Does Your Company Have Adequate Capital to Throttle Up?
CEOs often feel like their company is too big to be small and too small to be big as they enter the second stage of corporate growth. At that point, capital restructuring lurks around the corner to fund the wave of growth in the next revenue zone. The “pang” from capital “hunger” starts to feel something like this:
We recently compared a client’s financial performance to over 400 competitors in their industry. Here is what we found:
Our client’s company was at the bottom of the trough, poised to throttle up the wall of growth pains. EBITDA dropped dramatically in the next revenue zone industry wide due to infrastructure and management requirements. Once they peaked over the crest at $20 million the ride would be easier, but they had to pump in capital to fuel them through the transition.
Ironically, growth can be one of the greatest illusions of corporate health. The sooner CEOs identify the wave before it crests and acquire the capital horsepower required to carry them through that dangerous transition – that my partner Doug Tatum identifies as No Man’s Land – the higher the probability that the company will survive and scale.
Sync’Em (Part III): The Amazing Power of Tandem Action
People make business plans for all sorts of reasons — to attract funding, evaluate future growth, build partnerships, or guide development. Unfortunately, the vast majority of these plans are usually out of date by the time the printer ink dries. Business moves fast: the product’s features morph, new competitors emerge, or the economic climate shifts. When these changes occur, many people just throw their business plans out the window. For a plan to be truly valuable it needs to evolve with your company and stay relevant in the face of uncertainty. Amy Gallow, Keeping Your Business Plan Flexible, Harvard Business Review
“When you think about a business plan, think about the distinction between a snapshot and a moving picture,” says William Sahlman, the Dimitri V. D’Arbeloff – Class of 1955 Professor of Business Administration at Harvard Business School and author of How to Write a Great Business Plan.
Writing a plan makes you feel in control of things you can’t actually control. Why don’t we just call plans what they really are: guesses… When you turn guesses into plans, you enter a danger zone. Plans let the past drive the future. They put blinders on you. “This is where we’re going because, well, that’s where we said we were going.” And that’s the problem: Plans are inconsistent with improvisation… You have the most information when you’re doing something, not before you’ve done it. Sometimes you need to say, “We’re going in a new direction because that’s what makes sense – today. Give up on the guesswork. Decide what you’re going to do this week, not this year. Jason Fried, author of Rework, Founder of 37signals
“This downturn has changed the way we will think about our business for many years to come,” says Steve Odland, Office Depot’s chairman and chief executive.Walt Shill, head of the North American management consulting practice for Accenture Ltd., is even more blunt: “Strategy, as we knew it, is dead,” he contends. “Corporate clients decided that increased flexibility and accelerated decision making are much more important than simply predicting the future.” Strategic Plans Lose Favor, the Wall Street Journal January 25, 2010
I spent several hours this week with the founders of a $12 million company who literally papered the circumference of their board room with a linear 5 year business plan – believing they’ve anticipated every decision and investment required to scale 10x current revenues by 2016. I’ve encountered similar CEOs over the past year who have driven their strategic stake into the ground without considering the necessity of maintaining tandem action with their inner circle so that they can remain maneuverable by focusing on the right priorities that are relevant – today!
Entrepreneurs fight a daily battle for survival. They’re immersed in a war that bombards them with a poor economy, increasing regulations and crippling taxation. Without alignment between CEO and inner circle on the right priorities they are swimming upstream against the Class 6 Niagara rapids to meet objectives. Instead of suffering through the perils of misalignment the team can DAT (Decide, Align and Track) in tandem, working with seamless synchronization on critical issues in the battle. I love this final scene from The Last of the Mohicans when Hawkeye and Chingachgook pursue their enemy Magua not as individuals, but as a single fighting unit in tandem with each others movement and strategy.
Our company has observed that tandem action requires continual assessment of internal alignment as well as a trusted decision process that forms the backbone of an effective corporate culture. When CEO and inner circle are aligned and in sync on the 3-5 top priorities for corporate growth, they can engage in the business equivalent of the “Mohican” tandem action that Hawkeye and his father achieved to defeat Magua and survive.
When tandem action occurs on a leadership team it’s an amazing and beautiful thing to behold.
How do We Fuel the Law of Accelerating Returns?
- Image via Wikipedia
Will the new Health Care Plan hurt Entrepreneurs? Listen to Stacey Blackman’s from BNET offer her observations:
Because the plan calls for businesses with over 25 employees to provide mandatory health coverage or be fined 8 percent of its payroll, McGrath believes this will not only have an ill effect on small business, but our economy as a whole. She writes:
With small business growth having led us out of most recessions in the past, get ready for this sector to add jobs far more slowly and with far greater caution than it had previously — a big blow to an economy that desperately needs a vibrant and growing small business sector.
McGrath also notes that under the plan households that make above $350,000 will face a surtax to pay for medical care. She believes that many of those taxed will be small business owners and entrepreneurs who would otherwise use that money not for luxuries, but for “working capital, inventory, marketing and other unglamorous business necessities.”
Ray Kurzweil is one of the most recognized inventors of the last 4 decades. Inc. Magazine calls him “the rightful heir to Thomas Edison”, the Wall Street Journal refers to him as “the restless genius” and Forbes, “the ultimate thinking machine.” Kurzweil made this fascinating “entrepreneurial’ statement in his futuristic work, The Singularity is Near:
It’s the economic imperative of a competitive marketplace that is the primary force driving technology forward and fueling the law of accelerating returns.
I remember reading an article in the Wall Street Journal almost twenty years ago when National Health Care first appeared on our radar. When asked about the impact on his practice, a Canadian surgeon identified that he was surviving despite having to use equipment over twenty years old.
Twenty years old? That means if you need your gallbladder removed today you would face over three weeks of recovery due to the necessity of receiving a subcostal incision across muscle in a 60 minute procedure rather than playing golf two days later after a 15 minute laparoscopic cholecystectomy.
Listen to Kurzweil: Drive Technology + Competitive Marketplace = Accelerating Returns, which produces what? Entrepreneurial incentive to act on their ideas, risk their resources on future rewards and… CREATE JOBS!
Or have your gallbladder removed the old way. I’ll set our tee time for mid-October.
An Entrepreneur Must Protect Her Fastball
- Image by cliff1066™ via Flickr
Delegating authority is a notoriously difficult undertaking for many business owners to accept, especially when it comes time to bringing in an outside CEO. In a Q & A in The New York Times, Lisa Price, founder of the beauty products company Carol’s Daughter, explains how she learned to calmly accept that an outside CEO might not be such a bad thing. Price explains that while juggling a lot of issues, it helps to put an actual dollar amount to the value of your time and then determine whether or not it is cost-effective for one person to handle every single task. “I did something as long as it made sense to me to do it,” she said. “And then, once it made sense to turn it over to someone else–either because it could get done better, or because I could spend my time making more money elsewhere–I did it.”
Inc. Magazine, A Model for Smarter Growth, August 23, 2010, Jason Del Ray
Delegation is essential to growth, no question. But when does an Entrepreneur refrain from delegating? The founder must not release the company’s most valuable asset in order to maintain momentum and growth – he or she must protect the “Fastball”. My partner Doug Tatum describes this phenomenon:
What do I mean by “Fastball”? Consider my favorite baseball ever – Nolan Ryan. Ryan is considered by many to be the greatest pitcher of all time. Batters braced themselves for almost twenty years when Ryan took the mound because they had no question what was coming – a blazing, 100 mph fastball right down the center of the strike zone. Hall of Famer, Reggie Jackson, said of Ryan’s heater – “It disappeared half way to the plate.”
Nolan Ryan built an incredible career around one thing – something he was passionate about; something he did better than anything else. All Entrepreneurs have their “fastballs” and although the company at some point must get good at what the founder does best in order to scale, it makes little sense in the first few stages of corporate growth for her to give up trips to the mound to throw her heater. It’s what she, and the company does best.
Which is More Valuable: Capital or a Crystal Ball?
What does the average Entrepreneur want most? Before you scream “More capital!” as the typical visceral response, consider the deeper implications that our Economy Heroes face concerning crucial decisions for an uncertain future. Over the past two years I’ve heard them ask the same questions time and again; seldom about money, or the lack thereof.
Most arm chair economists believe that capital is the hammer that should slam every strategic “nail”. But research with thousands of companies over the course of two decades reveals that, although adequate funding is an inevitable necessity to growth, Entrepreneurs would be better served with revelations from their company’s Corporate Crystal Ball (if they had one) than immediate Capital.
If Entrepreneurs could cup their hands around their company’s Crystal Ball, what would they want it reveal? How about the answers to these questions:
“What is the REAL condition of my company?”
“How misaligned is my leadership team on critical issues?”
“Am I building company wealth by my decisions?”
“What future landmines am I missing?”
“What is my company’s Value Proposition?”
“Do I have the right people in the right positions in order to grow to the next level?”
“Will the company make more money at higher volumes?”
“Do we have enough capital to grow?” (ok they do ask this question too)
Entrepreneurs need a Crystal Ball that is both indicative (present condition) and predictive (future results) in order to make crucial decisions now that impact future performance. They need a powerful solution that will equip them to control their company’s destiny.
Can I tell you a secret? I may not look like a Freakonomic Gypsy, but I know where to find your company’s Crystal Ball. Are buckets full of duckets close to your financial fore-token? Maybe not, but I’ll bet you’re more interested in what the Ball reveals than where the coins are buried.
A Tale of Three Economy Heroes
Economy Heroes come in all shapes and sizes. They come from different families, different cultures and different resources. They’re men and women who voraciously take the risks required to maintain surface tension on our country’s innovation, generate jobs and keep us in the hunt with our world’s economy.
Are there categories of heroes? Patternicity is a term that is gaining ground in social and business vernacular. At its core, Patternicity describes the search for patterns, such that some patterns are real and some are not. I believe their are patterns in how Entrepreneurs are both “born” and “made” in this great capitalistic society of ours. I’d like to tell you a short tale, in fact three short tales of individuals that represent the primary categories of Economy Heroes. The stories represent real heroes; only the names have been changed.
The Natural (Julie) - She started with a paper route in the 4th grade (the age when most entrepreneurs surface by the way – future post). She created several concert events in high school with live bands that paid for her first year of college tuition. She didn’t pursue a degree in college – she only took classes that contributed to her academic portfolio for a future 
business. During her first break at school she sold for Southwestern, hawking books door to door in the blazing heat of an unfamiliar metro area. She won top honors for summer sales. After taking all pertinent classes Julie placed a down payment on a duplex and worked nights to repair it to perfection.
Fast-forward fifteen years. Julie’s business and her employees have survived and thrived through all swings in the commercial real estate industry. She doesn’t need to work; her most recent purchase was a 140 foot Hatteras parked in the Caribbean. And as she looks out over the water from her 8500 square foot condo thirty stories up, she spins the mental plates of her next seven commercial deals.
The Fighter (Todd). His step-father grabbed his shoulders shook him at age fourteen, shouting that he was white trash and would never amount to anything. From that moment Todd determined he would get the hell out of that house as fast as he could. He would become financially independent ASAP and eventually prove to that S.O.B. that he was dead wrong about his step-son. Todd paid his way through school and with bulldog tenacity graduated magna cum laude with an MBA and his Physician Assistant license. His anger and energy ran deep. He worked several years for an orthopedic surgeon before proving his business acumen by helping the CEO with a few critical decisions on expanding the practice. When the CEO decided to move on, Todd stepped in and grew the practice from 17 million to 70 million in 7 years; he currently employs over 200 people. During his reign as CEO he also invested in numerous companies and land deals on the side, acting as corporate leader by day and rogue entrepreneur by night. He was a millionaire many times over before he turned 40, but he ended every day with the same phrase, “Well I’m still employed.” He proved the S.O.B. wrong and he never let his Physician Assistant license expire.
The Bounced (Ken). After working with International Harvester as top sales person worldwide for 25 years, Ken was bounced into unemployment via company reorganization. He knew what he knew best – selling a gigantic, all wheel drive strip mining truck. This hunk of powerhouse machinery was so large you could almost stand inside one of its tires. So Ken, the truck engineer and the truck business manager mortgaged their homes and secured a $10 million loan to purchase both truck and parts business from IH. For the next ten years Ken and his cohorts worked 24/7, traveling around the world looking for deals and dealers. They negotiated and re-negotiated loans with “the man”, and enjoyed every minute of it. A much larger competitor eventually bought both truck and parts business just to get them out of the market. Ken now travels the world with his wife, but he misses the life he experienced after the “bounce.”
I’m sure there are more categories of Entrepreneurs than the Natural, the Fighter and the Bounced; but thankful are we that these heroes used their innate ability as well as their resiliency and tenacity to build enterprise in this great nation of ours. They, and our other Economy Heroes, deserve our support to clear the path and get our of their way so that they continue to do what they do best – CREATE JOBS!
The Ninjas of Innovation
Innovators seek to improve capabilities by multiples. Innovation is multiplicative, not additive - from Ray Kurzweil‘s book, The Singularity is Near
Entrepreneurs are, without question, the ninjas of innovation. Who else keeps his/her radar on Defcon 1 always alert for a problem they can solve? Who else, by solving that problem increases energy efficiency, extends quality of life, equips us to enjoy entertainment on the go with “1000 tools in our pocket” and generates over 86% of jobs in this country?
I love it when entrepreneur inventors present at TED (www.TED.com) like these scary genius nut-cases:
Where does Google find the arrows to fill their portfolio quiver? Where does GE, Sysco, IBM and every other Fortune 500 company find it’s new idea to scale? The Ninjas of course! Generating a new idea in GE is like turning a barge around in a retention pond. The F500 don’t innovate, they BUY great ideas from our Economy Heroes and cast their ample resources into the fledgling infrastructure to produce 10x fold.
So if Entrepreneurs are the ground zero of our nation’s innovation, and if they generate over 85% of jobs why would we want to discourage them with higher taxation and a national health care mandate that decimates incentive to create and take risk? I remember reading a WSJ article several years ago about Canadian health care. A statement buried in the text referenced a particular doctor and how he was able to continue his surgical practice at the hospital even though he was forced to use technology over fifteen years old.
Fifteen years? Can you imagine what lives have been saved and/or quality of life extended by medical innovations created in the last 15 years? How about PSA testing? How about robotic surgery? How about regional anesthesia and advanced MRI for brain surgery? And let’s don’t even start about Viagra…
The point is, we NEED our Ninjas to continue hanging their derrieres out the window in hopes of launching the next disruptive product that will greatly improve our lives. We want a Dan Kamen (see video above) to stay in the game so that he can perfect an artificial arm. The coolest part of innovation with Economy Heroes – for the most part they create because they are passionate about their solution. They risk, not only for financial reward (making money is ok with you, isn’t it?), but also to make a difference.
Let’s get behind our Economy Heroes. Do they need a tax deferral (like The Bridge Act) – by all means let them have it. Do they need less regulations and federal constraints – FREEEEEDOM!
Creating jobs and increasing innovation isn’t hard – just make a path for our Innovation Ninjas and get out of the way, they will do the rest.
The Entrepreneur’s Greatest Obstacle to Success
- Image via Wikipedia
You cannot build character and courage by taking away a man’s initiative and independence. Abraham Lincoln
I suppose at this point it doesn’t surprise you that Washington is currently the Entrepreneur’s greatest foe. It seems unthinkable that a country that depends so heavily on the innovation and job creation of it’s Economy Heroes (86% of jobs) would seek to shackle those heroes to the point of strangulation. Read this article to the end and you’ll see what I mean:
Washington is Killing Our Economy Heroes
Why immobilize entrepreneurs with taxation when they could sign a little bill called The Bridge Act that costs the taxpayers nothing but will generate, according to the Kaufman Foundation, over 600,000 jobs. The Bridge Act is a tax deferral not a tax break. It allows growing companies under $10 million to bridge the capital gap by deferring taxes for only a few years – to be paid back with interest! The Bridge Act sits on our president’s desk waiting for ink.
I know you don’t scare at the thought of additional taxes and regulations compounding your current growing pains – but dang it…
The Six Secret Steps to CEO Split Second Decisions
I referenced a New Normal process for CEOs in the last post that equips the company to make critical decisions and maintain maneuverability on a continuous basis. It’s a “speed chess” decision process that enables the CEO and Inner Circle to defeat competition and win. The process is based on the strategy used by our military every day on the battlefield; Special Forces and Seals know it as the OODA Loop:
There are 6 secret steps a CEO must employ to make split-second decisions in order to effectively maneuver his/her company and win in our current economy.
The 6 Secret Steps to Split-Second Decisions
1. Readiness
Mickey Pittman is a Special Forces instructor and entrepreneur. He founded Lead the Way, a training program for Wall Street executives built on military tactics and the OODA Loop. Mickey and his team create elaborate customized simulations that instruct business leaders how to make quick and continuous decision. I asked Mickey to describe his primary goal for a weekend with Wall Street execs. He responded without hesitation, “To create readiness.” Readiness, as Mickey described it, is the eagerness to engage in battle and the willingness to make tough decisions on a continuous basis.
I’ve worked with over 200 CEOs during the past two years. The biggest hurdle these Economy Heroes face is their own lack of resolve to make the tough decisions on a timely basis. Readiness is the foundation of Gazelle success. Without the willingness to embrace the brutal facts revealed through accurate intelligence, and without the readiness to act on those facts a CEO will probably lose.
2. Unique Intelligence
Unique Intelligence provides situational awareness of the immediate current condition and issues a company faces. In the Korean War the MiG was faster and had greater turning ability, but the U.S. F-86 was quicker in changing maneuvers and it had, for the first time, a bubble canopy that enabled the pilot to enjoy a 360 degree view of his condition.
3. Observation
A relationship exists between the observer and what is being observed… If we are aware that these changes take place we reassess and recalculate our relationship with whatever it is that we are observing. In other words, the process not only shapes what is being observed but feedback reshapes the observer’s output.
John Boyd
The CEO must use the unique intelligence to identify critical patterns unfolding in the organization’s condition such as a vague value proposition, inadequate management, a poor economic model, or lack of capital. A highly qualified and experienced Advisor, equipped with unique intel generated by a continuous feed engine like the 4M Navigator (www.4MNavigator.com) can provide an objective perspective to identify the company’s critical patterns.
4. Orientation
Once the patterns are identified, the CEO can then analyze and synthesize the data to identify the questions that must be answered in order to make the best decision.
Here’s a sample scenario for fighter pilots seeking situational awareness:
- If I’m flying at 30,000 feet and 450 knots and pulling six G’s (G forces), how fast am I gaining or losing energy? Can my adversary gain or lose energy faster than I can?
Let’s rephrase that scenario from in an entrepreneur’s context:
- We’ll hit 8.5 million in revenue this year, EBITDA 15%, GP 23%. If I grow into the next revenue zone (10 -20 million) what are the average performance metrics of my competition and do I have the infrastructure, value proposition, management team, internal alignment, economic model and capital to survive the next few maneuvers?
5. Choice
The CEO chooses an option based on a hypothesis that fits the condition – considering the data, context, personnel, capital and risk identified during Orientation. I consulted with the specialty medical practice that experienced solid growth over the past year. When we reviewed his Unique Intelligence reports, a critical issue surfaced. Both Gross Margin and EBITDA dropped when the practice grew over $10 million in revenue. The CEO decided on the spot to limit their growth to $9 million instead of investing significant capital to expand into a large metropolitan area.
6. Action
It’s time to play out the decision and immediately engage with the necessary personnel and resources. The CEO maintains situational awareness at all times, capturing all data and nuances that can be applied to the next maneuver.
A CEO must have the fortitude and willingness to make tough choices quickly. In order to perform a strategic “button hook turn” the CEO requires an uninterrupted flow of unique intelligence to fuel the circular pattern of observation, orientation, decision and action. An experienced Advisor can dramatically increase the probability of success by offering insight and accountability to the critical issues continually surfaced in the company’s trusted decision process.
An Economy Hero’s First Gig
Nick Nanton is an Economy Hero. He started early, as most Entrepreneurs do; “chasing the 8 Ball” as he told me for over eighteen years. He’s started a number of businesses and employed many with innovation, drive, and a gift for gab that makes Zig Ziglar look like a street mime. He’s a best- selling author who helps Entrepreneurs and celebrities develop their personal brands. He also owns a cool chain of “Professional Shaving” establishments (www.kennedysbarberclub.com). He’s one of the off-the-hook catalysts who make up America’s competitive advantage.
Small Business Hard Facts – Courtesy of Focus.com
- Image by Getty Images via @daylife
“Inability of management to reach decisions and act on them.”
http://www.focus.com/fyi/small-business/small-businesses-and-hard-facts/
Dan Devine: Online Innovator and Economy Hero
When you enter the Compass Knowledge office you immediately understand why talented people like to work for Dan Devine. The walls are decorated with signs, shirts, pom-poms, and mascot figurines from major universities around the country who have access to quality training and degrees online through Compass Knowledge. Students from heralded institutions like Boston University, The University of Florida, Northwestern and many others can earn and receive bachelors, masters, and doctoral degrees via Dan (and his team’s) elaborate online academic portal.
Since 1993 Dan masterfully GREW his company through economy swings, the “.com bust”, and even the now infamous late 2008 and 2009 slide. He is a superb leader, innovator, and certainly – one of our Economy Heroes. I had the privilege to interview Dan and ask him some pointed questions about his business and his life as an entrepreneur.
First I asked him about his origins with Compass Knowledge. How does a successful executive with the Harris Corporation end up in online learning?
How Did You Get Into This Business? from Brent Sapp on Vimeo.
Want to become a pharmacist and graduate from one of the most respected academic institutions in the country – ONLINE? Listen to Dan describe his company’s Value Proposition…
What is Compass Knowledge? from Brent Sapp on Vimeo.
Every CEO has a “Home Run” for their business. Here is Dan’s out-of-the-park objective for Compass Knowledge.
What is Your Home Run for Compass Knowledge? from Brent Sapp on Vimeo.
Dan has received leadership training from the most prestigious organizations available. But what does he consider the attributes of a successful leader?
What Attributes do You Admire in a Corporate Leader? from Brent Sapp on Vimeo.
I’ve known Dan for years. I can tell you he, like his Economy Hero peers, does not scare easy; but he does embrace the brutal facts of the mines in the emerging company mine field – and combines that with an unwavering belief that his company will survive and thrive going forward.
Entrepreneurs are America’s Competitive Advantage. They know best what they need most to survive, thrive and move the needle of success in this economy. Here’s Dan’s response to my question about his greatest need as an Economy Hero.
What is Your Greatest Need as an Entrepreneur? from Brent Sapp on Vimeo.
Compass Knowledge generates over $30 million in revenue and employs over 200 people. Dan Devine has created a Gazelle that can scale beyond his “headlights” as CEO. He does what entrepreneurs do best – he creates jobs!
Forget the tax HIKE, Take the Bridge
- Image via Wikipedia
I want to repeat that you, Ms. and Mr. Entrepreneur, are our nation’s competitive advantage; you are our Economy Heroes (@EconomyHeroes). The idea of forcing a tax hike on entrepreneurs in this downturn is the most whacked disincentive one could possible envision:
Tax Hikes for the “Rich” – Can We Afford Them?
Why create a tax hike, when what Economy Heroes really need is a tax “deferral” that costs the tax payers nothing but gives the business owner a bridge to traverse the capital gap of second stage growth. My partner, Doug Tatum, constructed a bill that is sitting on our presidents desk which, according to a study done by the Kaufman Foundation, could generate over 600,000 jobs. It’s called The Bridge Act:
The Bridge Act
There are several “overlooked” legislative opportunities to help move the needle on entrepreneur success. The Bridge Act, a tax deferral proposal for entrepreneur business that, according to the Kaufman Foundation, could generate at least 600,000 jobs. Here is some interesting FAQs about this little bill that carries a huge punch.
Q: When is a rapidly growing business in “No Man’s Land” for capital funding purposes?
A: First, when the firm’s financing needs are within the “capital funding gap” of $250,000 to $1,000,000, it is very difficult and costly for growing, small businesses to obtain external funding. Second, when the return on assets is less than the rate of revenue growth, the business cash flow becomes negative under accrual accounting even though the business may be profitable and owe income taxes.
Q: What happens if a business fails after deferring income tax?
A: A bankrupt business generally does not have net income tax liability because of accumulated losses, but if so, it would be collectible (as under current law) against business assets or personal assets (in the case of a proprietorship, partnership, or S corporation). C corporations (and proprietorships with Schedule C business income) currently have a 5-year net operating loss carryback that may be used against outstanding tax deferrals. For S corporations and partnerships, any outstanding tax deferral when the business entity dissolves would be collectible against the shareholders or partners for their pro rata share of the net tax liability (as under current law).
Q: What tests must be met to qualify for the tax deferral?
A: The business must have a growth of 10% or more above the average annual gross receipts for the prior 2 years. A business meeting the growth test and using accrual accounting for tax purposes with $10 million or less in annual gross receipts would be eligible for the tax deferral.
Q: Would it be possible, using gross receipts data, to manipulate the growth figures to qualify?
A: Not likely, since the current year’s gross receipts must be 10% or more above the average gross receipts for the prior 2-year period.
Q: How much Federal income tax deferral is authorized under the proposal?
A: The aggregate tax deferral is limited to $250,000 for each business entity, or a lesser amount should the business exceed $10 million in gross receipts in the meantime. Partners of a partnership or shareholders of an S corporation would be limited to a combined total of $250,000 of tax deferral for each entity.
Q: When is the tax deferral amount paid?
A: Each year’s tax deferral amount may be deferred for 2 years; payment of deferred tax may be made over the following 4-year period. Interest (Federal underpayment rate) is payable during the entire deferral period. Upon the sale or merger or cessation of a business, any remaining tax deferral would be payable at that time. Being “acquired” would include the sale of 80% or more of the firm’s assets.
Q: How does the IRS ruling on cash accounting affect businesses eligible for the tax deferral?
A: The Bridge Act only applies to growing businesses on accrual accounting. Growth businesses need to be on accrual accounting to obtain outside financing and to have outside audited financial statements. The IRS ruling increasing the cash accounting gross receipts limit to $10 million generally applies only to service businesses; it does not apply to C corporations with average annual gross receipts of more than $5 million.
Q: Is the tax deferral a loan guarantee by the U. S. Government?
A: No, it is not a “loan guarantee,” as the Federal Government would not be guaranteeing any loans made by a financial institution to the business. The Federal Government has established a number of loan guarantee programs, e.g., by the Small Business Administration, Federal Housing Administration, Veterans Administration, and others.
Q: Is the tax deferral a loan by the U. S. Government?
A: A “loan” means that additional capital is contributed into the business from an outside source, with required payback regardless of whether the firm is profitable or unprofitable. The Bridge Act, however, simply adjusts the timing of an obligation to the Government created when the firm is profitable–it does not provide added funds from the Government. The tax deferral can be offset by business loss carrybacks or carryforwards.
Q: Are other sources of capital readily available to small, emerging growth businesses?
A: Very few, and generally only to the most promising and well-connected businesses. The lack of capital funding is most urgent for growing, small businesses with funding needs between $250,000 to $1,000,000. Funding needs below $250,000 generally are available from family, friends, credit cards, home equity credit, and banks (personal credit basis). Funding needs between $250,000 and $1,000,000 may be available from so-called “angel” financiers, “factors,” and in limited cases from SBA loan guarantees and SBICs that have met certain capital requirements. When a business reaches a $1,000,000 funding level, it generally has a much better opportunity to attract capital funds from traditional sources. A profitable $10,000,000 or more gross receipts level is more likely to support an asset-based loan from banks and other financing sources.
Q: Are there venture capital or private equity sources of funds for small, emerging growth businesses?
A: Usually not. As the venture capital and private equity industries have grown, their investments generally are well above the $1,000,000 funding level.
Q: What is the revenue cost of the tax deferral proposal?
A: The introduced bills (H.R. 3062/S. 1903) would sunset the tax deferral after 4 years. The Joint Tax Committee estimates that this proposal would result in revenue “losses” for the first 4 years, which would be more than offset in the next 6 years–for a net gain of $1.1 billion over the 10-year budget period.
Q: Why should Congress enact this tax deferral proposal?
A: Macro-economic research by Cognetics, Inc. and the Kauffman Center for Entrepreneurial Leadership along with other economists have documented that the major force behind the net job expansion in the U. S. over the last decade has been from smaller and mid-sized growing companies (principally, those with fewer than 100 employees). These growing, entrepreneurial companies are fragile as they try to obtain sufficient capital and other resources to survive the “No Man’s Land,” bridge the “capital funding gap,” and become big enough to attract adequate outside financing at a reasonable cost to keep growing and providing expanding job opportunities.
Q: What are the benefits of the tax deferral proposal for emerging growth businesses?
A: First, the proposal will benefit thousands of emerging growth businesses with $10,000,000 or less in gross receipts, which will help the U. S. economy to grow and expand job opportunities, with the potential of creating up to 641,000 new jobs in the first 3 years. Second, the proposal is neutral as to the types of businesses that will benefit (businesses are eligible, whether capital-intensive or services, if they meet the growth and sales tests). Third, the proposal is a tax deferral, payable with interest, thus minimizing the long-term revenue cost. Fourth, the proposal will provide emerging growth businesses a source of needed capital financing when few outside sources are readily available at an affordable cost.
Q: What is the effective date of the proposal?
A: [NOTE: The BRIDGE Act was originally introduced in the 102nd Congress. The effective dates of the proposal would need to be updated so that the tax deferral would be effective for a new 4-year period – for taxable years 2009 – 2012.]
Why create a tax hike, when what Economy Heroes really need is a tax “deferral” that costs the tax payers nothing but gives the business owner a bridge to traverse the capital gap of second stage growth. My partner, Doug Tatum, constructed a bill that is sitting on our presidents desk which, according to a study done by the Kaufman Foundation, could generate over 600,000 jobs. It’s called The Bridge Act:
Tax hikes might not be scary, but capital gaps ARE frightening for companies about to enter No Man’s Land.
Why are so Many Adolescents in No Man’s Land?
The reason is: No Man’s Land is the home state for all business adolescents. I only described half the story when I stated that over 90% of all companies fail; I know, I know you don’t scare that easy. The “rest of the story” (as Paul Harvey used to say) and the Freakonomics of the reason behind such an outlandish percentage, is what my 4M Navigator partner, Doug Tatum describes in his best-selling book as No Man’s Land:
It’s adolescence, the stage we all go through when we’re too big to be small and too small to be big. We’re confused and unfocused, and we’ve got significant transitions ahead that are hidden like mines in a minefield. Imagine your business is a Ferrari 575 M Maranello. You’re plowing down the Autobahn at 145 mph and you’re increasing speed. Here’s the good news: you’re driving the vehicle of your dreams, you’re moving at a fast and reckless rate, and the road is clear. The bad news: there’s a 1500 foot wide bottomless ravine hidden in the fog about ¼ miles ahead. Are you ready to jump it? We should call this chasm DeadCo Drop because all companies must, at some point in the second stage of growth, jump it.
I’ll discuss DeadCo more in my next post, even though I know a bottomless drop doesn’t scare you.
Brent Sapp
