Tag Archive for 'Business Plan Pro'

Angel investors and other small business capital sources

Blasingame’s 3rd Law of Small Business states, “Its redundant to say ‘undercapitalized small business.’”

There are two primary reasons this Law is true:

1. Unlike big businesses, small businesses typically have only three sources of capital: a) retained earnings (profits left in the business); b) direct investment, usually by the founder; and c) debt, usually from a bank.

2. Everyday one or more elements of a small business are screaming for funds to increase the company’s competitive advantage.

Even very successful small businesses are undercapitalized. In fact, ironically, the more successful a small business is, the more undercapitalized it will likely be. If a business is not growing, it needs capital to achieve growth. A growing business needs capital for R&D, upgrading technology, acquiring new product lines, funding accounts receivable and inventory that increase with sales growth – the list is long.

For most small businesses, the lion’s share of capital comes from retained earnings and bank debt. However, other than the founder’s investment, direct equity capital is less likely. But when outside equity is acquired, the next most likely source is from angel investors, which has become an increasing direct investment option over the past few years.

An angel investor is typically an individual who has money to invest and, instead of putting all of it in the stock market, he or she will allocate a portion to invest directly into a business, which could be either a start-up or a going concern. More recently, angel investors have formed regional consortiums to aggregate their investment dollars in order to spread the risk and make sure that they don’t make the mistake of under-funding a venture.

Most people have heard of venture capitalists (VC), the big dogs of entrepreneurial investment. Angels are sort of mini-VCs. The big difference is the level of funding and, in many cases, the closeness of the relationship with management; angels will be more likely to be geographically and emotionally closer to their recipient than a VC. The big similarity is that both anticipate an exit strategy where their capital – and hopefully a profit – are returned. This last point is the primary reason why most small businesses are not candidates for any investor capital, since the typical small business founder expects to run his or her business forever and perhaps hand it off to the next generation.

Recently, on my small business radio program, The Small Business Advocate Show, I talked about how angel investors choose investment candidates with Tim Berry. Tim is the world’s leading expert on business planning, founder of Palo Alto Software, an original member of my Brain Trust and my good friend. Tim is not only an angel investor, he is a member of one of those angel consortiums mentioned earlier. Take a few minutes to listen to what Tim told me about his experience and this fascinating process.

Successful small business succession planning

Statistics show that nine out of ten small businesses are family owned and operated; no big surprise there. After all, isn’t a start-up virtually by definition a family business? Indeed, what small business can be founded without some involvement, if not a lot of sacrifice, from the family members?

But when the founders ultimately decide to take their leave, orderly transfer of management and ownership to next generations breaks down significantly. In fact, less than one third of small businesses are transferred to family, and that number includes those that work and those that don’t.

In a past career as a business consultant, often working with families who work together in their businesses, I discovered at least two important small business succession planning truths:

1. The only thing harder than founding and growing a small business successfully is transitioning management and ownership successfully from the founder to the next generation of family.

2. The percentage of succession success increases with any combination of these three elements: higher management sophistication; high degree of respect among the parties; counsel from a family-business transition professional.

One family business transition I’ve observed, merely as an interested party, is the company founded by my friend, Tim Berry, a member of my Brain Trust and founder of Palo Alto Software, the makers of Business Plan Pro. All of his five children have worked in the company to some degree over the years, and earlier this decade he turned over the management reigns (not sure about any ownership transfer) to a middle child, daughter Sabrina.

From what I can tell, this transition is making all parties happy. With regard to my second point above, I’m not sure how much professional assistance they’ve sought, but I do know that Tim and Sabrina clearly fit the other two criteria of sophistication and mutual respect.

Recently, Tim joined me on my small business radio program, The Small Business Advocate Show, as we talked about some of the key elements of succession planning. He’s been the world’s top business planning guru for a long time, but he has become a family business transition expert in the last few years. Take a few minutes to listen to his words of wisdom. And, as always, be sure to leave your thoughts.




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