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Senior Managing Director | The Opes Group LLC

Structuring

When some entrepreneurs want to start a new business they may call a ‘finder’ to make some sporadic calls in the hope that someone this person knows will like their idea and write the check. Others, typically with a technology based idea, may apply to an accelerator.  These programs are however quite competitive, take an equity stake, require a time commitment (away from work if you have another job) and prefer teams to single entrepreneurs. Where do you go for help if none of the above options are suitable for your particular situation?

I had a call with a single entrepreneur today. I am not at liberty to disclose the details of her business model but I’ll discuss some general details. She started off telling me that she had lined up some buyers and sellers for a product but that she needed a letter of credit to actually execute her trade. She noted that there really was no risk of profit loss because she would only ever order the product after locking in pricing with a buyer. Upon further discussion I noted that there was in fact timing/credit risk…..she could very well be required to draw on the letter of credit to pay for the product 2-3 months before receiving payment from the end buyer. What if she never received payment from that buyer…how would she mitigate that risk?

I then asked about collateral. What if a prospective buyer walked away after an order was already placed and paid for. Now she would be left with millions of dollars of product and no buyer, at least temporarily. What if the value of the product went down and she had to unwind the trade? The letter of credit provider would now be at risk and to hedge against that might probably only allow drawdowns for a fraction of the purchase price rather than for the full price. How would she meet the gap? Should we look at a line of credit from another party? Should we increase the equity raise? Following up on that thought, I asked how much equity was needed and how much was already secured. The equity ask went from $3 million to an unknown figure given the possible change in the letter of credit and the certainty around the lead investor fell from 90% to 5%. By the way, I also learned that quite a few of the internal mechanics were understood conceptually but not actually in place for closing.

Our telephone call went from an entrepreneur stating a specific need to a realization that everything was in flux and the true need was not for someone to call a few contacts to see if they had $3 million that they could spare but for someone to actually plot out a business strategy that would work for the product seller, product buyer, the letter of credit provider and investors. Yes, the investors would be drawn to the idea of trading only when profits are guaranteed but should something go awry they would need a mechanism in place to manage the collateral. Someone was needed to help structure the transaction and develop the business.  Our entrepreneur had a background in the business and did not need an accelerator. A ‘finder’ would also not be useful because he or should would not have the time or interest in evaluating the changing needs of the business as the business strategy was developed.

This is one of the many areas in which my firm, The Opes Group, adds value. We work with business owners in these ‘pre-capital raise’ situations to assess an efficient formulation for the business model prior to introducing third party funding into the mix. Our approach is unique in that we work side-by-side with the business owner as an ‘in house’ team and we approach the financing of the business as if we are the owners. This means that we invest the time to secure low cost and appropriate capital rather than accepting capital from indiscriminate sources. We are of course not limited to sole entrepreneurs or letters of credit. I will be providing several other transaction descriptions here in the next few months. Today’s conversation was however a good example of the evolution of our role in our relationship with our clients as their needs change. You may also have noticed that although we can work with this client to secure private equity financing we would be doing that in connection with evaluating other financial options and developing operating aspects of the business. We offer full service business developing consulting and thus a different approach from the typical private equity model. Please feel free to contact me at aharding@opesgroup.online if you feel that we can be of help to you.