Financing Your Entrepreneurial Startup: Educate And Comfort

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STOP PITCHING AND START EDUCATING - GEIconsulting - Douglas E. Castle

If your company is either a startup or an entrepreneurial enterprise and you are seeking financing from individual accredited investors, remember this: Prospective investors (regardless of their level of sophistication) are interested in several things, and each one must be addressed in your presentation. The idea is not to simply boast with great confidence about your unique business model, intellectual property or disruptive technology – you must also devote adequate time in your presentation to discuss how a viable and interested investor:

 

*can make a substantial return on capital invested;

 

*recovers his or her initial capital contribution (through cash flows, exit strategies, etc.);

 

*is protected against any loss of principal.

 

You’ll do well to conduct yourself (and to tailor your pitch) as if you were an investment advisor and advocate for the prospective investor instead of as a mere promoter. Don’t just sell. Educate and reassure. You can appear quite confident – so long as you temper that confidence with some caution and in both your attitude and presentation. Remember: Be enthusiastic, but come across as conservative. Part of your responsibility is to comfort the prospective investor. http://GlobalEdgeInternational.com 


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This site is the Management Consultants' and Chief Reconstruction Officers' best all-industry guide to analyzing, diagnosing, devising a strategy, creating either an Action Plan or an Emergence Plan and overseeing and monitoring the successful implementation of either in order to ensure the client organization's optimal, sustainable profitability. These plans are always made scalable to accommodate the size and needs of the client, whether it is fast-growing young company with an aggressive and ambitious agenda, or whether it is an older, larger, well-established business which is experiencing problems or which is at a crucial decision making point in its evolution as an entity, and which requires sound advice (and often implementation oversight and assertive "hands-on" assistance in the form of a powerful third-party representative agent or a an expert in the art of negotiation as its appointed "point person") regarding its next steps. In the alternative, Douglas E. Castle is expert at helping fast-track, rapidly emerging companies to growth through acquisitions, mergers, licensing, branding and both domestic and international strategic joint ventures to access better, more efficient supply chain sourcing and to open up wider global markets to dramatically increase the scope of possible new revenue opportunities.


The Investment Banker Joke – Douglas E. Castle

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Stereotypes - Douglas E. Castle

Yes, ladies and gentlemen. There is, unarguably, an increasing disconnect between Wall Street and Main Street. And, for the most part, the good folks residing on Main Street (situated somewhere between Lake Wobegon and Anytown, USA) are on the losing end of the misunderstanding, and will probably continue to remain so until a major disruption brought on by Peer-To-Peer lending and financing or crowdfunding takes place.

It seems that most everyone has something negative or nasty to say about investment bankers; sadly, I’ll confess to being conflicted in that both the critics and objects of their criticism are among my friends and acquaintances.

There’s a celebrated joke that’s made its way around business and financial circles over the years. It goes something like this:

An investment banker walks into a room where his colleagues are in a meeting. “I’ve got good news and bad news,” he announces. “The bad news is we’ve just lost $100 million. The good news is, it wasn’t ours.” An associate raises his hand. “What was the bad news again?”

It’s humor, but if you were alive during 2008 to 2009, you’ll know that there is more than a grain of truth to the tale. Whether we’re talking about brokers, bankers, or even your most trusted financial advisor, you are probably finding it increasingly uncomfortable to rely on anyone else to care about your money and keep it safe.

Thank you, as always, for reading me.

Douglas E. Castle

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This site is the Management Consultants' and Chief Reconstruction Officers' best all-industry guide to analyzing, diagnosing, devising a strategy, creating either an Action Plan or an Emergence Plan and overseeing and monitoring the successful implementation of either in order to ensure the client organization's optimal, sustainable profitability. These plans are always made scalable to accommodate the size and needs of the client, whether it is fast-growing young company with an aggressive and ambitious agenda, or whether it is an older, larger, well-established business which is experiencing problems or which is at a crucial decision making point in its evolution as an entity, and which requires sound advice (and often implementation oversight and assertive "hands-on" assistance in the form of a powerful third-party representative agent or a an expert in the art of negotiation as its appointed "point person") regarding its next steps. In the alternative, Douglas E. Castle is expert at helping fast-track, rapidly emerging companies to growth through acquisitions, mergers, licensing, branding and both domestic and international strategic joint ventures to access better, more efficient supply chain sourcing and to open up wider global markets to dramatically increase the scope of possible new revenue opportunities.


Why Prices Seem To Be Increasing Everywhere – Douglas E. Castle

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Why Prices Seem To Be Increasing Everywhere

By Douglas E. Castle

The primary forces which are driving prices ever-upward in the United States economy are entrenched flaws in the economic system, which I will endeavor to isolate, identify and describe in this brief “read it and weep” article. While the situation continues to worsen, economic policy steps and changes in consumer habits could go a long way to bringing prices for durable and non-durable goods and services back within the realm of affordability. Please read on:

Flaw 1: Too Much Consumer Credit Available:

While access to consumer credit does increase consumption and can indeed be economically stimulating, it also changes major consumer acquisition decisions regarding durable goods (cars, appliances, homes…) from being cost-sensitive to merely being debt/lease service affordable. If I can drive a $55,000.00 automobile for a reasonably affordable $350.00 per month, I will either lease or purchase the car on installments (regardless of the real “cash” price) without even stopping to think that a car of equal value would have only cost me $27,500.00 five years ago. We’ve become obsessed with monthly payments while becoming irresponsibly uninvolved with real costs, which continually rise in response to the availability of credit. Simply put: More credit availability leads to steeply increasing prices.

Flaw 2: Too Little Personal Saving

The average United States taxpayer saves less than 10% of his or her annual income due to cultural changes, the growing disparity between wages and household expenditures, and due to the irksome fact that an increasing percentage of what used to be disposable personal income is now going toward the servicing of consumer debt. This leads to increased borrowing, which brings us back to Flaw 1, above.

Flaw 3: Third-Party Reimbursement And Payment

Why should I decline a medical test (whether truly necessary or not) or any medical or healthcare protocol when my insurance company will pay for all or close to all of the cost? Medical costs (as well as healthcare insurance premiums) have risen astronomically because prices do not reflect the ability of individuals to pay, but instead, reflect the willingness of third party payers (i.e., insurance companies) to foot the bill. This third-party payment addiction (just like debt addiction) takes the focus off of the real cost and necessity per procedure, treatment or medication, and replaces it with a focus on “how much does my insurance premium cost and how good is my plan coverage?”.

Flaw 4: Too Many Monopolies Or Protected Territories

Without mentioning the names “Comcast” or “Xfinity” (two monikers for one of the least-beloved and most hated companies by users/consumers), government-permitted or inadequately-regulated trusts or constructive monopolies make competition all but impossible for new market entrants to offer better, cheaper alternatives to those offered by the Goliaths which dominate the cable/telephone/ISP service sphere, as well as the consumer spheres for most major utilities – all of which are necessary for ‘normal’ living. Impediments to fair and open markets invariably lead to lower quality and higher prices to consumers.

Flaw 5: The Notion Of “Too Big To Fail” And Resultant Bailouts And Subsidies

When governments selectively elect to print more money, allocate more of public funds or increase taxes in order to subsidize the inefficiency and provide cover for the mistakes and misdeeds of large institutions (under whatever guise that this is done), it activates cost-push inflation as these subsidies and bailouts are paid for by consumers and taxpayers. What is worse, is that these colossal corporate wastrels are all but encouraged to continue behaving poorly as there is absolutely no incentive (either negative or positive) for them to mend their wicked ways. These beached whales (with extensive ties to government policy and largesse) will always be pushed back into the ocean by the governmental administration. Consumers get poorer while the corporate elite continue to receive paychecks and bonuses in ever-increasing, stratospheric amounts. Unconscionable? Yes, indeed!

Flaw 6: Premeditated Obsolescence

The adoption of new technologies is a natural outgrowth of scientific advancement and market demand, and that’s perfectly fine; but when you buy a generational model of something that you use (either a product or a service), such as an iPhone 5 – just to cite one example – and the company which manufactures or provides the product or service stops supplying peripheral support for your version and all but forces you to buy the newer, more expensive version, prices are driven up as unwitting or unwilling consumer hostages line up to trade in the increasingly-useless older model for the shiny new one. This inflates costs (i.e., the new version is more expensive than the old), and increases the requirement to buy replacements, virtually turning a durable good into a consumable, depletable item.

Flaw 7: The Disappearance Of The Middle Class

As the middle class shrinks to an ever-decreasing percentage of the total population, the wealthy become wealthier and can afford to buy more, while the poor proceed to either rely upon government aid (quite inefficient and expensive) or live an increasingly leveraged lifestyle. Please refer to Flaw 1, at the beginning of this article…

As always, thank you for reading me.

Douglas E. Castle

Please join me on LinkedIn.

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This site is the Management Consultants' and Chief Reconstruction Officers' best all-industry guide to analyzing, diagnosing, devising a strategy, creating either an Action Plan or an Emergence Plan and overseeing and monitoring the successful implementation of either in order to ensure the client organization's optimal, sustainable profitability. These plans are always made scalable to accommodate the size and needs of the client, whether it is fast-growing young company with an aggressive and ambitious agenda, or whether it is an older, larger, well-established business which is experiencing problems or which is at a crucial decision making point in its evolution as an entity, and which requires sound advice (and often implementation oversight and assertive "hands-on" assistance in the form of a powerful third-party representative agent or a an expert in the art of negotiation as its appointed "point person") regarding its next steps. In the alternative, Douglas E. Castle is expert at helping fast-track, rapidly emerging companies to growth through acquisitions, mergers, licensing, branding and both domestic and international strategic joint ventures to access better, more efficient supply chain sourcing and to open up wider global markets to dramatically increase the scope of possible new revenue opportunities.


Leadership: Delegate Or Die – Douglas E. Castle

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Leadership: Delegate Or Die
One Of the Most Important Responsibilities Of A Leader Is To Delegate Responsibility

 

To be a leader and to maintain a position of leadership, you must be a competent and efficient delegator. By the act of delegating, you are not relinquishing control – you are actually expanding the realm and scope of your control. The larger the responsibilities and the larger the organization, the more proficient you must be at delegation.

In the military, “delegation” is defined as the action by which a commander assigns part of his or her authority commensurate with the assigned task to a subordinate commander. While ultimate responsibility cannot be relinquished, delegation of authority carries with it the imposition of a measure of responsibility. The extent of the authority delegated must be clearly stated.

Your success at delegation will determine the strength and length of your reign as a leader and commander. The most significant insights and skills which are required in successful delegation are listed below. They are worth studying:

=> If you are obsessive-compulsive by your nature, do all that you can to rationally counterbalance this dangerous impediment to effective delegation. You cannot micromanage and be a leader. You cannot be the servant of your subordinates because you are insistent about things being done exactly as you would have them done;

=> You must constantly keep the big picture and the broader focus in mind. If you are a perfectionist and overly detail-oriented, you will never be able to attain your organizational objectives while mired in minutiae;

=> Understand all of your responsibilities, and itemize or componentize each of them. You’ll find that each individual component can be delegated (as it must) to someone in your organization whom you can select. If the right individual is not among your inventory of Human Assets, then you must either replace some of your people, or your must acquire some new members with the requisite skill sets. The objective is to export as many of your responsibilities as possible, while retain the central responsibility of organizational stewardship, oversight and goal attainment;

=> When you delegate responsibility for the accomplishment of a task or function, also remember to grant the requisite authority and to impose the necessary accountability to the person to whom you’ve charged with the job. Responsibility without authority is a recipe for managerial impotence and non- performance. Responsibility without accountability is a recipe for waste, abuse and failure;

=> Since you, as a leader, are ultimately responsible for the successful and efficient attainment of your organization’s most important goals, you must constantly monitor the performance of those to whom you’ve delegated, without being drawn in to correcting their mistakes yourself. Observe, measure, suggest, monitor and determine whether the subject task has been assigned to the right individual; sometimes a change may be warranted.

=> Where you observe leadership potential in some of those persons to whom you’ve delegated tasks, you may find it wise to increase their roster or responsibilities, but to also grant them greater authority to sub-delegate to others who are subordinate to them. Remember that the greatest leaders know how to identify and cultivate leadership within their organizations. Be aggressive and bold about identifying and leveraging the leadership talents of other leaders within your organization. Encourage leadership and acceptance of increased responsibility. Reward it and give it appropriate recognition. Empowering other leaders liberates you to be a greater leader yourself.

=> As you develop leaders and assign them to their respective specialty areas (not unlike fiefdoms within a kingdom), clearly identify where each one’s territory begins and ends. Clearly define their responsibilities with minimal overlap. Keep your subordinate leaders separated from each other (unless you are present and orchestrating or conducting a meeting or hearing reports) – fiefdoms should not compete, but neither should their feudal lords unite, lest they undermine the king’s leadership. 

In brief, don’t permit your subordinates to take you over. Delegate, but do so without ever permitting your absolute command from being undermined. Keep your emerging leaders separated from each other, and even instill a competitive spirit amongst them to ‘fight’ for your approval.

As always, thank you for reading me. 

Douglas E Castle 

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Douglas E. Castle, leadership, management, delegation, responsibility, authority, taking command, grooming leaders, accountability, business, career advancement, self-promotion, personal power, organization. 

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D.E.Castle's Daily Business Advisory Wrap-Up.
Skim It. But DON'T MISS It.
This site is the Management Consultants' and Chief Reconstruction Officers' best all-industry guide to analyzing, diagnosing, devising a strategy, creating either an Action Plan or an Emergence Plan and overseeing and monitoring the successful implementation of either in order to ensure the client organization's optimal, sustainable profitability. These plans are always made scalable to accommodate the size and needs of the client, whether it is fast-growing young company with an aggressive and ambitious agenda, or whether it is an older, larger, well-established business which is experiencing problems or which is at a crucial decision making point in its evolution as an entity, and which requires sound advice (and often implementation oversight and assertive "hands-on" assistance in the form of a powerful third-party representative agent or a an expert in the art of negotiation as its appointed "point person") regarding its next steps. In the alternative, Douglas E. Castle is expert at helping fast-track, rapidly emerging companies to growth through acquisitions, mergers, licensing, branding and both domestic and international strategic joint ventures to access better, more efficient supply chain sourcing and to open up wider global markets to dramatically increase the scope of possible new revenue opportunities.


Fund Your Startup Through A Joint Venture – Douglas E. Castle

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Funding Startups Through Joint Ventures:
Why It Might Be Smart To Form A Partnership With An Established Business

 

A Good Joint Venture Is More Than Just A Source Of Funds - Douglas E. Castle

By: Douglas E. Castle

Entrepreneurs with brand-new pre-revenue companies, developmental-stage enterprises (DSEs) and fledgling companies having won their first client contracts are, generally speaking, desperately in need of capital. And, generally speaking, most funding sources shy away from companies with limited operating histories and limited tangible collateral assets. Yet these intrepid (but naive) newcomers insist on shopping the capital markets in search of either an investor or lender who will make them the “special exception” and grant them free rein and total discretion with a pile of money. Shopping in this marketplace is all too often a waste of time.

A more viable alternative for any one of these entities in need of cash might be to form a joint venture with an established and synergistic (or complementary) company. Not only do some of these existing companies have capital and credit lines of their own, but in many cases their management teams [at the senior level] have business acumen, contacts and other non-financial resources that can be leveraged by their younger counterpart in the joint venture relationship.

The key, of course, is in finding the right joint venture partner. In order to insure a productive, long- lasting (and non-traumatizing), entrepreneurs might give serious thought to utilizing the services of an outside management consulting firm or agency to facilitate the matchmaking process and to advise and assist in negotiating terms. In the immediate term, this may cost a bit of money, but in the near-term and the longer term, engaging the services of an independent third-party professional firm may save you the costs of a meandering, time-consuming, trial-and-error process.

Give some sincere thought to either financing your startup though a joint venture, or, if you are a well- established organization, to seeking out fresh, new co-venturing and licensing opportunities through an impartial, experienced consultant. In a well-crafted joint venture, all parties win.

If you’d like to reach me directly with your questions about this article or about joint venture possibilities, please contact me at http://bit.ly/CASTLEDIRECT .

As always, thank you for reading me.

 

 


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D.E.Castle's Daily Business Advisory Wrap-Up.
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This site is the Management Consultants' and Chief Reconstruction Officers' best all-industry guide to analyzing, diagnosing, devising a strategy, creating either an Action Plan or an Emergence Plan and overseeing and monitoring the successful implementation of either in order to ensure the client organization's optimal, sustainable profitability. These plans are always made scalable to accommodate the size and needs of the client, whether it is fast-growing young company with an aggressive and ambitious agenda, or whether it is an older, larger, well-established business which is experiencing problems or which is at a crucial decision making point in its evolution as an entity, and which requires sound advice (and often implementation oversight and assertive "hands-on" assistance in the form of a powerful third-party representative agent or a an expert in the art of negotiation as its appointed "point person") regarding its next steps. In the alternative, Douglas E. Castle is expert at helping fast-track, rapidly emerging companies to growth through acquisitions, mergers, licensing, branding and both domestic and international strategic joint ventures to access better, more efficient supply chain sourcing and to open up wider global markets to dramatically increase the scope of possible new revenue opportunities.


Valuation Of Your Privately-Held Business

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Establishing a valuation for your company is a crucial process. You’ll need a valuation for the following purposes (and these are just several): sale of the business to a third party; taking your private company public; merging with another company or acquiring another company; for a buy-sell agreement; for the issuance of such incentives as stock purchase options… your company’s valuation is important. What is equally important is that the valuation is properly documented, the computation strongly justified and supported, the actual process is undertaken and overseen by an impartial, objective third party with the appropriate credentials. Valuation of a company is a target which moves and changes over time depending upon the company’s performance and other variables, so periodic valuations of your company are important to stakeholders, creditors and potential investors or acquirors.

If the business is passive, and merely serves as an ownership vessel for income-producing property, equipment, securities or the like, establishing a valuation can be relatively easy. Simply take the combined Fair Market Values of all of the assets, reduce this amount by the total liabilities on the books (and perhaps some contingent liabilities in certain cases), and you have a basic valuation.

If the business is an operating entity (usually in the form of a partnership, an LLC or an IRC SubChapter S corporation), and income from operations is generally being swept out to the maximum extent possible to the stakeholders who work for the entity, the valuation issue is somewhat more complex. The business’ books might reflect very little in the way of appraisable assets, making a Fair Market Value approach untenable. The business’ true value is in its Human Capital, which is unreflected (lamentably) on its books.

Most of these operating entities must be valued on a more subjective, judgmental basis, which usually involves some capitalization or discounting approach based upon the entity’s distributable income prior to any distributions made to the owner-managers.

Several prospective methods (all variations on the Net Present Value theme) are offered for your consideration, with the caveat that these methods assume [and we all know what happens when we assume] that the business being subjected to the valuation has been in operation for a period of no less than five consecutive years:

1) Simply add the most recent 5 consecutive years’ distributable income together to arrive at a value;

2) Average the most recent 3 consecutive years’ distributable income and multiply that result by five;

3) If the business has shown a pattern of consistent growth, you may consider using a weighted average method, where, for example, you’d take (say) 50% of the most recent year’s distributable income, 30% of the prior year’s income plus 20% of the earliest of the three years’ respective distributable incomes, take that weighted sum and multiply it by 3 , 4, or 5.

My inclination is to utilize the third approach because it gives effect to growth and affords the most recent income-generating period the highest weight.

Douglas E. Castle


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Perspective Is Wisdom - Large
D.E.Castle's Daily Business Advisory Wrap-Up.
Skim It. But DON'T MISS It.
This site is the Management Consultants' and Chief Reconstruction Officers' best all-industry guide to analyzing, diagnosing, devising a strategy, creating either an Action Plan or an Emergence Plan and overseeing and monitoring the successful implementation of either in order to ensure the client organization's optimal, sustainable profitability. These plans are always made scalable to accommodate the size and needs of the client, whether it is fast-growing young company with an aggressive and ambitious agenda, or whether it is an older, larger, well-established business which is experiencing problems or which is at a crucial decision making point in its evolution as an entity, and which requires sound advice (and often implementation oversight and assertive "hands-on" assistance in the form of a powerful third-party representative agent or a an expert in the art of negotiation as its appointed "point person") regarding its next steps. In the alternative, Douglas E. Castle is expert at helping fast-track, rapidly emerging companies to growth through acquisitions, mergers, licensing, branding and both domestic and international strategic joint ventures to access better, more efficient supply chain sourcing and to open up wider global markets to dramatically increase the scope of possible new revenue opportunities.


What Is Your Burn Rate?

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Burn Notice - Capital Burn Rate Computation - Business Life Expectancy Calculation - Douglas E. Castle

KNOW YOUR COMPANY’S CAPITAL BURN RATE

“It is imperative that your business be operated in accordance with a realistic budget that provides for coverage, in full, of your monthly capital ‘burn rate’.”Douglas E. Castle

The basic definition of Burn Rate (from the ever-notable and perpetually-edited Wikipedia) is as set forth below:

Burn rate is a synonymous term for negative cash flow. It is a measure for how fast a company will use up its shareholder capital. If the shareholder capital is exhausted, the company will either have to start making a profit, find additional funding, or close down.

The term came into common use during the dot-com era when many start-up companies went through several stages of funding before emerging into profitability and positive cash flows and thus becoming self-sustainable (or, as for the majority, failing to find additional funding and sustainable business models and thus going bankrupt). In between funding events, burn rate becomes an important management measure, since together with the available funds, it provides a time measure to when the next funding event needs to take place.

Some entrepreneurs and investors say that part of the reasons behind the dot-com bust was the unsound management and financial investor practices to keep the burn rate up, taking it as a proxy for how fast the start-up company was acquiring a customer base.

The term burn rate can also refer to how quickly individuals spend their money, particularly their discretionary income. For example, Mackenzie Investments commissioned a test to gauge the spending and saving behavior of Canadians to determine if they are “Overspenders.”

Aside from financing, the term burn rate is also used in project management to determine the rate at which hours (allocated to a project) are being used, to identify when work is going out of scope, or when efficiencies are being lost. Simply put, the burn rate of any project is the rate at which the project budget is being burned (spent).

In earned value management, burn rate is calculated via the formula, 1/CPI, where CPI stands for Cost Performance Index, which is equal to Earned Value / Actual Cost.

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Perhaps a better working business definition of “Burn Rate” can be found in the august annals of Investopedia, an excellent resource for business definitions:

DEFINITION of ‘Burn Rate’

The rate at which a new company uses up its venture capital to finance overhead before generating positive cash flow from operations. In other words, it’s a measure of negative cash flow.

INVESTOPEDIA EXPLAINS ‘Burn Rate’

Burn rate is usually quoted in terms of cash spent per month. For example, a burn rate of 1 million would mean the company is spending 1 million per month. When the burn rate begins to exceed forecasts, or revenue fails to meet expectations, the usual recourse is to reduce the burn rate (which, in most companies, means reducing staff).

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Sadly, neither of these protracted and elaborate definitions show us the true utility for knowing your company’s burn rate. According to the Douglas E. Castle explanation, “Burn Rate” means at least two different things and has several highly useful computations attached to it.

Firstly, your company’s Maximum Capital Burn Rate is the amount of money which you have available to spend per month over a given time frame in order to accomplish financial self-sufficiency or some other objective.

The perfect example would be in the case of a newly capitalized enterprise that had acquired $1,000,000.00 [this number was chosen arbitrarily] and had establish an 18-month time frame in order to be actively engaged in commerce at a profit with its new product. In this case, the Capital Burn Rate would be equal to the capital infused, divided by 18 months, or a Capital Burn Rate (actually “Maximum Capital Burn Rate”) of $55,555.56 per month.

Looking at this same situation in reverse, suppose the company’s management knew that it required $30,000.00 per month in order to sustain itself. It could then calculate its Capital Life Expectancy by dividing $1,000,000.00 by $30,000.00, or 33.33 months, after which the capital would have run out.

Secondly, your company’s Operating Burn Rate is simply the monthly fixed costs (in the aggregate) required in order to keep the company operating without incurring a loss. If your Operating Burn Rate ( based upon experience) were $20,000.00 per month and your company’s liquidity were a declining $1,000,000.00, your company’s Operating Life Expectancy would be $1,000,000.00 divided by $20,000.00, or 50 months.

The only way to reduce Burn Rate is to reduce or eliminate unproductive fixed costs.

Douglas E. Castle

Tags, Labels, Keywords, Categories And Search Terms For This Article:
Maximum Capital Burn Rate, Operating Burn Rate, Operating Life Expectancy, Business, Finance, Capitalization, Fixed Costs, Breakeven Analysis, Douglas E. Castle

NOTE: THE INFORMATION CONTAINED IN THIS ARTICLE SHOULD NOT BE CONSTRUED BY THE READER AS BEING LEGAL, FINANCIAL, TAX, ACCOUNTING, ECONOMIC OR INVESTMENT ADVICE. NO OFFERING OF SECURITIES OR OTHER INVESTMENT INTERESTS OF ANY TYPE IN ANY ENTITY IS MADE HEREBY, NOR IS A SOLICITATION FOR THE PURCHASE OF SECURITIES OR OTHER INVESTMENT INTERESTS OF ANY TYPE IN ANY ENTITY MADE HEREBY. THIS ARTICLE IS INTENDED FOR GENERAL INFORMATIONAL PURPOSES ONLY AND REPRESENTS THE VIEW OF THE AUTHOR ONLY.

THIS ARTICLE IS COPYRIGHT 2014 BY DOUGLAS E. CASTLE, WITH ALL RIGHTS RESERVED. ANY REPRODUCTION, TRANSMITTAL OR DISTRIBUTION OF THIS ARTICLE, EITHER IN WHOLE OR PART, IS UNAUTHORIZED AND MAY BE UNLAWFUL, UNLESS FULL ATTRIBUTION IS GIVEN TO THE AUTHOR AND ALL IMAGES AND LINKS IN THE ARTICLE REMAIN INCLUDED AND “LIVE.”


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Financial Guarantees, Sureties And Collateral

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FINANCIAL GUARANTEES, SURETIES AND COLLATERAL By: Douglas E. Castle

Obligees in a business relationship (such as contractors, subcontractors and sometimes mere payers) are frequently called upon by obligors (the parties for whom they are rendering a service, even if that service is merely making payment) to enhance or further bolster the likelihood that they will perform by bringing in either a third-party guarantee or by assigning the rights to some supplemental collateral (assets which can be liquidated in the unfortunate event that the contractor, payer or other obligor is unable to either perform or pay in full on a timely basis.

In a difficult economy, small- to medium-sized businesses are being called upon to provide these assurances by those parties hiring them or financing them. The tools or arrangements that are utilized to fulfill that need for additional “comfort” are financial guarantees (issued by financially strong third parties), surety bonds and supplemental collateral, which latter may be in the form of a lien on real estate, a hypothecation of marketable securities or any other assets which are not related to or involved in the subject transaction. These are, candidly, easier to obtain for smaller transactions (and newer or smaller companies) than are surety bonds or financial guarantees.

A very select and limited group of companies provide any of these hedges against an obligor’s failure, but any one of these “enhancements” could be the difference between obtaining business or being left out.

Following is a brief treatise on financial guarantees and surety bonds:

Definition: A non-cancellable indemnity bond, backed by an insurance company, which guarantees that principal and interest will be paid in compliance with the underlying contractual agreement or promissory note. Financial guarantee bonds are used by debt issuers as a way of attracting investors. The guarantee provides said investors with an additional level of security that the investment will be repaid/obligation will be fulfilled in the event that the securities issuer is unable to do so. The bond may benefit the principal by enhancing the principal’s creditworthiness thereby lowering the cost of financing. The guarantee “wraps” the security/promissory note with the insurer’s indemnity. Because the bond represents an UNCONDITIONAL GUARANTEE of compliance/repayment, a preferred interest rate is often offered.

There are three types of ‘financial guarantee bonds’. The first category is small “finite” financial guarantee. These are essentially performance bonds with a payment guarantee

element. They may look like license/permit bonds on their face. The bonds often have a small penalty (denomination) and are underwritten like standard surety bonds, with extra emphasis on the principal’s (applicant’s) liquidity and the insurer’s ability to recover any loss paid. Examples are lease bonds and energy broker obligations. The second category is bonding of structured finance, and the third public finance.

Bond denominations within these latter two categories can be enormous. As a result of severe losses in the financial guarantee sphere New York State passed the ‘ Appleton Law’ and quickly other insurance regulators’ policies regarding financial guarantee followed suit with administrative regulations restricting financial guarantee to only MONOLINE insurers. In the U.S. market, there are very few participants. AMBAC, Assured Guarantee, CIFG, Financial Guarantee Insurance Company, Radian, RAM Reinsurance, and Syncora Guarantee carry the majority of this market. These companies specialize in the selection of financial guarantee risks and the ongoing surveillance of their principals.

With some exceptions, financial guarantee insurers DO NOT PARTICIPATE IN PRIVATE, COMMERCIAL TRANSACTIONS. If you are engaging in a person-to- person or business-to-business contract and you seek to enhance your position with a financial guarantee, you WILL NOT OBTAIN A FINANCIAL GUARANTEE INSTRUMENT THROUGH STANDARD FINANCIAL GUARANTEE MARKETS.

Your only alternative is to approach a captive or specialty insurer based outside of the regulatory jurisdiction of the United States where carriers are not hampered by mono- line restrictions. Additionally, the few markets that will entertain private financial guarantee severely limit their exposure on each risk selected.

Financial guarantees for non-government issued securities, or asset-backed securities with very little worth DO NOT EXIST! If you are seeking a guarantee in the hundreds of millions of dollars, I recommend that you do not waste your time. You will not find one. Further, private financial guarantees are written with FULL COLLATERAL SECURITY. Financial guarantee insurers are not interested in promises of indemnity based on the speculation that your transaction, that your proposed project, will be successful, or on the ongoing profitability of your operation.

Financial guarantee bonds are considered to be a much higher risk than standard surety and fidelity products, therefore my due diligence must include a review of the proposed contract, the solvency and identity of the indemnitors, and the collateral that you wish to deposit to support the bond. Premiums are generally fifteen percent (15%) on face value per annum for those bonds up to one million, and ten percent (10%) on face value for those bonds in excess of one million dollars. Collateral security in the form of cash, letters of credit, or highly rated debt instruments (i.e., U.S. Treasury issues, notes, bills, warrants, and highly stable, publicly traded stock or bond issues) will be credited at one hundred percent (100%) of current market value. Unacceptable forms of collateral are REAL PROPERTY (although real estate might be considered by the obligee or lender to supplement or supplant a bond or other guaratnee in certain transactions) and ‘BLOCKED FUNDS LETTERS’.

And now a brief word about surety or financial guarantee bond “Ratings.”

When I receive requests for information about, or regarding the procurement of financial guarantee bonds, I am invariably asked about the carrier’s “rating.” To my knowledge, there are only three financial guarantee insurers with an A.M. Best rating which operate in the United States. Two of those entities are absolutely unwilling to write bonds for private contracts, one will consider them. The former two will only issue financial guarantee bonds to municipalities that collateralize the obligation with bonds or other instruments issued by that municipality, leaving only the third as a “rated” carrier from whom I receive authority.

Given the severe restrictions of financial guarantee to mono-line insurers, carriers that wish to engage in financial guarantee business in addition to other insurance lines are often forced to move to a domicile without those restrictions. Bermuda, Seychelles, the British Virgin Islands, and the Dominican Republic are currently the choice destinations for offshore captives.

There is no ‘automatic’ rating system for non-U.S. admitted carriers. In order to obtain an A.M. Best rating an insurer must ordinarily have certain ‘seasoning’ minimums during which time they are under market surveillance. The carrier’s financial statements and books must be open to the rating agency. These requirements cause problems for offshore captives.

First, by entry (admission) into the U.S. market, a carrier subjects itself to U.S. taxes, precisely one of the reasons for which insurers DO NOT enter. Second, not all insurers wish to share their financial statements with a market surveillance group. So, although I may be able to pair a principal with an A.M. Best rated carrier, you will have a great deal of difficulty identifying any other “rated” entity that will write these undertakings. Unrated carriers WILL provide audited financial statements demonstrating their solvency, and their current certificate(s) of authority.

I hope that my information is helpful in understanding this type of instrument. Please keep in mind that this market has few participants. They do not and will not deviate from the full collateral rule.

Call To Action: Understanding that neither I nor my management consulting companies provide or are licensed brokers for these types of guarantees or bonds (although we do frequently engage in arranging to provide for supplemental or substitute collateral [i.e., in the form of bank deposits, treasury securities, publicly-traded stock and real estate] with which to bring transactions into indirect or derivative compliance with the “full collateral” or “full coverage” rule, or to eliminate the need for surety or financial guarantee bonds entirely), please contact us at http://bit.ly/CASTLEDIRECT, and we’d be delighted to discuss your needs and your best choices for solutions. We pride ourselves on being creative – as we must when working hand-in-hand with small- to medium-sized client companies in this difficult economic climate.

Douglas E. Castle

NOTE: THE INFORMATION CONTAINED IN THIS ARTICLE SHOULD NOT BE CONSTRUED BY THE READER AS BEING LEGAL, FINANCIAL, TAX, ACCOUNTING, ECONOMIC OR INVESTMENT ADVICE. NO OFFERING OF SECURITIES OR OTHER INVESTMENT INTERESTS OF ANY TYPE IN ANY ENTITY IS MADE HEREBY, NOR IS A SOLICITATION FOR THE PURCHASE OF SECURITIES OR OTHER INVESTMENT INTERESTS OF ANY TYPE IN ANY ENTITY MADE HEREBY. THIS ARTICLE IS INTENDED FOR GENERAL INFORMATIONAL PURPOSES ONLY AND REPRESENTS THE VIEW OF THE AUTHOR ONLY.

THIS ARTICLE IS COPYRIGHT 2014 BY DOUGLAS E. CASTLE, WITH ALL RIGHTS RESERVED. ANY REPRODUCTION, TRANSMITTAL OR DISTRIBUTION OF THIS ARTICLE, EITHER IN WHOLE OR PART, IS UNAUTHORIZED AND MAY BE UNLAWFUL, UNLESS FULL ATTRIBUTION IS GIVEN TO THE AUTHOR AND ALL IMAGES AND LINKS IN THE ARTICLE REMAIN INCLUDED AND “LIVE.”

http://www.LinkedIn.com/in/douglascastle

http://DouglasECastleBlog.com

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The Rule Of 72

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THE RULE OF 72

By: Douglas E. Castle

=>A Method Of Estimating How Long It Will Take (In Years) To Double Your Money Using Compound Interest At A Given Rate.

=> A Method Of Estimating At What Rate Of Compound Interest It Will Take (In A Whole Number Percentage) To Double Your Money In A Given Number Of Years.

In finance, the rule of 72, the rule of 70 and the rule of 69 are methods for estimating an investment’s doubling time. The rule number (e.g., 72) is divided by the interest percentage per period to obtain the approximate number of periods (usually years) required for doubling. Although scientific calculators and spreadsheet programs have functions to find the accurate doubling time, the rules are useful for mental calculations and when only a basic calculator is available.

These rules apply to exponential growth and are therefore used for compound interest as opposed to simple interest calculations. They can also be used for decay to obtain a halving time. The choice of number is mostly a matter of preference, 69 is more accurate for continuous compounding, while 72 works well in common interest situations and is more easily divisible. There are a number of variations to the rules that improve accuracy. For periodic compounding, the exact doubling time for an interest rate of r per period is

,

where T is the number of periods required. The formula above can be used for more than calculating the doubling time. If you want to know the tripling time, for example, simply replace the constant 2 in the numerator with 3. As another example, if you want to know the number of periods it takes for the initial value to rise by 50%, replace the constant 2 with 1.5.

You can amaze your friends and colleagues by doing compound interest computations in your head (or on a napkin, if you require one).

For example, the amount of time that is required to double your investment at a compound interest rate of 4% would be 72/4, or 18 years, while the time required to double your investment at a rate of 8% would be 72/8, or 9 years.

As another example, the rate of compound interest required to double your money in 5 years would be 72/5, or 14.4%, while the rate of compound interest required to double your money in 10 years would be 72/10, or 7.2% per year.

It’s a very good system for quick and dirty estimates of time and compound interest. Use it, and enjoy it.

 

Douglas E. Castle

 

Labels, Tags, Keywords, Categories And Search Terms For This Article: Rule of 72, computations, investments, ROI, compound interest, doubling money, The Braintenance Blog, Douglas E. Castle, math shortcuts, financial calculations, Douglas E. Castle Blog, Rule of 69, Rule of 70, Rules of thumb, capital recovery, the Payback Method.

 

NOTE: THE INFORMATION CONTAINED IN THIS ARTICLE SHOULD NOT BE CONSTRUED BY THE READER AS BEING LEGAL, FINANCIAL, TAX, ACCOUNTING, ECONOMIC OR INVESTMENT ADVICE. NO OFFERING OF SECURITIES OR OTHER INVESTMENT INTERESTS OF ANY TYPE IN ANY ENTITY IS MADE HEREBY, NOR IS A SOLICITATION FOR THE PURCHASE OF SECURITIES OR OTHER INVESTMENT INTERESTS OF ANY TYPE IN ANY ENTITY MADE HEREBY. THIS ARTICLE IS INTENDED FOR GENERAL INFORMATIONAL PURPOSES ONLY AND REPRESENTS THE VIEW OF THE AUTHOR ONLY.

THIS ARTICLE IS COPYRIGHT 2014 BY DOUGLAS E. CASTLE, WITH ALL RIGHTS RESERVED. ANY REPRODUCTION, TRANSMITTAL OR DISTRIBUTION OF THIS ARTICLE, EITHER IN WHOLE OR PART, IS UNAUTHORIZED AND MAY BE UNLAWFUL, UNLESS FULL ATTRIBUTION IS GIVEN TO THE AUTHOR AND ALL IMAGES AND LINKS IN THE ARTICLE REMAIN INCLUDED AND “LIVE.”


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International Business Update: Wiring Funds And Banking

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Banking Is Becoming More Challenging In A World Aflame

International Business Update: Wiring Funds And Banking

If you are either conducting business internationally or are contemplating conducting any type of business which may require international electronic or SWIFT transfers of funds (i.e., funds transfers inbound or outbound via wire) the current terrorist threat levels are already creating additional diligence and reporting on the part of depositary institutions, as certainly as it will now take you longer to go through airport security clearance protocol on any international flight due to the prevalance of consciousness relating to possible terrorist or Ebola virus-related problems throughout the world.

Following are several suggestions to provide your banker, or your recipient’s banker – as well as the host of regulators to which they now answerable – with additional comfort regarding the nature of your transactions, business and funds. While you may see these steps as “overkill,” rest assured that they are not, and that they will reduce the likelihood of any holds or restrictions on your funds. Again, these are not legally mandated, but are just an extra step of precaution:

  1. Do not, under any circumstances, accept any inbound transfers, or make any outbound transfers by wire (or by check, for that matter) to businesses or other organizations located in any of the prohibited jurisdictions on US Ex-Im Bank’s most recent publication of the Country Limitation Schedule (a link to which which follows for the purposes of example) or which happens to be on the Department Of The Secretary Of State’s “Watchlist” (a link to which follows for the purposes of example) ;

  2. Pre-advise your bank, via email to your account officer or manager, if you are anticipating any transfer into or out of your account in any amount in excess of $1.0 million US;

  3. Have any transferor execute the following undertaking [or one in a format suggested by your legal counsel] in a signed writing and either fax or email the same to your banker (in the form of a PDF attachment) with your own covering letter to accompany it: “ _________________ is transferring funds in the amount of _____________________ to ________________ [recipient name] via SWIFT [or even via check, if you’d like to take that extra precaution when you are accepting a check drawn on a foreign bank in payment for goods or services]. This transaction is made using clean, cleared funds of non-criminal origin, and is being transferred in compliance with applicable laws; further, these funds are free of all liens, taxes, encumbrances and other claims of any sort, and are being conveyed to be utilized for legal purposes.”

The above steps will help to keep both you and your bankers in the best possible standing. Should you wish to view Ex-Im Bank’s latest updated Country Limitation Schedule (CLS), go to http://www.exim.gov/tools/countrylimitationschedule/index.cfm.

Should you wish to find out if the country with which you are considering doing business is “watchlisted” by either the Department Of State or the Department Of Homeland Security, go to either http://www.state.gov/ or http://www.dhs.gov/ respectively. Both websites offer you telephone numbers to contact helpful civil servants to answer any of your questions.

Douglas E. Castle

NOTE: THE INFORMATION CONTAINED IN THIS ARTICLE SHOULD NOT BE CONSTRUED BY THE READER AS BEING LEGAL, FINANCIAL, TAX, ACCOUNTING, ECONOMIC OR INVESTMENT ADVICE. NO OFFERING OF SECURITIES OR OTHER INVESTMENT INTERESTS OF ANY TYPE IN ANY ENTITY IS MADE HEREBY, NOR IS A SOLICITATION FOR THE PURCHASE OF SECURITIES OR OTHER INVESTMENT INTERESTS OF ANY TYPE IN ANY ENTITY MADE HEREBY. THIS ARTICLE IS INTENDED FOR GENERAL INFORMATIONAL PURPOSES ONLY AND REPRESENTS THE VIEW OF THE AUTHOR ONLY.

THIS ARTICLE IS COPYRIGHT 2014 BY DOUGLAS E. CASTLE, WITH ALL RIGHTS RESERVED. ANY REPRODUCTION, TRANSMITTAL OR DISTRIBUTION OF THIS ARTICLE, EITHER IN WHOLE OR PART, IS UNAUTHORIZED AND MAY BE UNLAWFUL, UNLESS FULL ATTRIBUTION IS GIVEN TO THE AUTHOR AND ALL LINKS IN THE ARTICLE REMAIN INCLUDED AND “LIVE.”


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This site is the Management Consultants' and Chief Reconstruction Officers' best all-industry guide to analyzing, diagnosing, devising a strategy, creating either an Action Plan or an Emergence Plan and overseeing and monitoring the successful implementation of either in order to ensure the client organization's optimal, sustainable profitability. These plans are always made scalable to accommodate the size and needs of the client, whether it is fast-growing young company with an aggressive and ambitious agenda, or whether it is an older, larger, well-established business which is experiencing problems or which is at a crucial decision making point in its evolution as an entity, and which requires sound advice (and often implementation oversight and assertive "hands-on" assistance in the form of a powerful third-party representative agent or a an expert in the art of negotiation as its appointed "point person") regarding its next steps. In the alternative, Douglas E. Castle is expert at helping fast-track, rapidly emerging companies to growth through acquisitions, mergers, licensing, branding and both domestic and international strategic joint ventures to access better, more efficient supply chain sourcing and to open up wider global markets to dramatically increase the scope of possible new revenue opportunities.


U.S. Lending To Sub-Saharan Africa – New Trade Stimulus Direction

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In light of all of the horrific news concerning the ebola virus and some of the Humanitarian issues which have raised eyebrows throughout the U.S. and numerous other nations, it appears that the United States through EX-IM Bank is acknowledging the vast market potential that exists in Sub-Saharan Africa, a geographical locus of increasing Human Capital and slowly, but steadily growing consumerism. This is encouraging.

————————

Ex-Im Bank Approves Record $1.7 Billion in Financing of U.S. Exports to Sub-Saharan Africa

$3 Billion in Financing Support Pledged for U.S. Exports Over the Next 2 Years

Washington, D.C. – The Export-Import Bank of the United States (Ex-Im Bank) announced today that it has authorized a record $1.7 billion in financing to support U.S. exports to sub-Saharan Africa over the past 10 months. This record-setting surge has not only empowered U.S. small businesses to sell their products in global markets, but has also supported more than 10,000 American jobs which contribute to strengthening the U.S. economy.

The announcement was made as Ex-Im Bank Chairman and President Fred P. Hochberg participated in the U.S.-Africa Leaders Summit convened by President Barack Obama this week in Washington D.C. The summit has drawn about 50 heads of state, ministers, and business leaders from across the African continent.

“Ex-Im Bank is firmly committed to equipping U.S. exporters to realize the vast economic opportunities emerging throughout sub-Saharan Africa, which is home to seven out of 10 of the world’s fastest-growing markets,” said Ex-Im Bank Chairman and President Fred P. Hochberg. “Each transaction the Bank supports creates jobs for local U.S. businesses and strengthens our relationship with a region that has a strong prospect for long-term economic growth.”

Ex-Im also announced that it will pledge $3 billion in financing to support U.S exports to sub-Saharan Africa over the next two fiscal years. The Bank also recently signed a memorandum of understanding (MOU) with Angola to strengthen collaboration on the financing of American-made exports to Angola.

Recent Ex-Im Bank success stories in sub-Saharan Africa:

Ex-Im approved a loan guarantee for $17 million to support long-term financing by the West African Development Bank (BOAD) for the Azito Power project in Cote D’Ivoire. Two-thirds of the population of Sub-Saharan Africa lacks electricity; by strengthening their power capacity, however, their economies will be well-positioned for growth. Financing for steam turbines used in the Azito Power project will support 40 manufacturing and engineering jobs in Schenectady, New York, and Bangor, Maine.

Three Louisana small businesses benefit from Ex-Im’s $43 million financing of a liftboat destined for Nigeria. The “Bellator” liftboat is a self-propelled vessel, 150-foot long by 118-foot wide, that lifts and suspends equipment and personnel up to the level of an offshore drilling platform. About 300 employees of C.S. Liftboats, Inc., of Abbeville, Louisiana, together with Gulf Island Fabrications of Houma, Louisiana, will construct the high-tech vessel. The Nigerian buyer also contracted for prefabricated liftboat-mounted modules for housing workers; these are built by Fiberglass Unlimited Inc. of Raceland, Louisiana. This is Nigeria’s first purchase of a new, American-made liftboat system.

Pennsylvania employees of GE Transportation will benefit from the Bank-supported export of GE’s locomotives with Pennsylvania-made engines and components to Transnet in South Africa. In its recent transaction, Ex-Im Bank authorized a $563.5 million loan guarantee to support financing for the sale of 293 locomotives being manufactured by GE Transportation, which will support an estimated 2,500 U.S. jobs.

—————————–

Douglas E. Castle


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This site is the Management Consultants' and Chief Reconstruction Officers' best all-industry guide to analyzing, diagnosing, devising a strategy, creating either an Action Plan or an Emergence Plan and overseeing and monitoring the successful implementation of either in order to ensure the client organization's optimal, sustainable profitability. These plans are always made scalable to accommodate the size and needs of the client, whether it is fast-growing young company with an aggressive and ambitious agenda, or whether it is an older, larger, well-established business which is experiencing problems or which is at a crucial decision making point in its evolution as an entity, and which requires sound advice (and often implementation oversight and assertive "hands-on" assistance in the form of a powerful third-party representative agent or a an expert in the art of negotiation as its appointed "point person") regarding its next steps. In the alternative, Douglas E. Castle is expert at helping fast-track, rapidly emerging companies to growth through acquisitions, mergers, licensing, branding and both domestic and international strategic joint ventures to access better, more efficient supply chain sourcing and to open up wider global markets to dramatically increase the scope of possible new revenue opportunities.


Douglas E. Castle Business Advisory is out! Edition of 29 July 2014

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QUOTATIONS - Immortal Wisdom - WORDS - The Building Blocks Of Language - Linked Image - By Douglas E Castle














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Perspective Is Wisdom - Large
D.E.Castle's Daily Business Advisory Wrap-Up.
Skim It. But DON'T MISS It.
This site is the Management Consultants' and Chief Reconstruction Officers' best all-industry guide to analyzing, diagnosing, devising a strategy, creating either an Action Plan or an Emergence Plan and overseeing and monitoring the successful implementation of either in order to ensure the client organization's optimal, sustainable profitability. These plans are always made scalable to accommodate the size and needs of the client, whether it is fast-growing young company with an aggressive and ambitious agenda, or whether it is an older, larger, well-established business which is experiencing problems or which is at a crucial decision making point in its evolution as an entity, and which requires sound advice (and often implementation oversight and assertive "hands-on" assistance in the form of a powerful third-party representative agent or a an expert in the art of negotiation as its appointed "point person") regarding its next steps. In the alternative, Douglas E. Castle is expert at helping fast-track, rapidly emerging companies to growth through acquisitions, mergers, licensing, branding and both domestic and international strategic joint ventures to access better, more efficient supply chain sourcing and to open up wider global markets to dramatically increase the scope of possible new revenue opportunities.


Valuation For Start Up Businesses – New Model

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Valuation Step Function For A StartUp Entity - Douglas E. Castle

 
 
Establishing a valuation for a startup business is not only a challenge, but it is (on a positive note) an opportunity to be endlessly creative depending upon projections and other variables. Having said this, valuation is the primary issue, aside from survivability of the underlying business, that concerns both the promoters and the prospective investors in the startup.
 
Sadly, most entrepreneurs are clueless about the issue of company valuation and the need to have some underlying theory to support it when a prospective investor inquires. The valuation model must be established by the company’s owners or promoters immediately, before solicitation or recruitment of investors begins — and, admittedly the process is somewhat arbitrary at its very starting point, but a model constructed on logic needs to be created.
 
Established companies value themselves (assuming that they are not publicly-traded) based upon several approaches, or upon an average of the of the results yielded by several approaches. These include 1) values of comparable companies in the same industry and of approximately the same revenue size or point of revenue growth; 2) net present value of several consecutive years of either historical cash flows or projected cash flows, with the latter used far less frequently than the former, in the the interest of conservatism; 3) the cost to replace the business at its current operating level; and d) the liquidation value of the business, where the fair market value of all the assets are reduced by the amount of all liabilities and either a fairly negotiated value or a distressed value (i.e., the fire sale) in an immediate cash sale at auction.
 
None of these approaches lends itself to valuing a brand new enterprise, so alternative, creative approaches have to be designed. The only solid variables to work with are 1) an initial starting point valuation for the first investor who comes in; 2) the timing of an investor’s capital contribution, which is the order (i.e., first-in versus last-in) of that contribution — the later the investment, the higher the company’s dynamic valuation, because the perception is that later adopters are more risk-averse and not as critical to the new entity’s very survival; and 3) the amount of the investment, on the assumption that a larger investment is more valuable to the company than a smaller one, so that it should be “appreciated more” in terms of a bargained-down valuation.
 
I would propose that a combination, or multivariate formula comprised of these three variables be applied to solving the valuation issue. This could either be done with a degree of arbitrariness and instinct, or it could be done with a multivariate type of formula.
 
By way of example, if each factor could be assigned a weight (represented as the inverse of a decimal fraction), perhaps a dynamic valuation formula for a new enterprise could look like this:
 
Dynamic Valuation = Preliminary Valuation x f(order, amount).
 
In terms of result, the earliest and largest investors would be buying at a lower Dynamic Valuation than the later and smaller investors. Intuitively as well as practically, this makes a great deal of sense.
 
Douglas E. Castle


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QUOTATIONS - Immortal Wisdom - WORDS - The Building Blocks Of Language - Linked Image - By Douglas E Castle














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This Day in History


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Messy Matrix (Eh, Neo?) Of Social Media Sharing Links
View DOUGLAS E. CASTLE's profile on LinkedIn
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Contact Douglas E. Castle Follow Me on Pinterest
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This site is proudly affiliated with Global Edge International Consulting Associates, Inc. ["GEI”]
Free Subscription to The GEI Business Daily!
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***Follow GEI's Company Page On LinkedIn!

Respond To Douglas E Castle
http://bit.ly/CASTLEDIRECT

Perspective Is Wisdom - Large
D.E.Castle's Daily Business Advisory Wrap-Up.
Skim It. But DON'T MISS It.
This site is the Management Consultants' and Chief Reconstruction Officers' best all-industry guide to analyzing, diagnosing, devising a strategy, creating either an Action Plan or an Emergence Plan and overseeing and monitoring the successful implementation of either in order to ensure the client organization's optimal, sustainable profitability. These plans are always made scalable to accommodate the size and needs of the client, whether it is fast-growing young company with an aggressive and ambitious agenda, or whether it is an older, larger, well-established business which is experiencing problems or which is at a crucial decision making point in its evolution as an entity, and which requires sound advice (and often implementation oversight and assertive "hands-on" assistance in the form of a powerful third-party representative agent or a an expert in the art of negotiation as its appointed "point person") regarding its next steps. In the alternative, Douglas E. Castle is expert at helping fast-track, rapidly emerging companies to growth through acquisitions, mergers, licensing, branding and both domestic and international strategic joint ventures to access better, more efficient supply chain sourcing and to open up wider global markets to dramatically increase the scope of possible new revenue opportunities.


Venture Investors: Optimal Deal Structure

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Venture Investors have been investing more speculatively than necessary — not based upon their selected investee companies or projects — but in terms of their “all or nothing” deal structure, which usually is based upon the occurrence of an event (such as an acquisition, going public or some other exit) which provides capital recovery as well as gain, if any. While waiting for this event, the investor either doesn’t receive cash flow at all, or receives some debt service payments if the deal was structured as a loan of some sort, plus equity. Most important to note is that most investors are not truly looking at the investee’s fundamentals and inherent profitability as a free-standing entity. This not only affects the deals selected (i.e., flash versus fundamentals), but it puts the investor into an uncertain period of little or no income and limited liquidity.

I am proposing a less speculative and more liquid deal structure based upon the use of Revenue-Based Royalties as capital recovery devices (to reduce risk over time) and as a means of generating a stream of positive cash flow to the investor. And this cash flow, if sufficient, can be re-invested to maximize total portfolio return.

The method is simple. Regardless whatever the other particular details of the deal structure, add a net revenue-based royalty (as set forth in the illustration below). This approach can also have the effect of making many a less-than-glamorous early-stage enterprise look considerably more attractive. I believe it would make more money available to small businesses and middle-sized enterprises that are less than revolutionary in measuring their intellectual property or market capitalization potential.

Sample Investment Recovery Chart Template - Douglas E. Castle

This approach is much “cleaner” than profit-sharing in that it does not permit subjectivity or manipulation of the numbers. It’s simply elegant: The investor takes a look at the investee’s bank statement, multiplies the non-investment, non-loan, cleared deposits (ostensibly the proceeds from sales activity), multiplies that number by the applicable royalty percentage expressed as a decimal, and is paid appropriately.

Douglas E. Castle

 


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QUOTATIONS - Immortal Wisdom - WORDS - The Building Blocks Of Language - Linked Image - By Douglas E Castle














more Quotes

This Day in History


NOTICE









Messy Matrix (Eh, Neo?) Of Social Media Sharing Links
View DOUGLAS E. CASTLE's profile on LinkedIn
Share this page
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Contact Douglas E. Castle Follow Me on Pinterest
Follow Douglas E Castle on Quora


***************
This site is proudly affiliated with Global Edge International Consulting Associates, Inc. ["GEI”]
Free Subscription to The GEI Business Daily!
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Receive Our Free GEI RSS Feed!

***Follow GEI's Company Page On LinkedIn!

Respond To Douglas E Castle
http://bit.ly/CASTLEDIRECT

Perspective Is Wisdom - Large
D.E.Castle's Daily Business Advisory Wrap-Up.
Skim It. But DON'T MISS It.
This site is the Management Consultants' and Chief Reconstruction Officers' best all-industry guide to analyzing, diagnosing, devising a strategy, creating either an Action Plan or an Emergence Plan and overseeing and monitoring the successful implementation of either in order to ensure the client organization's optimal, sustainable profitability. These plans are always made scalable to accommodate the size and needs of the client, whether it is fast-growing young company with an aggressive and ambitious agenda, or whether it is an older, larger, well-established business which is experiencing problems or which is at a crucial decision making point in its evolution as an entity, and which requires sound advice (and often implementation oversight and assertive "hands-on" assistance in the form of a powerful third-party representative agent or a an expert in the art of negotiation as its appointed "point person") regarding its next steps. In the alternative, Douglas E. Castle is expert at helping fast-track, rapidly emerging companies to growth through acquisitions, mergers, licensing, branding and both domestic and international strategic joint ventures to access better, more efficient supply chain sourcing and to open up wider global markets to dramatically increase the scope of possible new revenue opportunities.