SHARE:
Small Business Adviser
With US Group betting that sales will top $16 million this year, up from $2.5 million in 1995, funding growth is more important than ever. So this year, the company turned to the institutional investment market and sold an interest in the company for $10 million to an investor group led by J.P. Morgan Capital. In 1997, US Group hopes to take the big step and do an initial public offering (IPO). Says Scherr, "We're right on plan."
This year, a record number of Florida companies have gone public (see below, "Running With The Bulls"), driven by favorable market conditions and Wall Street's willingness to invest in fast-growth companies that don't meet the old benchmarks of multimillion dollar revenues and a track record of profits. Orlando's Autonomous Technologies Corp., for example, raised $20 million last spring even though the laser vision instruments company has no sales and lost $4.8 million in 1995. Drug research companies, Internet businesses and even some restaurants are among the businesses getting attention on Wall Street based on the promise of future performance, not on results. "It's selling the sizzle," says Biff Marshall, president and managing partner of Gray, Harris & Robinson, an Orlando law firm.
What's the appeal of raising capital through a public offering? "You generally don't have to pay it back," quips Gary M. Epstein, a shareholder with Miami's Greenberg Traurig law firm. Selling stock gives a company a higher profile in the investment community and more access to capital in the future. Company owners gain liquidity of their own investment stake in the business, and they can use stock both for acquisitions and executive compensation. On the downside, "going public" means losing an element of control of the company, pressure from investors to maintain improved earnings on a quarterly basis, and the expenses of selling stock.
Underwriting, legal, accounting and printing fees typically run 15% to 18% of the amount raised - that's more than $3 million on a $20 million offering, according to Martin A. Traber, a corporate securities lawyer with Foley & Lardner in Tampa.
Perhaps the biggest disadvantage of going public is the continuing disclosure requirements of corporate and personal information, including executive salaries and the company's competitive position, required by the U.S. Securities and Exchange Commission. "You have a life in a fishbowl," says Stan Martin, SEC reviewing partner at KPMG Peat Marwick in Fort Lauderdale.
Does your company have what it takes to perk Wall Street's interest? Martin says a key component is a proven management team with a strategy for the future. Typical companies with successful IPOs have been in business at least five years, have potential for annual revenue growth of 20% or more and, ideally, can show a record of profits.
Choose an underwriter carefully, warns Tampa financial and management consultant Gordon Tunstall. He recommends that companies evaluate an underwriter's national and regional reputation and how it plans to market the stock to institutional and retail customers. Also, Tunstall says different underwriters can put widely different valuations (next year's projected earnings multiplied by anticipated growth rate in foreseeable future) on a company. That valuation directly affects the pricing of the IPO and, in turn, the company's proceeds. It's also important to sign on with an underwriter who will support the stock after the IPO. Finally, says Tunstall, "Look for an underwriter who's excited."
Once an underwriter is selected, the IPO process takes four to six months, with adjustments for market conditions.
During the first two months, company executives, accountants and legal counsel put together the registration statement, SEC Form S-1. The offering date is generally set for about 75 days after the S-1 is filed, to allow time for the SEC to comment on the registration statement and the company to respond to comments.
The specific timing of an IPO is governed by company events and market conditions. "Good companies can go public in a bad market," says Marshall, the Orlando lawyer. "OK companies need a good market."
--
Raising Capital--Shortcuts From The SEC
The Securities and Exchange Commission (SEC) has a number of special programs to help small businesses tap into the public and private financial markets. There are simplified registration forms and alternative ways to sell securities without registering with the SEC. Some options outlined in "Q & A: Small Business and the SEC," are available on the Internet, http://www.sec.gov/sm bus/qasbsec.htm or from the Office of Small Business Policy, 202/942-2950.
Simple Registration Forms. A small business with less than $25 million in revenues in its last fiscal year can use Forms SB-1 and SB-2 if the value of the company's securities owned by the public is no more than $25 million. These forms require less disclosure than the SEC's basic registration Form S-1. Form SB-1 may be used by small businesses offering up to $10 million in securities in a fiscal year.
Form SB-2 permits the company to offer an unlimited dollar amount of securities. Only two years of audited financial statements are required, compared to three years with Form S-1, and shorter narrative descriptions of the business and executive compensation can be submitted. Also, the form can be filed with the SEC's regional office in Miami (1401 Brickell Ave., Suite 200, Miami, FL 33131; 305/536-4700) rather than in Washington.
Intrastate Offering Exemption. If a Florida company does most of its business within the state's borders and offers and sells stock only to Florida residents, the stock doesn't have to be registered with the SEC. If the stock is offered or sold to even one out-of-state purchaser, however, the exemption may be lost.
Regulation A. When a company sells less than $5 million in securities in any 12-month period, it does not have to register with the SEC. Because the company is required to file an "offering statement" that is similar to a prospectus, Regulation A offerings are often referred to as "short form" filings. Financial statements do not have to be audited, there are no quarterly or annual SEC reporting requirements unless the company has more than $5 million in assets and 500 shareholders. The overall cost of a Regulation A offering is less than an IPO.
Private Placements - Regulation D. There are three ways that companies can make private sales of securities without registering with the SEC.
Rule 504 allows the sale of up to $1 million of securities in a 12-month period. The offering may be made using a general solicitation to an unlimited number of people. Within 15 days after the first sale of securities a Form D notice must be filed with the SEC in Washington.
Rule 505 permits companies to sell up to $5 million in securities in a 12-month period.
Certain information, including audited financial statements or the company's balance sheet for the most recent fiscal year, must be provided to non-professional investors.
Rule 506 lets businesses raise an unlimited amount of money by selling securities to "sophisticated" investors - those with sufficient knowledge and experience in financial matters to evaluate the merits and risks of the investment. Within 15 days after the first sale of securities, a Form D notice must be filed with the SEC in Washington, D.C.
--
- Brian Hires
Education--Out Of The Ivory Tower
A national trend in business school curriculum is rapidly changing the philosophy of Florida's business schools. Responding to student concerns about going to work for big corporations in the era of downsizing, business schools are adding more entrepreneurial classes to their curricula focusing on how to run small businesses. "When the large companies who always hired and never laid off began laying people off, we had to sit up and pay attention," says Michael Plater, executive director of the University of Florida Center of Entrepreneurship and Innovation, which offers such courses as Venture Finance and Business Plan Formation.
"Our goal is to give them the skills, abilities and the confidence to start their own businesses," says Jerome S. Osteryoung, director of Florida State University's entrepreneurship program.
After taking one of FSU's entrepreneurial courses, finance major and senior Kevin Moss, 22, started the Door & Wall Company, making and selling apartment repair kits to Tallahassee college students. "I had always thought about starting a business. After taking the class, however, I knew what I had to do. The courses taught me how to market, how to make a financial plan, and how to establish business contacts," says Moss, adding, "It's what they don't teach you in the other classes. It really filled in all the holes."
George Solomon, director of research and special projects for the Center for Family Enterprise at George Washington University in Washington, D.C. says there are clear reasons for the responsiveness of community colleges and even universities. "There is a greater community demand to be community-oriented," Solomon says, adding that money also plays a big part. "Schools aren't going to sponsor programs that don't generate student enrollment and demand."
--
Business Incubators
Reviving East Tampa
Tampa's Life Skills Foundation, a non-profit group that teaches personal responsibility, is trying to rebuild an economically depressed area north of the city's bustling Ybor City entertainment district by converting the former Perfecto Garcia cigar factory into a "business incubator" for as many as 25 small businesses employing a total of 300 workers.
Michael Eurich, development coordinator for Life Skills, says he expects retail, service and light manufacturing businesses to take advantage of the 47,242-square-foot incubator, which will offer inexpensive lease rates and a cadre of accounting, marketing, legal and other business advisers. The building also will house a police substation, day care center and bank.
To proceed on the project, Life Skills is working to raise $500,000 from public and private sources for renovations on the structure, which is located in a federally designated enterprise zone.
Life Skills was started in 1993 by Jim Walter Jr., son of the founder of Tampa's billion-dollar construction and homebuilding company, Walter Industries. The foundation plans to create incubators in enterprise zones in Orlando, Miami, Jacksonville, St. Petersburg and Fort Lauderdale.
--
SBA Florida's Outpaces The Nation in Lending Growth
In Florida, the dollar volume of Small Business Administration (SBA)-guaranteed loans rose by 13.5% last year, more than quadruple the 3.3% increase in SBA lending nationwide. Much of the money is going to South Florida, where SBA lending grew 17.7%, to a record $283 million.
The number of SBA loans is down from 1995, however, both in Florida and the nation. Nationally, loans fell by 12.3% while in South Florida and North Florida the decrease was 4.4% and 16.2%, respectively. SBA officials attribute the decline in loan volume to a less active market for the SBA's "Low Doc," loans. Low Doc loans, which allow a streamlined application for loans up to $100,000, were very popular when first introduced in 1994.
