Equity Crowdfunding in Canada

Crowdfunding for Individuals

On May 14, 2015 British Columbia, Saskatchewan, Manitoba, Québec, New Brunswick and Nova Scotia announced early stage companies can use online portals to raise $500,000 per calendar year. With equity crowd funding, non-accredited investors will be able to invest up to $2,500 per company. In British Columbia the restriction is $1,500.  Additionally, provinces restrict the type companies seeking funding. Basically an investor with annual income and or net worth less than $100,000 can invest 5% of his net worth or maximum of $2000 in a 12-month period. If the individual investors annual income is or net worth is greater than $100,000 then the individual can investment up to 10% of his annual income. Regardless of how wealthy an individual is no one is allowed to invest more than $100,000 in a startup using an online equity crowdfunding portal. Companies raising money have to follow strict filling requirements before and after the distribution of shares.

Valuing businesses and conducting due-diligence are critical skills required for investing in small businesses. Since the investments are small, all due diligence tasks must be completed by the individual investor as it may be too difficult to hire a lawyer or accountant to assist. Investors are required to understand and acknowledge all risk and warnings associated with the investment.

Usually private equity investment has been available only to accredited high net-worth individuals and institutional investors.  With equity crowd funding individual investors can invest in startups and established small businesses looking for funding.  Private equity investments are a good way to diversify because they are not co-related to public markets. In some cases, they can even be negatively co-related to stocks and bonds. However, investing in private-equity (small companies and startups) is a high-risk asset class as the failure rate for these companies are very high. Additionally, private equity investments have limited liquidity. At the moment there are no equity crowdfunding exchanges that allow you to liquidate these investments. Individual investors should also be aware that initial investments will get diluted over time as the company they have invested in raised additional rounds of funding.

Crowdfunding for Businesses

Companies to have to do a lot of work before they can raise funds from the private market. To start with companies, need a business plan that it can share with investors. They need to provide potential investors a solid business plan that includes description of the business, financial plan, marketing plan, competitive analysis and financial statements (Balance sheet, Income statement and Cash flow statement).  The business plan is not just a funding tool, it also helps plan operations and determine the company’s valuation.

Crowdfunding equity requires businesses to incur legal fees related to private equity exemptions and standard equity financing. As soon as a company has more than 50 shareholders they automatically forfeit the private equity exemption. In order to raise funds by selling securities in Canada, businesses need to file a prospectus with the securities regulators or their province.  However, because this step can be expensive for start-ups and small businesses, the regulators have created “start-up crowdfunding exemptions” for eliminate this step.  Under the “start-up crowdfunding exemptions” a start-up is not required to file a prospectus and a funding portal is not required to register as a dealer with the securities commission.

Running a crowdfunding campaign requires significant amount of time and effort. Companies need to determine the type and characteristics  of the securities sold, number of securities sold and the price at which they will be sold (valuation).  Companies must raise the minimum amount required within 90 days of publishing the offering document on a funding portal Website. Additionally, the businesses need to have a system in place to manage large of share holders after successfully completing a crowdfunding campaign.

BuySellBusinesses.com facilitates equity crowdfunding by aggregating deals from our partners and connecting business investors with startups.

Top Ideas for Computer Related Businesses

Digital Economy

All companies require computer related services. Computer related businesses are specially well suited to people who have a technical background or are very interested in the area. Following are computer and Internet related businesses for consideration if you want to operate in this domain:

Computer Repair Service

Most people now have multiple computers including laptops, desktops and smart phones. When these computers have problems, downtime can cause significant impact to business and other users. Computer repair businesses help people by fixing their computers. Computers can be fixed remotely using virtual private networks (VPN) rather than actually going to location of the computer (house calls). Computer technicians and computer repair businesses tend to be very busy given people reliance on computers for business and personal work. Computer problems may be related to keyboards, mouse, printers, internet connection, component failures, disk failures and so on. Additionally, computer repair firms can also provide data backup services. There are several tools that allow you to back up data online and becoming affiliates for the these backup service providers can add to your revenue.

Website Design

Big and medium sized companies have well established Websites. However small companies can also benefit from online presence. Small companies have smaller budgets and Website design consultants can help these companies create and manage their Websites for a fee. Initially one can start with a few small companies and do this part-time. Developing Websites is simple with several advanced content management systems (CMS) available. CMS systems like WordPress makes it simple to develop Websites. Website designers can develop digital products like CSS themes and sell them on online market places for additional income. Additionally, Website designers can also make a mark up on hosting websites. They usually buy hosting from cloud providers like Amazon Web Services (AWS) and Microsoft Azure, but charge a markup for hosting. On the softer side, website design business allows you to be creative every day.

Internet Marketing Consultant

Internet marketing relates to promoting businesses online. It includes Search Engine Optimization (SEO), SEO experts help companies get more traffic from Google, Bing and other search engines. To be an SEO expert, you need to keep up to date with the latest changes in search engines and analyze websites to check if they implement all the best practices. This is a good business opportunity because there are millions of websites competing for maximum visibility. SEO requires copywriting skills and analytical skills. There are hundreds of websites online that teach you SEO skills. Additional benefits of this business include working from home, starting small (part-time) and scaling the business.

Blog Consulting

Blogs are discrete posts (articles) written by one or more individuals to and presented in chronological order. That is the most recent article is presented on the top sorted by date and time. It is one of the most common and powerful way to present your voice online. Many well established news sites now use the blog format to present news as it happens. There are millions of blogs online on every topic conceivable. Blogs are not necessarily written by one person. Typically there is a team supporting a blog. If you are good at writing and have time to research topics, blog consulting can be a good business. You can start this business on part-time basis and then scale the business over time to include multiple blog consultants as the market for blogging is large. Blog consulting is primarily content writing, but can also include blog setup, site customization and site hosting. The start-up costs for blog consulting is minimal. Blog sites typically make money through affiliate marketing, sponsorships and advertising. On the downside, one must be aware a blog site requires two to five thousand unique visitors per day before it can attract a sponsorship opportunities, so it requires significant internet marketing effort to get traffic.

Online Bargain Finders

Looking for bargains online requires time and knowledge of the Internet. There is an opportunity to find bargains online and re-list the bargain item on your own website. The re-listing website must sign on as an affiliate to sites where the deals are available. Your website makes commission on each sale through the affiliate relationship.

Data Entry Business

Several professions like legal and medical require significant amounts of data entry. The service includes data entry from hard copies to database (soft) format, data cleansing, legal forms, making soft copies of hand written information and several others. Data entry businesses can provide a steady source of income where the business gets paid by the hour or by the amount of data entered or transcribed into a system. Data entry services include data entry from images, PDF document indexing, Like other computer related business ideas, data – entry businesses have low startup costs and can initially be done part-time from home.

Internet Research Business

The Internet know has millions of websites and each website potentially has thousands of pages of information. Looking for information online, even with the Google and Bing search engine, is like looking for a needle in a haystack. It can take hours to compile a report. Additionally searching for information on the Web requires knowledge of internet safety.

Ink and Toner Cartridge Recycling Business

Ink and Toner cartridges are made by HP, Cannon, Epson, Lexmark, Brother and several other printer and photo copier vendors. Ink and Toner recycling business can be run part-time from home and the main skill required is the tools and ability to fill cartridges. Startup costs for the business are low between $2000 and $5000 and the return on investment (ROI) is high. Your clients can get recycled cartridges for less than 50% of the cost of a new one. Additionally, its green business because toner recycling businesses prevent millions of used cartridges from showing up in landfills.

Custom 3D Printed Products

Custom 3D printed parts have opened up a hundreds of opportunities for startups. As the cost of 3D printing comes down rapidly more and more use cases become feasible in manufacturing, health care and several other sectors. Key areas to focus on 3D printing includes mass customization, rapid proto typing, personal part fabrication and fabrication of non-standard parts.

Computer Training

Computer training businesses include training people on Windows, Office, Macintosh, Internet and other software products.

Computer Consulting

Computer consulting in Software development, Windows and Linux systems. networking and other services. Software development is perhaps the toughest area to get into because it requires computer science skills. But if you have these skills the demand for computer programmers, database administrators, computer systems analysts and software architects is large.

Negotiating a Term Sheet

The term sheet is not a legal document. It is used to negotiate the broad parameters of an investment. The actual agreement is set in several other documents including the stock purchase agreement and investor rights agreement.

Term sheets are non-binding agreement between parties involved except for certain terms that include confidentiality and no-shop provision. Most deals that get negotiated using a term sheet are finalized. Term sheets have an exit date and agreements must be signed before the expiry date.

Term sheets can be for a debt offering or equity offering. Terms common to debt offering and equity offerings include pre-money valuation, amount to be invested, post-money valuation and cap-tables. Debt-offering terms include convertible offering, fixed or indeterminate conversion price, automatic or optional conversion, assets used for security and interest rate. Interest rates are not usually negotiated if it is in a reasonable range. Anything between 3% and 8% is considered reasonable.

Equity offering terms include shares (common or preferred), liquidation preference, conversion price and valuation, automatic conversion, anti-dilution, pre-emptive rights, protective provisions, voting rights and shareholder rights.

Additional common terms in a term sheet include full legal name, type of security (debenture, common shares, and preferred shares), size of round, price per security, number of closings, number of tranches and milestones, targeted closing date, use of proceeds and expiration date.

A term sheet can be for a note deal (debt) or for an equity deal. Usually it is cheaper and quicker to do a convertible note deal because there are a lot fewer terms to negotiate and draft as compared to an equity deal. Additionally, a convertible note term sheet kicks the valuation can down the road to when the note matures. For example, in case of a convertible note deal if the investor invests in 100 thousand when the deal matures (say after 1 year) the investor will get $106 thousand worth equity at the negotiated equity price.

The convertible note puts a stop in the valuation discussion and frees up the business to go and get work done. In effect the valuation discussion is pushed to a later point in time when the business is more established. Convertible notes are only useful if it includes terms that protect the investor from runaway valuation. For example, the investor may invest $100,000 in a business at an early stage, but then if the company gets an investment in millions of dollars the original investor is completely diluted. Suddenly the investor who took the biggest risk has the lowest percentage in the company and correctly compensated for the risk. Convertible debt makes sense only if the term sheet has terms to protect the original investor investing through convertible debt.

The most negotiated terms in a term sheet are valuation, type of security, board of directors, significant financing threshold, IPO threshold, drag along threshold, anti-dilution provisions, pay-to-play and management carve-out.

The term sheet is usually served up by the investor to the entrepreneur. However, in case of a seed round or party round it may fall up to the entrepreneur to create and serve up term sheet and serve it to the investor. Both investors and entrepreneurs should take the opportunity to get legal advice before signing a term sheet.

Ideally, all inside rounds of financing should be shopped around using term sheets. Doing so facilitates a market check that helps determine the correct valuation for the business, which is the correct outcome for everyone involved. That said a term sheet may include a no-shop provision.  During due-diligence investors should be mindful of this provision because can affect the valuation of the company long-term.

Exploding terms sheets are term sheets that must be signed in a very short time. Ideally, investors should avoid exploding term sheets because it does not give them sufficient time to complete due-diligence on the company.

Business Transfer

Business transaction starts with due diligence investigation and negotiation. Usually the prospective buyer makes a written offer (Letter of Intent) that sets the broad parameters of the negotiated deal. The negotiated deal must include consensus regarding price, payment structure, price allocation and all other details that comprise the final deal.

Once all the terms of the offer are accepted by both parties a Purchase-and-Sales agreement is drawn up. The agreement must be drawn up by an attorney who specializes in commercial law possibly with the assistance of an accountant and business broker. The details of the Purchase-and-Sales agreement must be based on the accepted offer. Banks (lenders) also need the agreement signed by both parties to analyze the deal and issue loans.

PURCHASE-AND-SALE AGREEMENT (P&S)

 The Purchase-and-Sale (P&S) agreement is a contract that shows the buyer has decided to acquire the business and the seller has decided to sell the business for a certain price within a certain period of time. This document covers everything negotiated and listed in the letter of intent (term sheet).

The P&S agreement is legal and binding once it is signed by both parties.  It is the conclusion of in-debt investigation and due-diligence by the buyer and seller. At this point the seller has determined the buyer has the financial and business capability to see through the transaction. The Purchase-and-Sale agreement can be several pages with exhibits and attachments that address all the necessary points to be covered. It is important for the buyer and seller to understand the elements covered in the agreement. Listed below are a few items covered in the P&S agreement.

Buyer, Seller and Business Names Names of the business buyer, business seller and the name and location of the business.
Asset Inclusion and Exclusion List of assets included with the sale of the business.  Assets include equipment, machinery, inventory, accounts receivable (AR), brand (business name), goodwill, real estate and so on. The P&S agreement shall also list all items that must be excluded from the agreement cash and real estate.
Price The total purchase price for the business. This section must breakdown the price into its component including down payment.
Closing Date (Time frame) Closing date for the business transaction. It can take 3 to 6 months to get a commercial loan, so the closing date must be a few weeks away.
Liabilities (Accounts Payable) The business seller usually retains responsibility for Accounts Payable (AP). All current business loans must be re-paid by the seller so that the new owner has clear titles on all assets. If the buyer takes on any expenses it should be reflected in the selling price.
Accounts Receivable  Accounts Receivable (AR) that is money owed to the business is also typically retained by the seller. In some cases the AR may be sold with the business by adjusting the selling price higher. If the AR is sold with the business the seller must provide a detailed list containing amounts, counter party details and expected dates.
Payment Terms This section includes the amount of cash that will be paid on the closing day, deferred payment scheme and seller financing details.
Inventory Contains list of all inventory items included in the sale. The inventory should be counted when the agreement is created and once again just before the deal closes.
Seller Agreements This section usually includes non-compete covenant, inspection reports (federal, state and local, environmental) and other actions required by the seller such as repairs and transfer of licenses.
Taxes Taxes due should be paid by the seller before the closing date.
Escrow Agreements Escrow Agreements are created only if there is an outstanding obligation where some work needs to be done by the seller after the closing date. In this case money is held in an escrow account and released when the obligations have been satisfied.
Seller’s Representations and Warranties This one of the important parts of the agreement. It is used to ensure the seller has provided correct business information through the due-diligence process.

Business Transition

The process of buying a business includes several activities. The business buyer must search for an appropriate business, analyze the business and financial data, develop a viable offer, close the sale and transition to the new business. The business transition step is critical because after the sale is finalized the original owner may not be available to answer questions.

The business seller should start grooming the business for sale several years before actually putting up. This period is crucial because it allows the business seller to organize the following documents:

  1. Prepare financial statements for three to five years.
  2. Corporate tax returns for three to five years.
  3. Inventory value and capital expense and equipment.
  4. Customer lists and list of employees.
  5. Documents related to leases and franchise agreements.
  6. Artifacts related to transitioning the business to the new owner.

Completing all artifacts for smooth transition significantly increases the chances of a business being sold as it reduces risk of owning a business for the new owner. Some common areas both buyers and sellers must discuss include:

  1. The business seller must be clear why he is putting up the business is for sale and document the reasons. The buyer must ask this question and the business seller must provide a detailed explanation.
  2. The buyer and seller must determine the value of the business and set an asking price range. The asking price breakdown must include asset value, interest expenses, business quality, business value and goodwill. Goodwill amount is the difference between the total value of assets and the selling price.
  3. The business seller must create a marketing plan that contains the type of business, the industry the business belongs to along with trends and projections for the industry. The marketing plan must include market share, growth potential, target market and other elements. The marketing plan must include competitive analysis and rank the competition.
  4. Location of the business and the history of the location. Both parties must be clear if the business can be re-located and / or merged with another business.
  5. The seller must create a customer list. The customer is the most valuable asset in a business, so it critical for the buyer to understand the customer profile and behavior. The Buyer must evaluate any customers who account for more than 10% of the business as losing this business can significantly impact profitability.
  6. Define all products, services and document their history if they have changed over time. The business seller must document how the products or services are priced and create a list of all suppliers.
  7. The seller must also document proprietary processes or trade secrets that must be transferred to the new owner.
  8. All operational tasks related to how products and services are produced from start to finish. Buyers must gain access to payment terms of suppliers, operating manuals and handbooks and any other information that can help them understand the day-to-day operation of the business.
  9. Job descriptions and pay rates of all employees. The new owner usually has the opportunity to re-hire existing employees and review their current and future responsibilities, wages and benefits.
  10. Buyer and seller financing. Buyer financing is the ability of a new buyer to raise sufficient money to buy the business. Seller financing is the seller’s willingness to finance part of the business. The discussion on financing must include liabilities. Usually all debts are paid by the seller unless there is a mutual written agreement stating the amount of debt the new owner will take on.

All the items above are important considerations to reduce the dependency on the current owner and simplify business transition. If the owner of the business agrees to assist with transition after the sale, the decision should be included in the purchase and sale agreement. The agreement must include specific tasks that the owner will perform during the transition period and the length of time for which he will perform the tasks.

 

Why list a Business for Sale Online

Business OnlineBusiness for Sale listings used to be posted by business brokers and business owners in print media.  However, listing businesses for sale in print is rapidly declining for several reasons.

To start with space is limited and only a brief summary of business can be listed. If the user wants more information there is no mechanism for him to get it besides calling the business buyer. The print format is just not well suited for business for sale listings, which tends to be more complex and has several attributes attached to it. On BuySellBusinesses.com business sellers can list up 20 images, several videos and any number of documents. Additionally, business sellers can use deal-rooms, which allows business sellers to securely share documents with selected users only.

Print media tends to be expensive, slow with limited reach, so business brokers and business owners have to advertise in a publication for several months to get any attention. In that duration, changing the advertisement can be onerous and time consuming and because there is a physical media involved – expensive.

Online listings are confidential. Business for Sale listing on BuySellBusinesses.com can be set-up with varying levels of disclosure depending on the sellers requirement. The business seller cab decide what to include or exclude from the listing.

Finally, the most important reason print media does not work for business listings is because print readership is declining rapidly and readership not targeted. In the US, only 6% of time is spent on print media. Radio and TV, as an advertising medium, is just not suitable for business for sale listings.

MediaTime

Time Spent on Media

On the flip side, Internet and mobile account for 36% of time spent on Media. The Internet is the first place business buyer’s start the buying process and potential business buyers spend time researching and looking for businesses to buy on multiple sites. On an average, buyers can take between one to two years to complete the buying process and a large portion of the search is conducted online.

Internet traffic on http://www.buysellbusinesses.com/ is highly targeted because Google and Bing match keywords to Websites so that only relevant users are directed to the site. Dynamic nature of the Web allows business sellers to login to a site and de-list their business listing or change the content of their business listing at any time. Additionally, online sites allow business sellers to track and manage leads generated. When a potential business buyer asks for MORE information, the business seller receives the request and the lead instantly.

The ability to syndicate deals online and share business listings on social media is adding fire to the fuel for online business deals. Business deals can be syndicated through a trusted network, through email or through other business-for-sale sites.

Finally, the best part of listing online is the price. Online listings are cheaper than print media and http://www.buysellbusinesses.com/ and makes business listings even more inexpensive. Being mindful of these facts one can safely assume almost 100% business for sale listings will move online in the next few years.

Typical businesses listed online

Almost any business can be listed online, but given the semi-confidential nature of online listings it is best suited for main-street businesses (Businesses valued between $0 and $2 Million). Businesses commonly listed online include E-Commerce businesses, Health and fitness clubs, Websites, Convenience stores, Restaurants, Auto repair, Bars, Fast food franchises, Bakeries, Gas stations, Delis, Printing businesses, Pizza Delivery Businesses and several others.

Non-Financial Due-Diligence (Business Buyer)

The following are a few non-financial due-diligence considerations a business buyer must account for:

Establish Customer Concentration

An important element of business due-diligence is to determine customer concentration. Customer concentration may be defined as the percentage of revenues coming from a single customer. For example, a business may have five large customers responsible for 60% of its revenue.

Customer concentration is directly correlated with the purchase price and the cash at close component of the deal structure. Let’s say there are two similar companies with equal revenues, margins and net income. The business with lower customer concentration will demand higher price and higher cash at close as compared to a business with lower customer concentration. A business buyer should always model the business losing a few customers when ownership changes. If customer concentration is high, losing large customers when the business changes hands can hurt the business significantly.

Non-Compete Agreements

When a business changes hands the former business owner still has a relationship with all customers. This relationship becomes a critical element of the due-diligence process if the customer concentration for the business is high. It is possible that after selling a business the former owner may restart the same business in the same area. The business buyer can protect himself from such behavior through non-compete agreements. If the former business owner could be a competitive threat, the business buyer must work with his lawyer to draft a non-compete agreement and get it signed as a part of the deal.

Business Buyer Checklist

Determine Baseline Deal Structure

The buyer should determine his budget and come up with a baseline deal structure prior to shopping for a business. There are several elements that constitute a deal including cash at closing, seller financing, mezzanine financing, seller retained equity, and earn-out.

Cash at close is the actual cash that will be transferred from the business buyer to the business seller when the deal closes. Seller financing is a loan provided by the business seller to the business buyer. Mezzanine financing is a hybrid between debt (loan) and equity financing. It is a variation of debt financing where the lender has the right (option) to convert the loan to an equity interest if the company defaults on the loan. As the name suggests, Seller Retained Equity is the equity retained by the seller in the business after the owner (management) of the business changes. Once a business buyer has determined the baseline deal structure and cash on close amount he should get approved for financing before approaching a business broker or business seller.

Complete Financing

It is getting harder and harder to get credit in the current environment. Therefore most business brokers and businesses sellers require the business buyer to verify their ability to purchase a business before getting into lengthy due-diligence process.  The buyer should be clear on what the sources of financing are.  The average first time buyer is an experienced professional in the mid 40’s, so a large portion of financing may come from personal savings or home-equity. Additionally, the buyer should be clear on how much of his funds he can use for down payment. In some cases there may be an option to ask for seller financing. The buyer should be clear on the terms for seller financing before approaching the seller.

Build a Team

Purchasing a business is a complex transaction, so the business buyer should engage a business broker to assist him with the process. TheBuySellBusinessess.com website can help buyers and sellers connect, but businesses then need to engage a broker to complete the transaction. In addition to business brokers the buyer may also need to engage an attorney to evaluate the term sheet, stock purchase agreement, leases, franchise agreements etc. The buyer should engage an accountant to review the books for structure the business deal.

Business Assets

Typically, purchasing a business implies purchasing the operating assets only. That said purchasing a business can be extended to include the corporation and fixed assets. In some cases buyers may not want to purchase account receivables (AR). The buying party can include or exclude any assets in the agreement. The buyer should know upfront the industry he wants to focus and if he is in the market to buy an operating business or to buy an operating business with fixed assets.

Find a Business

There are many sources buyers can use to find a business. http://www.buysellbusinesses.com/ and similar Websites are one source. Business brokers play a crucial role in finding businesses as well.