Trident Capital LLC (dba Trident Marketing) is a leading Sales, Marketing, and Technology company focused on customer generation for major brands across the United States.  The Trident’s marketing expertise spans traditional media, online & mobile, generating thousands of calls each day. Trident relies on deep quantitative predictive analytics, which allows detailed tracking, analysis & maximizing profitability for each customer encounter.  The company is guided by a world class people with an entrepreneurial spirit who see the world not for what it is – but what it could be.  Major customers include DirecTV, ADT, HughesNet and Travel Resorts of America.

With the financial advisory support of Scale Finance, Trident has closed $6.5 million of senior debt through First Bancorp.  Steven Baldelli, Trident Marketing’s CEO observed “we operate a very complex business model, and our job was to provide clarity, simplicity, and a financially sound plan.  We are extremely pleased with the outcome and First Bank’s decision to support our strong growth”. Managing Director Gerhard Renner serves as Trident’s CFO and commented “this is a perfect example of Scale Finance’s model at work – our Chief Financial Officers leverage the expertise of our capital markets group, and work hand in hand with the entrepreneurs to ensure we present a comprehensive and compelling case to our financial partners”. 

This funding expands Trident’s balance sheet enabling the Company to capitalize on growth opportunities, expand working capital, and make capital investments.

About First Bancorp

First Bank was established in Troy, North Carolina built on a commitment to care for customers like no other bank, providing genuine community bank service and helpful solutions from local bankers who care about doing what’s right. With more than 77 years of dedicated service, that commitment has not wavered. First Bank proudly serves 29 counties in North Carolina, with locations in South Carolina and Virginia, for a total of nearly 100 full-service branches and is the fourth largest bank headquartered in North Carolina with approximately $3.2 billion in assets.

About Scale Finance

Scale Finance LLC (www.scalefinance.com) provides contract CFO services, Controller solutions, and support in raising capital, or executing M&A transactions, to entrepreneurial companies. The firm specializes in cost-effective financial reporting, budgeting & forecasting, implementing controls, complex modeling, business valuations, and other financial management, and provides strategic help for companies raising growth capital or considering M&A/recapitalization opportunities. Most of the firm’s clients are growing technology, healthcare, business services, consumer, and industrial companies at various stages of development from start-up to tens of millions in annual revenue. Scale Finance LLC has offices throughout the southeast including Charlotte, Raleigh/Durham, Greensboro, Wilmington, Washington D.C. and South Florida with a team of more than 45 professionals serving more than 100 companies throughout the region.

Source: Tien Anh Nguyen, Research & Analytics Team, OpenView

For quickly growing startup or expansion-stage software companies, raising venture capital should be cause for celebration. Champagne bottles should pop, high fives should ensue, and every stakeholder should salivate over the ways in which the business can leverage its cash infusion to scale and drive future growth.

And while most investments start that way, it isn’t long before some companies’ euphoria gives way to disaster.

Unfortunately, starting from the notorious “Webvan” of the dotcom bubble, the high tech “deadpool” is infamously littered with many examples of ventures that either had no business accepting outside capital, or had issues that couldn’t simply be solved by more money. That many startups fail is not ground breaking news, of course, because venture-backed startups are risky investments and have a very high rate of failure, by definition.

The more relevant issue is why they fail. In my experience, it happens for five simple reasons:

1. The product isn’t a must-have in the long run

A lot of nifty, trendy software startups produce nice products that appeal to early adopters. They’re good enough in the first few years, but they might not translate into mainstream appeal as the business begins to scale. And if you haven’t cornered your market or your customers can’t live without your product, then what’s the point of trying to grow bigger with outside capital?

2. The technology architecture isn’t scalable

It’s one thing to support a handful of customers early on. It’s quite another to support thousands (or millions, if you’re Facebook or Instagram) of customers. Unfortunately, far too many businesses assume that their technology can scale with their customer growth. When something inevitably goes wrong and they aren’t prepared to deal with it, that seemingly small issue can sink the entire business.

Imagine what would have happened if Instagram hadn’t been able to support the million new Android users it received in just 12 hours last April. Instead, the popular photo sharing application handled the influx seamlessly and signed a $1 billion acquisition offer with Facebook less than a week later.

3. The business model isn’t sustainable

It’s not uncommon for unprofitable companies to receive very significant outside capital investment (see: Groupon, Pinterest, and Twitter) that let them continue to operate unprofitably for a long time. And while unprofitability isn’t necessarily an issue in the startup and early growth stages, not having a profitable economic model in place for the product you plan to sell is a huge problem.

A lot of founders think that the only reason they aren’t making money is because they aren’t selling enough of their software. But if the economic model that supports the business is ultimately unprofitable, then that assumption is a fallacy. As you sell more of an unprofitable product, after all, you’ll simply be more unprofitable.

4. The senior management team is inept

For almost any business, bad management is bad management. If you haven’t assembled a forward-thinking senior management team that can set the right course for your business, then the company is doomed. Moreover, good management at one point in the company’s lifecycle can be totally inappropriate (or even bad) management at another stage in the company’s growth. So it is essential that the company’s management is always looking to upgrade itself, and be wary of complacency. Ultimately, no amount of outside capital can rectify a senior management team’s failings, as it is the senior team that decides its own fate.

5. The company doesn’t know what it wants to be

Given the right execution and strategy, almost any company can scale once they have avoided the previous four pitfalls. But what is it trying to scale to? Do you want to be a platform? Are you strategically acquiring customers in the hopes that the business will eventually be bought out by a competitor? Too few companies ask themselves what they want to be when they grow up. They lack a vision for the future and, as a result, misappropriate the capital they receive from outside investors. Before they know it, the money’s gone and their investors aren’t willing to pony up any more.

The good news? Failure doesn’t have to be a death sentence.

Twitter is a perfect example. The social network had several catastrophic outages earlier in its early development, largely because the product wasn’t scalable and the competitive landscape was stiff. But the company swallowed its pride and was quick to admit its shortcomings, digging itself out of the aforementioned pitfalls before it was buried for good.

That’s the real key to scaling, after all. Yes, raising venture capital can help you grow your company. But building a great, big business has far more to do with execution and vision. Cash should simply be used to support those two things, not as an alternative to good management and strategy.

About Scale Finance

Scale Finance LLC (www.scalefinance.com) provides contract CFO services, Controller solutions, and support in raising capital, or executing M&A transactions, to entrepreneurial companies. The firm specializes in cost-effective financial reporting, budgeting & forecasting, implementing controls, complex modeling, business valuations, and other financial management, and provides strategic help for companies raising growth capital or considering M&A/recapitalization opportunities. Most of the firm’s clients are growing technology, healthcare, business services, consumer, and industrial companies at various stages of development from start-up to tens of millions in annual revenue. Scale Finance LLC has offices throughout the southeast including Charlotte, Raleigh/Durham, Greensboro, Wilmington, Washington D.C. and South Florida with a team of more than 30 professionals serving more than 100 companies throughout the region.

Source: Michael Jacobs, Jacobs Capital and professor at UNC’s Kenan-Flagler Business School

The old adage “it’s lonely at the top” applies nowhere better than to running a private company, where CEOs make daily decisions about disciplines in which they have no background.

Having worked with more than 200 private-company owners over the past 25 years, it is my observation that the most-underutilized resource for private companies is a “real” board of directors. Owners who want to maximize the potential of a company and fully enjoy the experience of running a business need to surround themselves with a seasoned, diverse complement of business minds that meet on a regular basis.

Most business owners have complete autonomy. In fact, the primary reason many started their own company is that they don’t want anyone looking over their shoulder. However, not only is running a business too complex for any single individual, it is no fun to make decisions in a vacuum over an extended time period.

Business owners succeed because they are really good at something. It might be science, medicine, manufacturing or sales. But that “something” is rarely business itself. The Achilles heel of most business owners is that they don’t know what they don’t know.

It is not an admission of failure to acknowledge that you need help making key business decisions. In the 1980s the board of Coca-Cola, one of America’s most successful companies, was comprised mostly of marketing experts, with a sprinkling of lawyers and doctors who were buddies of the CEO. Coke’s stock had been dormant for years. Roberto Goizueta emerged from an unlikely background – head of the R&D department – to take the helm at Coke. The chemist questioned everything about the business despite its great success, and he reconstituted Coke’s board with experts who knew what he didn’t know. Over the next decade Coke stock grew 10-fold, dwarfing the S&P 500, largely the result of implementing new financial strategies his prior board had never considered. Today Emory University’s business school is named after Mr. Goizueta, because he knew what he didn’t know and built a board to supplement his skill set.

What should your board look like?

The key to constructing a successful board is to assemble a diverse set of business skills that are complementary, not redundant. You need at least one person who has significant knowledge of corporate governance. Unless there are people in the room who know what a board is supposed to do and how boards function most effectively, you will have the blind leading the blind.

You also need someone with knowledge of the specific industry and its competitive landscape.

You need an expert in finance. Most private-company CFOs are really controllers. You should have a board member that knows all aspects of the capital markets and has worked on transactions. Even if you don’t immediately need to raise equity, borrow money, make an acquisition or sell your business, some day you will.

The backgrounds of the other board members depend on your business and your personal skill set. Recruit directors whose competencies are in areas where yours are the weakest.

Except in rare instances, employees should not serve on the board. They can attend board meetings to present and discuss, but there should be times when the directors are free to discuss management issues without management (except the owner) present.

Likewise, every company should have a competent lawyer and accountant, but they should not be on the board. Public companies are prohibited from selecting their accountant and lawyer to serve on the board for a reason. They have a different role as paid advisers.

Your board should meet at least four times a year. Otherwise, directors can’t get to know the company and its management team, limiting their ability to offer insightful advice.

While it may be counter-intuitive, the best boards have even numbers of members. A board decision should never be determined by a single vote. If a solid majority of the board is not convinced a path is the right one, you shouldn’t go down it.

Your directors should receive some compensation. The amount and form depends on the size of your business, its financial resources and its stage of development. If you have the right directors, their sage advice is probably worth many times what you pay them.

Consult your board between board meetings. Directors are a resource 365 days a year.

Studies show that private companies with true boards outperform those without. What is not commonly known, though, is that business owners who have true boards of directors enjoy their jobs more—it is not so lonely at the top.

Source: Michael Jacobs is CEO of Jacobs Capital and a professor at UNC’s Kenan-Flagler Business School. He served as director of corporate finance and corporate governance policy at the U.S. Treasury Department and is the author of Short-Term America.

About Scale Finance

Scale Finance LLC (www.scalefinance.com) provides contract CFO services, Controller solutions, and support in raising capital, or executing M&A transactions, to entrepreneurial companies. The firm specializes in cost-effective financial reporting, budgeting & forecasting, implementing controls, complex modeling, business valuations, and other financial management, and provides strategic help for companies raising growth capital or considering M&A/recapitalization opportunities. Most of the firm’s clients are growing technology, healthcare, business services, consumer, and industrial companies at various stages of development from start-up to tens of millions in annual revenue. Scale Finance LLC has offices throughout the southeast including Charlotte, Raleigh/Durham, Greensboro, Wilmington, Washington D.C. and South Florida with a team of more than 30 professionals serving more than 100 companies throughout the region.

Source: Society of Actuaries, recently published study

Under the sweeping Affordable Care Act (ACA), which passed in 2010 and was upheld by the Supreme Court last year, the healthcare system in the United States will be overhauled and millions of uninsured Americans will become covered.

The ACA has numerous provisions — some that have already taken effect and some major changes scheduled to kick in next year. Among the provisions are:

• Restricting insurance companies from denying coverage, excluding individuals with pre-existing conditions, or charging more based on a person’s health status.
• Creating state health insurance exchanges that will cover uninsured individuals and those currently covered under state high-risk pools.
• Requiring large employers to offer health coverage to full-time employees or be charged a penalty.
• Imposing a tax penalty on individuals who do not buy sufficient health insurance coverage.

How will the ACA affect your individual healthcare costs — and the cost for employers providing healthcare coverage? Recently, some predictions were made in a new study published by the Society of Actuaries, a professional, educational and research organization.

The study, which focused on the individual (non-group) market, predicted that by 2017, insurance companies will have to pay an average of 32 percent more for health coverage claims on individual polices. The increased costs will come from the changes in composition of the people being covered by insurance.

Those increased costs could be passed on to certain parties in the form of higher premiums.

Other predictions from the study, titled “Cost of the Future Newly Insured under the Affordable Care Act:”

• Moving from the group market to the individual market -A significant number of people currently insured through state-sponsored high-risk pools or through the temporary Pre-Existing Condition Insurance Plan high-risk program will move into the individual market. In other words, more sick people will be covered. In states that operate a high-risk pool, the impact of these higher-cost individuals has been spread over a wider pool through approaches that vary by state.

  “Under the ACA, the impact of these members’ higher costs will be concentrated in the individual market,” the Society of Actuaries study states.

• Employer coverage - A number of people currently insured under employer-offered plans will move to the individual market, either because employers stop offering coverage or because the people perceive more value in the individual market than in their employer-provided plan. According to the Society of Actuaries research, even small shifts from the employer-provided market will have a significant effect on costs in the much smaller individual market.

• The individual market size – Currently, most people don’t buy insurance as individuals. But the size of the individual market will more than double, the study predicts, driven in part by people who are below 200 percent of the federal poverty line coming into the market. “This group of people are considered to be ‘good risks’ and are generally expected to bring down average costs. But other changes in composition of the individual market will drive average costs up,” the Society of Actuaries states.

  Specifically, shifts of currently insured people from high-risk pools, the employer market, and previously uninsured persons who must pay for individual market coverage, “will overwhelm the expected lower costs anticipated by the influx of newly-insured persons in the exchanges receiving federal benefit and premium subsidies,” according to the Society of Actuaries.

  As a result, the underlying claims cost of insurance in the individual market will increase by an average of 32 percent nationally, when compared to what it would have been without the reform law.

• State differences -The change in individual market costs will vary substantially across state lines. This can be attributed to factors including whether the state has a high-risk pool, demographic/ income differences in populations and underwriting practices.

  States that are currently low cost could see increases of up to 80 percent, while states that are now high cost could see double digit decreases.

  • Top 5 State Increases – Ohio – 81%, Wisconsin – 80%, Indiana – 68%, Maryland – 67%, Idaho – 62%
  • Top 5 State Decreases – New York – 14%, Massachusetts – 13%, Vermont – 13%, Rhode Island – 7%, New Jersey – 1%

Note: After the study was released, White House officials disputed its findings stating that it was speculative and didn’t address all financial aspects of the law. In response, a Society of Actuaries spokesperson said the study did not attempt to address all factors affecting cost increases. The goal was to look at claims — described as the “most important driver of health care premiums.”

Divorced Couple Cannot Become “Legally Separated” for Health Coverage Purposes

In a new case, a state appeals court in Alabama overturned a trial court’s move to amend a couple’s divorce decree to make them legally separated so the wife could continue to receive healthcare benefits.

Facts of the case: Robert Daniel Leverett and Debra Edmondson Leverett were divorced in 2012. They agreed that the wife, who is disabled, would continue to receive health coverage under the husband’s insurance plan through the U.S. military.

However, as a result of the divorce, the plan terminated the wife’s coverage because its eligibility rules did not allow former spouses.

At that point, the wife asked the trial court to amend the divorce decree to make the couple legally separated so she could continue to receive medical benefits. The court made the request.

The state appeals court overturned the change, stating the trial court had exceeded its discretion in substituting a judgment of legal separation for the previously entered judgment of divorce”…There was no legal basis for the trial court to frustrate the intent of the parties to be divorced simply to accommodate the wife’s desire to maintain military health-care benefits,” the court stated.(Leverett, Ala. Ct. of Civil Appeals, 2111042, 3/22/13).

 About Scale Finance

Scale Finance LLC (www.scalefinance.com) provides contract CFO services, Controller solutions, and support in raising capital, or executing M&A transactions, to entrepreneurial companies. The firm specializes in cost-effective financial reporting, budgeting & forecasting, implementing controls, complex modeling, business valuations, and other financial management, and provides strategic help for companies raising growth capital or considering M&A/recapitalization opportunities. Most of the firm’s clients are growing technology, healthcare, business services, consumer, and industrial companies at various stages of development from start-up to tens of millions in annual revenue. Scale Finance LLC has offices throughout the southeast including Charlotte, Raleigh/Durham, Greensboro, Wilmington, Washington D.C. and South Florida with a team of more than 30 professionals serving more than 100 companies throughout the region.

“Worker classification” has been a major source of disputes between taxpayers and the IRS for decades, but it seems to be an especially hot issue right now. In reaction, the IRS established the Voluntary Classification Settlement Program (VCSP) in late 2011 and recently liberalized the initiative.

Worker classification deals with whether individuals should be classified as employees or independent contractors for federal employment tax purposes. In this article, we will refer to businesses and entities that hire workers as employers (regardless of whether the workers should be classified as employees or independent contractors) and we will refer to the individuals who do the work as workers (regardless of whether they should be classified as employees or independent contractors).

Why Worker Classification Matters

When a worker is properly classified as an employee, the employer generally must withhold from the worker’s wages:

• Federal income tax (FIT), and
• The employee’s portion of the Social Security and Medicare taxes (FICA tax).

The employer must also:

• Pay its portion of the Social Security and Medicare taxes.
• Pay federal unemployment tax (FUTA).
• File federal payroll tax returns.
• Follow many burdensome IRS and Department of Labor (DOL) rules.

The employer may also have to deal with state and local income tax withholding, state unemployment and workers compensation taxes, and compliance with even more rules and regulations. Taking care of all the compliance work is costly and that is on top of the extra taxes.

Workers can be classified as employees based on various statutes, regulations, and court decisions. The IRS and DOL rules can differ from state and local rules. That said, if the IRS guidelines permit a worker to be treated as an independent contractor, the employer will usually be covered across the board.

Properly classifying a worker as an independent contractor is advantageous because the employer does not have to worry about employment tax issues or providing expensive fringe benefits such as medical insurance, retirement plans, paid sick leave, maternity leave, paid vacations, and so forth. In addition, the employer does not have to worry about providing the worker with “adequate” health coverage or paying a penalty in 2014 and beyond (pursuant to the 2010 healthcare legislation).

When an employer pays $600 or more in a year to a worker who is properly classified as independent contractor, a Form 1099-MISC must be issued to report the amount paid. That is usually the extent of the employer’s bureaucratic responsibilities.

However, if an employer treats a person who is actually an employee as an independent contractor, the employer could face significant assessments for unpaid employment taxes plus interest and penalties. The employer could also be on the hook for employee benefits that should have been provided but were not.

Voluntary Program for Improperly Classified Workers

In late 2011, the IRS opened up the Voluntary Classification Settlement Program (VCSP). The program obligates employers to reclassify the affected class, or classes, of workers as employees for future periods in exchange for paying a heavily discounted amount to cover unpaid federal employment taxes for past periods for the workers.

The discounted amount is based on 10 percent of a formula amount for the employer’s most recent prior year. For example, if 2012 is the most recent prior year, the discounted amount equals 10 percent times 10.28 percent of each affected worker’s 2012 wages up to $110,100 (the Social Security tax ceiling for 2012) plus 10 percent times 3.24 percent of any 2012 wages above $110,100. That is not a bad deal for workers that an employer knows have been misclassified.

No penalties or interest are charged for past periods, and the employer will not be subject to a federal employment tax audit for the affected class or classes of workers for prior years.

To be eligible for the VCSP, the employer must satisfy all the following requirements.

1. The workers in question must have been consistently treated as independent contractors in the past.
2. Forms 1099 must have been filed for the workers for the previous three years.
3. The employer must not currently be under an IRS audit (as explained below, this requirement has been liberalized).
4. The employer must not be under audit by the Department of Labor or a state agency with regard to worker classification issues.
5. If the employer was previously audited by the IRS or the Department of Labor with regard to worker classification issues, the employer must have complied with the audit results.

Participation Can Have Serious Side Effects

Any decision to participate in the VCSP should not be made lightly for several reasons including:

State liabilities - Participation might open an employer up to audits, taxes and penalties from state agencies.

Benefits - Workers reclassified as employees might make a claim for fringe benefits they feel they should have been receiving all along, such as inclusion in the employer’s retirement and health plans.

Future costs - Treating the affected workers as employees from now on might be an expensive proposition. In addition to owing employment taxes (federal, state, and local) from now on, your business may also face other substantial costs. These include the cost of providing employee benefits and exposure to the requirement to provide adequate health coverage or be fined, starting next year.

Important: There may be other alternatives to the VCSP that are more advantageous. Before proceeding, it is imperative for employers to consult with tax and legal professionals familiar with worker classification issues.

Liberalizations to the Original Program

Q. Are not-for-profit organizations and government entities eligible for the VCSP?

A. Yes, if all eligibility requirements are met.

In guidance issued in late 2012, the IRS liberalized some of the original VCSP requirements (IRS Announcement 2012-45).

• Employers that are under IRS audit — other than an employment tax audit — are now allowed to participate. This represents a liberalization of the third requirement listed above.
• Employers are no longer required to agree to extend the statute of limitations period for assessing federal employments taxes as part of the VCSP closing agreement. Employers were previously required to extend the period for three years for each of the first three years after the date of the closing agreement.

June 30 Deadline

In another recent move, the tax agency announced a temporary liberalization of the original VCSP deal — the so-called VCSP-TEE initiative (IRS Announcement 2012-46). Through June 30, 2013, employers that failed to file Forms 1099 in prior years for the affected class, or classes, of workers but meet the other requirements listed above can apply to participate in the VCSP-TEE. Under this initiative:

• Employers that are approved for participation must pay a larger but still-discounted amount for unpaid prior-year federal employment taxes for the affected class or class of workers than under the standard VCSP provisions and a discounted penalty for failing to file Forms 1099 for the affected class or classes of workers. Once again, that is not a bad deal for workers you know have been misclassified.
• The discounted amount for unpaid prior-year federal employment taxes is based on 25 percent of a formula amount for the employer’s most recent prior year. For example, if 2012 is the most recent prior year, the discounted amount equals 25 percent times 12.91 percent of each affected worker’s 2012 wages up to $110,100 (the Social Security tax ceiling for 2012) plus 25 percent times 5.03 percent of any 2012 wages above $110,100.
• Employers that are approved for VCSP-TEE participation will not be assessed interest or penalties on the discounted amount for unpaid prior-year federal employment taxes nor will they be exposed to a federal employment tax audit for the affected class or classes of workers.

Employers can apply to participate in VCSP or VCSP-TEE by submitting a form to the IRS. Consult with your tax adviser if you think your business might be a candidate for either of these voluntary programs.

About Scale Finance

Scale Finance LLC (www.scalefinance.com) provides contract CFO services, Controller solutions, and support in raising capital, or executing M&A transactions, to entrepreneurial companies. The firm specializes in cost-effective financial reporting, budgeting & forecasting, implementing controls, complex modeling, business valuations, and other financial management, and provides strategic help for companies raising growth capital or considering M&A/recapitalization opportunities. Most of the firm’s clients are growing technology, healthcare, business services, consumer, and industrial companies at various stages of development from start-up to tens of millions in annual revenue. Scale Finance LLC has offices throughout the southeast including Charlotte, Raleigh/Durham, Greensboro, Wilmington, Washington D.C. and South Florida with a team of more than 30 professionals serving more than 100 companies throughout the region.

If you are buying or selling a business, the transaction may involve an earnout provision. This is a contractual arrangement in which the seller receives additional payment in the future if certain financial goals are met. In other words, part of the price is contingent on the performance of the company after the sale.
 
Naturally, earnout arrangements have important tax implications for both the buyer and seller. This article focuses on the buyer side of the equation.

Depending on the circumstances, you may be able to treat an earnout transaction that’s legally considered a stock purchase under applicable state law as an asset purchase for federal income tax purposes. (The entire transaction, including the earnout, is treated this way.) This is often advantageous for the buyer but unfavorable for the seller.

When you engage in a transaction with an earnout provision, the tax rules for contingent payments come into play. A contingent payment purchase is one in which business assets or the stock that you are buying cannot be determined with certainty by the end of the tax year when the purchase takes place.

Whether you buy the assets of the target business or its stock, you receive no tax basis from contingent payment amounts until they become fixed. In addition, you may actually have to make payment in cash to become entitled to basis under the so-called economic performance rules.

At the time contingent payments are taken into account by the buyer for tax purposes, part of each payment generally must be treated as interest, which can usually be deducted currently on the buyer’s federal income tax return. If the terms of your earnout deal don’t charge an interest rate the IRS considers adequate (meaning the stated rate is too low or zero), the imputed interest rules may come into play. If so, complex calculations must be made to determine how much of each payment is treated as interest and how much is treated as principal.

The amount of each contingent payment that is treated as principal generally creates additional tax basis in the acquired assets or stock. Therefore, your tax basis gradually goes up as contingent payments are made. When the tax rules treat the transaction as an asset purchase, this “rolling” approach makes it more complicated to calculate depreciation and amortization deductions for the acquired assets. To make matters more complicated, when the so-called residual method rules apply to a transaction treated as an asset purchase (under Section 1060 of the Tax Code), the increased basis amounts from contingent payments are often allocated to intangible assets that must be amortized over 15 years (called Section 197 intangibles).

Two Other Important Tax Considerations:

1. In an asset purchase deal, how the purchase price is allocated to the assets being bought and sold can be crucial for both buyer and seller. As the buyer, you probably want to allocate as much of the price as possible to short-lived assets such as inventory and receivables. In contrast, the seller will typically want to allocate as much as possible to low-taxed capital gain assets such as land, buildings, and intangibles.

2. You should carefully consider whether you want to use an existing legal entity or a new entity to acquire the target assets or stock. This issue can involve both legal liability concerns and tax considerations.

Conclusion:  The tax (and legal) implications of buying a business under an earnout arrangement can be complicated. The terms of the earnout deal may involve better or worse tax consequences for you and the seller. Competing tax goals may lead to some necessary give and take on both sides. In many cases, the tax outcome can be healthier for you, depending on how the transaction is structured. To lock in the best results, consult with your tax pro before finalizing any transaction.

Source: BizActions

About Scale Finance

Scale Finance LLC (www.scalefinance.com) provides contract CFO services, Controller solutions, and support in raising capital, or executing M&A transactions, to entrepreneurial companies. The firm specializes in cost-effective financial reporting, budgeting & forecasting, implementing controls, complex modeling, business valuations, and other financial management, and provides strategic help for companies raising growth capital or considering M&A/recapitalization opportunities. Most of the firm’s clients are growing technology, healthcare, business services, consumer, and industrial companies at various stages of development from start-up to tens of millions in annual revenue. Scale Finance LLC has offices throughout the southeast including Charlotte, Raleigh/Durham, Greensboro, Wilmington, Washington D.C. and South Florida with a team of more than 30 professionals serving more than 100 companies throughout the region.

Source: Nick Hammerschlag, OpenView Partners

I and a number of my colleagues have spent time writing posts on what we look for in an investment opportunity. It’s probably the most frequent question we get from entrepreneurs and expansion-stage company management teams. Since I’ve already opined on how VCs assess investment opportunities in broad strokes, I thought I’d take the time to explain how we evaluate one of the more nuanced, but critically important aspects of an investment opportunity: market size.

Typically, I’ll start with a rough top-down analysis to get a quick sense of the scale of the opportunity. This can generally be gleaned from research reports from firms such as Gartner, Frost & Sullivan, Forrester, Ibis World, etc. While the accuracy of theses “market sizes” can vary wildly, they help give context/act as a sanity check for the most important part of our work, which is the “bottom-up” analysis.

Getting to an approximate “bottom-up” analysis can be done relatively simply if you have the appropriate facts or are willing to make the appropriate assumptions.

As an example, let’s say I was trying to figure out the overall market size for an imaginary company, LearnStuff.com, which sells software to higher education institutions for use by their students. An incredibly simple (but probably not sufficiently accurate) way to do this would be to find a figure for the total number of higher education institutions in the US and multiply that number by an assumed average sale price per institution. That figure is approximately 6,700, of which approximately 4,500 are degree granting. We might assume that only degree granting institutions have a need for LearnStuff.com’s solution so we’ll stick with a market of 4,500 institutions. If I then assume that, on average, LearnStuff.Com is charging $100k per institution per year, we would arrive at a market size of $450 million. Though this is helpful in understanding the market size in a “quick and dirty” fashion, it’s probably not completely accurate.

A more sophisticated approach to understanding the total market would be to evaluate the market based on LearnStuff.com’s different revenue streams (software and services/support) quantified by the number of FTE (full-time enrollments) at the underlying institutions (since most consumers of enterprise software make purchase decisions based on number of “seats” as opposed to writing checks for nebulously described services for a non-specific number of people).

If we first assume that LearnStuff.com charges $30 per FTE plus a 15% support charge, we get a blended total cost per FTE of $34.50. If we then multiply that number by the 18 million students we assume attend the 4,500 institutions in LearnStuff.com’s core market, we arrive at a total market size of roughly $621 million.

I then might try to figure out the actual addressable market and would make assumptions about the revenue dollars that LearnStuff.com could compete for (taking into account whether this was a highly competitive market), and what % they would win in competitive situations. For example, I might have reason to believe that only 40% of the market, or $249 million of revenue, was actually up for grabs to a new market entrant. Based on the information that the LearnStuff.com management team has provided to me during diligence, I know that they win 1 out of 3 contracts they bid on, so I feel comfortable making the assumption that they can take 33.3%, or $83 million of the available revenue in the market.

You can see how what appeared to be a $621 million market was quickly reduced to an $83 million opportunity in the eyes of an investor. I’m more inclined to get excited about a company whose initial investor presentation has put serious thought into their target market segment and actual addressable market, even if it’s sub $100 million. Nothing will draw more scrutiny from an investor than the magic $1 billion addressable market size!

Cornerstone Financial Partners, Inc. a wealth management firm headquartered in Cornelius NC, has closed on 3 recent wealth management firm acquisitions.  Cornerstone is pleased to announce the asset acquisition of Grey Oak Wealth Management located in Greensboro, NC – March 2013, Maralyn Henry Financial Services in Aiken, SC – September 2012, and Protegrity Wealth Management in Reidsville, NC – September 2012.  “These acquisitions allow Cornerstone to better service its expanding client base throughout the Carolinas” says Craig Rubrecht, Senior Partner of Cornerstone Financial Partners.

Scale Finance has been providing CFO and Accounting Manager Services to Cornerstone for 3 years.

Founded in 2001, Cornerstone is lead by 4 wealth management professionals with diverse and complementary backgrounds.  Combined, the partners offer over 75 years of experience and share a passion for the industry and the clients they serve.  Cornerstone is centered around managing and growing our client’s assets and offering sound financial advice while providing exceptional client service.   Brian Needleman, Senior Partner and Chief Investment Officer adds “We believe the key to successful investment management is achieving the optimal balance between enhancing returns and managing risk.”

Source: Nick Hammerschlag, OpenView Partners

Over the last year, I have found that entrepreneurs contemplating taking on expansion stage venture capital are almost universally concerned with the certainty of deal consummation after signing a term sheet. Here at OpenView, we aim to fund 100% of the companies with which we sign term sheets and complete our due diligence, but occasionally, we’ll discover something over the course of diligence that prevents us from continuing down the funding path. Several months ago, my colleague Firas Raouf opined on how to avoid getting yourself into a busted venture capital deal, so I thought I’d get a bit more specific and lay out the key components of how deals fall apart.

Revenues/Bookings are not as advertised

Occasionally, we will find that company management will either intentionally or unintentionally misrepresent the current financial state of the business. There is not much that we can do to mitigate the intentional or nefarious misrepresentation of revenues/booking information. I suppose people do this in the hopes that an investor won’t figure it out, but the odds of that are extremely low. All it does is waste a huge amount of time for both investors and company management alike and take both parties away from otherwise productive activities. Intentionally misrepresenting financial information is rather unscrupulous and leaves a really bad taste in everyone’s mouth.

Unintentional misrepresentation of financials is easier to understand but should also be avoided. This can occur when investor and management have differing definitions of what bookings are so it’s best to establish that definition at the beginning of the discussion. For example, I may think that bookings means contractually obligated revenue for a period of time and that both parties have signed said contract. You may think that bookings is defined as a verbal agreement with a contract to be signed at a future date. These are subtle differences but can have a huge impact on the way we evaluate a business. Another possibility is that deals that you had anticipated closing at the commencement of your discussion with an investor (and that you had included in your quarterly or yearly revenue numbers) end up falling through. This happens quite regularly and depending on the significance of deviation, perhaps can be worked through with your investor. I think a good rule of thumb is to be conservative with your revenue/bookings representations and to be up-front in saying that a deal has not yet officially closed etc.

Company drastically misses its numbers

This is touched on above but in case its not abundantly clear, if a company is projecting doing $X million in revenues during the quarter that we’re conducting diligence and they end up doing $0.5X, the deal can fall apart quickly. As “growth” investors, we are looking for sustained growth and a significantly “down” quarter would certainly give us pause. That being said, timing may be an issue and the revenue will simply be recognized a quarter later. We will certainly work to understand exactly what has happened and make the sensible and prudent decision.

Previously unknown litigation/legal matters

It’s best to make any current litigation, legal infractions, IRS investigations, etc. known upfront as again, the investors will always find out about them. Let us know at the on-set so we can evaluate the situation and determine if it makes sense to go forward.

Failure to release product in certain timeframe

If a company is advertising a significant product release and fails to release it in the timeframe contemplated, that is another worrisome development. That product release was likely factored into the company’s financial projections and our assessment/interest in the business. A failed product release could lead to weaker-than-anticipated financial performance.

Misrepresentation of sales pipeline/market opportunity/customer satisfaction

Generally, investors will have a decent sense of the market opportunity, sales pipeline, and customer satisfaction/opportunity prior to signing a term sheet. It is possible, however, that a company’s management has either misrepresented certain aspects of the opportunity or does not want to share certain pieces of information prior to signing a term sheet.

For example, if a company fails to introduce us to customers prior to signing a term sheet and then after signing we find out that numerous customers have serious issues with the company’s product or services, that will throw a serious wrinkle into the deal process. This can be mitigated by both providing customer introductions prior to signing a term sheet as well as relaying any key issues that customers may have had to the investor. I have also encountered situations in which a company will accurately represent its revenue/booking information, but have totally misrepresented its qualified sales pipeline. Like bookings, it’s best to ensure that both investor and company are aligned in their understanding of what “qualified sales pipeline” really means.

Bad management reference calls

As part of our standard due-diligence process, OpenView typically conducts reference calls for members of the senior management team (CEO, CFO, VP of Sales, VP of Engineering, etc.). It’s possible that something unpleasant would surface during the course of these calls. For example, if the CEO of a company has universally poor references from the references he provided, that would signal a few things: 1) The CEO isn’t the sharpest tool in the shed if he provided references that would unanimously ding him, and 2) There are probably significant issues with the CEO if numerous past employers, partners, and employees fail to paint a positive picture.

Hopefully this helps give further insight into why deals fall apart. These are by no means strict rules that investors live by (well perhaps some do) but more a compilation of elements that I have seen or heard of breaking apart deals. The bottom line is that transparency by both investor and company alike provides the best chance for a closed deal.

About Scale Finance

Scale Finance LLC (www.scalefinance.com) provides contract CFO services, Controller solutions, and support in raising capital, or executing M&A transactions, to entrepreneurial companies. The firm specializes in cost-effective financial reporting, budgeting & forecasting, implementing controls, complex modeling, business valuations, and other financial management, and provides strategic help for companies raising growth capital or considering M&A/recapitalization opportunities. Most of the firm’s clients are growing technology, healthcare, business services, consumer, and industrial companies at various stages of development from start-up to tens of millions in annual revenue. Scale Finance LLC has offices throughout the southeast including Charlotte, Raleigh/Durham, Greensboro, Wilmington, Washington D.C. and South Florida with a team of more than 30 professionals serving more than 100 companies throughout the region.

Source: Jason Lemkin, Co-Founder, EchoSign

At the enterprise level, discounting SaaS contracts is expected, not optional. If you don’t price your product right, it could severely impact your bottom line.

In many industries, developing a pricing model is relatively straightforward. You might take your product, compare it to its closest competition, consider the unique value your version adds above and beyond that competition, and factor in potential demand. From there, you can often set your list price and stick to it.

When it comes to establishing SaaS pricing models, however, things are rarely that simple.

After all, there are numerous variables and levels of deviation involved with every SaaS offering, and no two SaaS solutions — along with the economics that drive them — are ever exactly the same. As SaaS expert Jason Lemkin explains, what complicates things further is the fact that many SaaS customers expect some level of discount when they sign a long-term contract, or opt for packages with more product features or functionality.

“Naturally, most SaaS founders want their pricing structures to be transparent,” says Lemkin, who co-founded electronic signature company EchoSign and served as its CEO until the business was acquired by Adobe in 2011. “They want everyone to pay the same fair price, and they want their customers to enjoy the product. Unfortunately, it’s just not that simple.”

Why Transparency Isn’t Always an Option

Lemkin says that while transparent, rigid pricing structures tend to work early in a company’s development (or with smaller SaaS deal sizes), they often become unrealistic as annual contract value (ACV) goes up and discounting becomes expected, not a bonus.

At that point, Lemkin explains, SaaS pricing becomes a bit muddied.

Thankfully, there are some basic rules that should help companies step away from the negotiating table without losing their shirts. In a recent conversation with OpenView, Lemkin provided three tips for SaaS entrepreneurs who are looking for help with their SaaS pricing models and strategies.

1) If a SaaS purchase can go on a credit card, you don’t need to discount.

At the bottom of most SaaS markets, there’s no need to discount, Lemkin says. The reason? Transparency is the preferred model for both the customer and the vendor.

“For example, apps like Dropbox and Evernote didn’t have to worry about discounting early in their development,” Lemkin explains. “They couldn’t discount free, and even for their paying customers, the ACV of each user was so small that it wasn’t worth the time or friction for either party to haggle over price.”

2) Build a double discount into your SaaS pricing structures for larger enterprise deals. 

In larger enterprise deals, Lemkin says that discounting often isn’t an option — it’s required. In fact, with those deals, SaaS vendors typically have to provide discounts to two different parties:

• The champion that’s driving the purchase
• The procurement agencies that receive a bonus based on the discount rate they negotiate

“As much as entrepreneurs don’t like to hear this, the simple fact is that you have to build a double mark-up into your pricing when you’re selling into large enterprises,” Lemkin says. “You have to give yourself enough cushion so that those discounts don’t end up eating into your economics in both the short- and long-term.”

3) Understand when — and when not — to try to beat competing offers.

If SaaS salespeople are smart, they’ll go into every negotiation with a high pricing estimate. That way, if competition creeps in, they have room to discount the price to match (or come close to) alternative offers.

But what about when salespeople feel like they’re losing a deal and they have nothing else to offer to close it? If you allow them room to keep discounting, they’ll do it, Lemkin says. And that’s not often very good for SaaS companies in the long run.

“When you’re a smaller SaaS company, it might make sense to capitulate and close any customer that makes you a dollar,” Lemkin explains. “But as your company scales, that capitulation can wreak havoc on your economics. Larger enterprise customers can cost you more to manage, service, and retain, and the small amount of money you thought you’d make on them can go away in a hurry.”

Bottom Line: Discounting is Inevitable as SaaS Companies Scale

While every SaaS founder would love to have five-second sales conversations that center on cut-and-dry product pricing options, that’s not how most SaaS deals work — particularly as companies begin to scale.

“When you’re smaller and your focus is on smaller customers and ACV, it’s a little bit easier to set firm pricing tiers and not budge,” Lemkin says. “As you grow and you begin to deal with larger enterprises, procurement agencies, and competition, however, discounting becomes part and parcel of doing business.”

About Scale Finance

Scale Finance LLC (www.scalefinance.com) provides contract CFO services, Controller solutions, and support in raising capital, or executing M&A transactions, to entrepreneurial companies. The firm specializes in cost-effective financial reporting, budgeting & forecasting, implementing controls, complex modeling, business valuations, and other financial management, and provides strategic help for companies raising growth capital or considering M&A/recapitalization opportunities. Most of the firm’s clients are growing technology, healthcare, business services, consumer, and industrial companies at various stages of development from start-up to tens of millions in annual revenue. Scale Finance LLC has offices throughout the southeast including Charlotte, Raleigh/Durham, Greensboro, Wilmington, Washington D.C. and South Florida with a team of more than 30 professionals serving more than 100 companies throughout the region.