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.

Market Correction? Do Not Panic! This is Where We Should Be!

AUGUST 15, 2011 BY GEORGE LOVATO JR
I cannot take it anymore! The talking heads and Washington are driving me nutty! Between the two factions everyone should be jumping out of a window by now. Stop! Do not panic!!
Those of you that know me well can verify the fact that I have been saying the market was overvalued above 10,500. Put the puzzle parts together. The White House is not providing any leadership. On his best day the President is not even an “Armchair Economist”. He does not have a clue about what the Business Plan For America is. Congress as well has done a very poor job of instilling confidence not only from the American public but from foreign governments and foreign investors. Above and beyond that, the economy in in the proverbial tank. We have a government that cannot even tell the public what the true deficit is. So then why would it attempt to bump its’ head on 13,000? An overly optimistic group of traders and investors not really paying attention to the real metrics? Well it is more than likely all the above and some. Correction you ask? No this is where we should have been all along. The market has been overvalued for some time now.
We Need Organized Leadership

Europe is having its share of issues. But as far as we should be concerned, deal with our problems first then maybe move on to assisting others I say. For now we need organized leadership. We need to show the world that we are in control of our own numbers, budgets and forecasts. We need the American people to believe that the government really does know how to steer this massive economic ship. We need to have a government that promotes growth by stimulating the small business and its owners to reinvest and hire for expansion. Building businesses for growth through governmental incentives. That is the kind of boost we need. Give the incentives to the small business person I say. Let’s not put the governments’ money into beatification and highway off ramp projects. That is very short sighted. We need a Congress that stops bickering, takes off the party hat and puts on the hard hat. Look at tax incentives as capital to stimulate business growth. Thus economic growth!
We Need the Business Plan For America

I am tired of the Presidential rhetoric. I am tired of the Congressional verbosity. What we truly need is someone that has the Business Plan For America in his head and wants to put a plan of action that will put America back on the road to growth and prosperity. So Please Mr. Romney, tell us what it is. Since you are going to be the next President, share your Plan for Prosperity. We need it now more than ever. Leadership is lacking and it shows. We need to see your vision. We need to know that you have a sensible plan for business and for prosperity. We heed to see the same light at the end of this long and dark tunnel as you do.
The President has shown absolutely no knowledge of the theory of Economics. He has shown no knowledge of banking and finance. All he has chosen to do is blame the previous administration by saying “We inherited this problem and it is not ours.” Well guess what the day you took office Mr. President, it became your problem and you are, under the law, forced to take ownership of this mess. Get on with solving the problem and stop trying to tell us it is not yours.
Look For Bargains on the Stock Market

In the meantime, look for the bargains on the stock market. Buy gold! In short go in two directions at once. I have been out of the market since early last year. I bought Ford at $1.66 I sold it at the top as well as a host of others that were all bargains I might add. I have been buying silver whenever I can and gold along the way. It is time to get back in the market but only buy the undervalued bargains. The market is where it should be. That is until the economy bounces back. So there may be a little more to go to reach the absolute bottom but you are starring at it. So pay close attention to the metrics and get in only where a bargain exists.
The Government Can’t Help You But I Can

On to other matters what about money for my business you ask? Well it’s out there but it is scarce in some respects. In others it is abundant. All solid businesses can form capital. In other words all good transactions get done. There is light at the end of the tunnel and we at BHCL see it. But it takes hard work and a good business plan and solid management. Have hope, for we are going to see new leadership in Washington come the election. If this guy was one of my bankers I would have fired him by now. So Mr. Romney give us your Business Plan For America. We need to know new leadership will in fact put us all on the road to prosperity again. Meanwhile call me if I can help you with your business capital formation project! I know the government can’t help you but I can.
Disclaimer
This is not an offer to sell nor an offer to purchase securities. This is commentary and opinion. Any advice to purchase or sell any financial instruments, securities or government bonds should be sought from a licensed/registered financial advisor and or securities broker/dealer.

Stupid Business Decision

JULY 10, 2011 BY GEORGE LOVATO JR
Writing books is very much a cathartic experience for me. As you will note in The Obstacle Course it is a series of personal stories that are intended to teach the reader on a number of issues related to running a business big or small. I have just about put the Obstacle Course II in the can and I am editing a final review now for the publisher. I love writing and I can tell you it gives me great pleasure. Recently however I had another experience with a client that I feel deserves to be added to the Obstacle Course II. It involves an SBD! SBD you ask? Yes, otherwise known as a Stupid Business Decision. I asked the publisher to stop the presses so I could add this story that I hope teaches the reader about how to avoid making the SBD.
Weeks of Intense Review and Analysis

Recently I was engaged by a client to restructure the balance of his company as well as add new financing. After weeks of intense review and analysis one of the solutions was to convert some short term debt to long term debt thus improving the ratios on the balance sheet and easing the cash flow burden. Along with a few other key solutions was to significantly modify the business model for greater efficiency and profitability. The branding was very strong but at an early glance anyone could see the internal operation and the method of delivery and inventory burden were outdated and expensive. After weeks of hard work, I could see the light at the end of the tunnel and I was just about complete with the short to long term conversion solution when the client makes a stupid business decision.
Close the Business

This is a business that produces millions of dollars in sales via a very sophisticated website. The top line is very impressive but the bottom line is very weak. Hence the need to modify the business model. That part of the project was in progress. The new model integration included a host of generally accepted business practices used by almost every internet based company. I was just about to drill down and then the client decides to close the business. Yes close the business. I was stunned. I pleaded with him not to do so. But the client was tired and did not see the forest for the trees. His emotions assisted him in making a stupid business decision. After some discussion I convinced him there was another alternative. Sell the entire package. He agreed. Now I am off to sell the entire deal kit and caboodle.
Now I Have a Business to Sell

It sounds strange I know. It sounds unbelievable but it did happen. Emotions and not wanting to adapt to a new business model were the driving forces behind this decision. He was worn out and he could not buy into the new more progressive way to run his business from the bottom line rather than the top line. Many of his business, internet and operating theories were just wrong or simply outdated. His belief in these skewed ideas also lead him to the SBD. Many things would have been required to change the business model and they were all achievable but he remained resistant. He had a tremendous amount of critical mass to work from but he was simply in love with his old and outdated way of doing things. I could not convince him otherwise. Now I have a business to sell. Not the best option but surely better than just shutting it down. So if you are interested in buying an internet business with a history of producing millions of dollars call me.
How to Avoid the Stupid Business Decision

The Stupid Business Decision. It happens. And when it happens it can have devastating effects on you, your company and everyone around you. Emotions are the key fuel to this fire. How do you avoid the SBD? It is simple. Stop! Listen! And above all bring in people around you to help you fully analyze every move you make and every decision you make when you feel overwhelmed by the environment around you. Follow your gut and not your emotions. There is a very big difference. No decision you make quickly can ever be the best one.