The Cost of Capital Formation

SEPTEMBER 1, 2011 BY GEORGE LOVATO JR
Recently I gave my ten thousandth explanation of why it costs money to form capital. Most entrepreneurs do not understand the process of capital formation. If it is borrowed money or an equity infusion there are a host of costs associated with capital formation. So let’s talk about the costs.
Lawyers Cost Money

The client is always responsible for the costs of capital formation. First is legal. Lawyers cost money. The client will have to have a good general corporate lawyer on hand to read and interpret contracts, loan documentation and various agreements associated with a loan transaction as well as review and assist in the preparation of due diligence documentation. Also if the transaction involves the infusion of equity then the entrepreneur will need a top flight securities attorney. These are a special breed of lawyer. If they are worth their salt they will bring capital resources to the table as well. These lawyers are a bit more expensive than the corporate lawyer. So be prepared for the bill to be larger and more extensive. However if they are good they will be well worth the cost.
Accountants Cost Money

Lenders and investors want the most up to date financial statements and also desire as much disclosure as possible. Enter the accountancy costs. Accountants also charge by the hour. Getting your most up to date financial statements prepared or for that matter a full blown audit will cost you a pretty penny. The fact is the “numbers” as we say will tell the story and are a requirement. Don’t balk at the need for the preparation of financial statements. If you need capital you are required to provide disclosure. This one of the first steps you need to take.
Professional Reports Cost Money

Appraisals, Valuation Reports and Feasibility Studies are a fact of life. Even the Need and Necessity study is now par for the course in required documentation. If it is real estate or asset based financing these reports are a must. They can get quite expensive. Third party opinion reports are now the second set of eyes on almost every transaction. The lender or investor uses them as a touchstone to test their own impressions of value and need. Appraisals are usually accompanied by a Feasibility Study or at the very least a Need and Necessity Study. Equity or convertible debt transactions now require a Valuation Report. There is less reliance on the appraisal then before. That is why you see the Feasibility Report as the second requirement to real estate documentation requests. Hold on to your wallet because these reports are costly and getting the highly experienced and recognizable firms will cost even more.
Professionals Do Not Work For Free

The due diligence process takes not only time but money. Structuring a transaction should be done by the pros. Hiring a corporate finance consultant is a must. Get your own private banker to ply his skills during this phase of the process. A surgeon does not perform surgery on himself. Therefore the entrepreneur should let the professional step in and guide this part of the process. Getting the entrepreneur ready for the dance takes time and money as well. Preparing the documentation in an acceptable format takes time and money. Presenting the deal the entrepreneur seeks costs money. Presenting to the reliable sources takes time and money. Determining the final appropriate source for financing takes time and money. Your accountants, lawyers and corporate finance consultants will all have to pitch in to make the transaction a go for the entrepreneur. Even the final documentation will need all hands on deck for review and final negotiation. This costs money. Professionals do not work for free.
There are a host of other costs such as entitlement expenses, master planning costs, forecasting and budgeting, title searches, litigation and background checks. The list really does go on and on. Suffice to say that if you do not have this money in the bank when you start the process don’t start. No one worth his salt is going to work for free of put it all on the line for the entrepreneur when the entrepreneur can make or break the entire transaction. You need money to form capital. This is not a process where everyone around the entrepreneur is expected to take all the risk when there is little to gain.
Money Begets Money

I always get a kick out of the prospect that says if you charge “upfront fees” I am not interested. First of all BHCL does not charge “upfront fees”. But after I am done explaining to the prospect the aforementioned his tone changes. It’s easy to spot the guys with just an idea looking for a free ride as opposed to the serious entrepreneur who knows what he is facing to reach for the brass ring. In short money begets money. You have to have it to get it. Be prepared. It can be very expensive. But when the end goal is reached and the entrepreneur gets the capital he needs, then he understands it has been worth every penny he has spent.

How To Raise Capital

MAY 12, 2011 BY GEORGE LOVATO JR
Not everyone is familiar with how to raise capital. There is an art as well as a science. Most entrepreneurs travel blindly down the Obstacle Course seeking capital from mostly inappropriate sources and thus wasting time. You hire a lawyer to handle matters you know little or nothing about. Your accountant is your wing man at tax time or when you need to prepare financial statements. You hire expert sales professionals when you need to move your product or service. You in essence build a team. The same goes for raising capital. You must hire the experts that know and can teach you how to play in this arena.
Do Your Due Diligence

Most recently I reviewed a website that cautioned the reader about the multitude of scammers and scoundrels called “Money Finders”. Indeed there are more good guys than bad in the industry. I have had my share of dealing with the bad guys time and again. I still can be fooled by the guy with the good story and persuasive manner. But for the most part I can spot the bad guys sooner than later. It is important to look at all aspects of the history of the person you are considering hiring to assist you. Not everyone is who they represent who they are. There are however some very good professionals in the game. You just have to do your due diligence.
Recently I had a fellow contact me saying all he needed was a loan and he would supply the collateral and he had plenty of it for other uses if needed. Well the US Treasury Bonds he was using as collateral were bogus. I found the fellow to be full of BS. The government was even on his tail as well as a host of others so take a look at this . Pay special attention to the “SR letter 02-13” link in the article. It is full of information about other scams out there.
You Need Experts

But back to the point; you need experts and a team to form capital. Your job is to run the business of the business. By spending an inordinate amount of time trying to find the right sources, pitching your request and scanning the horizon for anyone who will listen to you, your business will suffer. You need to deal with the good guys. You need team members that can assist you in attempting to accomplish your goals.
Try, Try and Try Again

And another important point. You may not be successful in raising the capital you seek. Not every capital formation project is successful. You may have a poorly structured transaction. Your timing in the market place may be ill timed. Your business may not have the capacity to borrow or the valuation of the company may be too far reaching. Albeit the team members may be able to assist you in avoiding some of these speed bumps but not every request gets filled just because you gave it your all. Sometimes it is just not meant to be. Rare but it does happen. Remember to try, try and try again. As you will see in my first book it took five tries to get to the finish line.
Find The Good Guys and Add Them to Your Team

About that website I mentioned earlier? Well I found the site to be well done. The site owner talked about how you never should pay “up-front fees” and that anyone who asked for them was a scammer. But he too had a product to sell and it was a two hour call. Unique and I would assume useful as long as the advice you received during the $149 call to be useful. At least what he was selling was advice over a very short call and not a business plan or a software package. His point is that he was giving advice and that is what I am saying in this blog. You need advisors, and good advice costs money. Sometimes you need access to contacts you do not possess. That too costs time and money. The fact is building a team takes time and money. No professional worth his salt works for free. Remember the lawyer you paid the retainer to? The same goes for the corporate finance professional that knows his way around and how to navigate the Obstacle Course. Find the good guys and add them to your team. When you are raising capital it is “People before projects!” as I say.