — A Comparison of Two Entrepreneurship Models, it’s easier for one company to acquire another company. By using a strategy for its acquisition, an organization can quickly became a dominant player in the industry. This type of acquisition will work best for entrepreneurs and venture capitalists with a proven track record in developing successful businesses. However, if you’re starting from scratch, it’s probably a better option to go for a startup rather than an acquisition (Don’t get me started on how hard it is though!)

Sam Palazzolo

Acquisition Entrepreneur – Art or Science?

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The Point: We’re often asked about our Mergers & Acquisitions business specifically, “How can I be an Acquisition Entrepreneur?” The reality is that most entrepreneurs that take on an acquisition are not born that way, they are trained to do so. If learning is at the forefront, what else is involved in the background? So, in this post we’ll explore the Acquisition Entrepreneur – Art or Science… Enjoy!

Things to Consider As an Acquisition Entrepreneur

The acquisition of a business is often thought of as the same thing as buying an existing enterprise, however, there are several key differences. An acquisition can be more difficult for some entrepreneurs because of their inexperience and limited financial resources. Acquiring businesses involves a series of steps.

No Cowardly Lions!

The first step to successful acquisition is having the courage to buy a business. There is often fear among investors that if they invest in a startup it will fail. This is not true. The reason for this is that successful entrepreneurship is built on sound principles, strong leadership, and an excellent business plan.

You are an Investor

To buy a business, investors require information about the owner. They want to know the entrepreneur’s personal and professional background. This includes information on the founders, the current business model, and the products or services offered. Having this information allows investors to evaluate the potential acquisition more objectively.

What Does the Business Do Well?

Investors also look for the strength of a business. In addition to a strong business plan, an entrepreneur should have experience in his field. Additionally, he should show that he has the ability to manage and grow a business. In addition, it is important for a start-up to demonstrate how the business will survive during tough times. These can be difficult to assess when a company is still in the development stages.

What is the Legacy of the Business — and You?

When buying a company, investors look for companies that are well-established and that have a solid financial footing. It is also important for the entrepreneur to convince potential investors that he is capable of managing the business. By conducting a survey of the company and its current location, he can show investors that he knows where he is going. He can also convince potential funding sources that he has a great idea for making the company successful. If he is able to generate interest from interested funding sources, he may find himself able to buy the company more easily than he had originally expected.

Time is the Great Equalizer

Another important thing to consider when it comes to being an acquisition entrepreneur is the time line for making a successful acquisition. Most companies that are interested in buying a business develop interest over time. However, it is not always easy to close a deal at the right price and time. As a result, some companies prefer to wait to make an acquisition until they have more negotiating power. This gives them a better chance to get a good deal on the business. On the other hand, a strong acquisition entrepreneur knows that he needs to quickly close a deal so he needs to be ready to negotiate with all of his potential funding sources.

SUMMARY

In this post, we’ve explored the topic of Acquisition Entrepreneur – Art or Science. We know that there are a lot of ways in which you can explore your entrepreneurial spirit. Becoming an acquisition entrepreneur is a smart way of doing so.

Sam Palazzolo

Five Tips For Becoming an Entrepreneurship Through Acquisition

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The Point: Being an entrepreneur is great! However, the saying, “Work smart!” should be a tactical advantage with a strategy of buying a business being front/center! I see time and again entrepreneurs that start a business from scratch — and that’s just plain hard work! In this post we’ll explore Five Tips For Becoming an Entrepreneur Through Acquisition (ETA)… Enjoy!

You do not need to begin a new business from scratch in order to become an entrepreneur. In fact, purchasing a company with which you are familiar could be a wiser choice. Creating, marketing, and then selling companies are all a part of your entrepreneur s journey. There are certain things you will want to keep in mind when looking into purchasing a company, though. Below are four tips for becoming an entrepreneur through acquisition.

Tip #1 | Entrepreneurship Through Acquisition

The first and most important step to becoming an entrepreneur is being able to finance your business. Financing is crucial to making any business work, but it is even more critical when you are just starting out. If you are working with a limited budget, your options may be limited. In order to get everything lined up, you will want to begin working with a lender as soon as possible, particularly if you intend to use credit cards or other forms of capital. When you are seeking seller financing for your business, you will have to provide substantiation of your income, a solid plan for increasing your sales, and a clear plan for paying back the loan.

Tip #2 | Entrepreneurship Through Acquisition

The second step in becoming an entrepreneur through acquisition is finding a seller financing program. Most traditional banks do not look favorably on businesses that have never made a profit or do not have a history of revenue. In order to get everything lined up for your business, you will have to secure funding from either a bank or a private investor. A good real estate investor will be especially helpful because he or she can get you loans with a lower interest rate than what you can get from a bank.

Tip #3 | Entrepreneurship Through Acquisition

The third tip to becoming an entrepreneur through acquisition is to make sure you can make a profit on your investment after your first acquisition. The ideal scenario would be to purchase a business with low start up costs and high revenue potential. Most businesses fail shortly after they are launched. If you cannot turn a profit on the first sale, you may have to take a loss on every sale thereafter until you break even.

Tip #4 | Entrepreneurship Through Acquisition

The fourth tip to becoming an entrepreneur through acquisition is to consider a gradual increase in profits over time. An entrepreneur does not simply buy a business with the best potential for revenue and expect a huge windfall from it the next day. Business development takes time and effort. Your job during the early stages of your business venture is to generate customers and build a strong relationship with your suppliers.

Tip #5 | Entrepreneurship Through Acquisition

The fifth and final tip to becoming an entrepreneur through acquisition is to consider starting your own company as a small business. When you start your own business, your goal is to have low start up costs, high annual revenue, and a strong customer base. This means you will have a limited amount of resources to work with in terms of finances. Starting your own business can be extremely difficult if you do not have a comprehensive business plan in place. You must set a budget and identify your target market to determine how much money you can invest in your new business venture.

SUMMARY

In this post we’ve explore Five Tips For Becoming an Entrepreneur Through Acquisition (ETA). If you’re ready to put the strategic advantage of acquisition — buying a business — to work for you instead of starting one from scratch, success is still going to be hard work. However, the outcome can be much more advantageous.

Sam Palazzolo

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