Money. Without it, a company (or a nonprofit, for that matter) cannot start, operate, grow or survive. To note that money is the lifeblood of business is beyond basic. But it is also true.
There are several ways to get money into a business. Certainly, there is reinvestment of the proceeds generated from the sale of goods and services. (And investment returns from those retained earnings.) But, in general, new money gets into an enterprise in one of two elementary ways – equity and debt.
Let me distill equity and debt to their barest of bones.
Equity represents funds (or other valuable contributions) invested by a third-party into a firm, the trade-off for which is usually some greater or lesser degree of operational or financial control of the entity that benefits from the investment.
Debt represents funds loaned to a firm, the repayment of which can be secured with or without real or personal property collateral. And that is just the start of those stories.
Federal and state government highly regulate equity and debt.
The regulations include:
- The funded party’s qualification requirements
- The investor or lender’s qualification to contribute funds
- Available qualification exemptions
- Minimum disclosures (in terms of both form and substance) to be made by a funded party to the investor or lender
- Ongoing reporting requirements by the funded party to the investor, lender and government regulators (such as the U.S. Securities and Exchange Commission, the Internal Revenue Service and their peer state agencies), and the avoidance of fraud (even the appearance of fraud for that matter) at all points in a transaction’s history.
Both equity and debt contributions are subject to substantial and detailed contractual requirements, which apply all the way from the get-go to the final repayment of debt or the retirement of equity.
What can businesses do to work their way through this maze of regulatory and contractual details?
There are a variety of common-sense, self-help measures that you can take.
- Prepare – Get a solid bead on your enterprise’s value (addressing such matters as assets, predictable cash flows and accounts receivable/payable, because both investors and lenders will customarily require independent appraisals. But even before commencing a self-valuation, get your company’s operational policies, procedures, practices and documentation and financial books and records in good order consistent with industry standards.
- Proceed – Often the reports you are required to submit are fashioned as formulaic performance ratios (loan-to-value being a common one regarding debt, and return-on-investment regarding equity). The recipient of those metrics will dissect the elements of the reports, compare each report to prior reports and make detailed inquiries concerning any trends of pluses and – especially – minuses. These reports are subject to strict deadlines; the funder cares about timeliness and can exercise default rights and remedies when submissions are late.
Supporting players can help funded entities through the equity and debt life cycle.
A business even contemplating third-party funding of any type should involve a CPA.
Accountants can help the company get and then keep its financial house in order with applicable standards and metrics, and they put the required data and related information into formats acceptable to the funders and regulators.
Other professionals you need include insurance consultants, commercial bankers and investment advisors. As Benjamin Franklin said, “An ounce of prevention is worth a pound of cure.”
Another member of your cast should be your lawyer.
Your lawyer can help negotiate and prepare fair and realistic representations (statements of current fact), warranties (statements upon which the funder can reasonably rely) and covenants (enforceable promises) which form the basis of an equity or debt transaction as told in its required and supporting documents.
Your lawyer also can help interpret those documents and adjust them when the original operational, financial, tax and regulatory environment and conditions evolve over time.
Money is not to be feared. It is, however, something for which adequate and thoughtful preparation is needed to (1) attract it, (2) utilize it and (3) account for it.Companies desiring funding of any nature must be prepared to spend money to be effective, efficient and economical in obtaining money.
For more information, call Philip N. Kabler, Esq. of the Gainesville, FL office of Bogin, Munns & Munns, P.A. at 352-332-7688, www.boginmunns.com/Office?Office=Gainesville, where he practices in the areas of business, real estate, banking and equine law.