Key Idea: Sell Through a Public Offering (7)
While the Initial Public Offering (IPO) is relatively well examined, the Direct Public Offering is not. Little known among DPOs is the Small Corporate Offering Registration, known as a SCOR. Stockbroker David Porter explained the benefits. More... Related...
Peter took the anonymous road and Lorraine took the friendship path. Peter wrote an ad (just like an advertising man, right?) and ran it in the Wall Street Journal. He described the type of person he was looking for which was the way he found a person like himself.
Lorraine told her banker friend that she wanted to sell and it turned out that she had more than one offer. The person who "won the right" to buy the business told Lorraine that he loves plants and that was the opening of the buy-sell negotiations. Because she was able to sell to a plant lover, Lorraine felt good about the sale. She felt that the employees and customers would be happy because the new boss is in simpatico with the founder.
The big bonus for Peter and Lorraine is they didn't just get money for their businesses; they transferred the business to a person that they felt would keep the business much like they found it.
Because it does take a little effort to understand the process and most of us are not even aware that the SCOR exists.
It is an option for any small business owner who is willing to learn about it. It is a way to directly offer ownership in your company to employees, family, friends and investors you have never met.
Since the United States Congress and the Securities and Exchange Commission put the regulations in place in 1982, then simplified them in 1989, followed by the emrgence thereafter of the SCOR document, very few owners have taken advantage of this financial instrument.
Brad Armstrong of Blue Whale Movers said the SCOR is an option for him while organic growth, venture capital and banks are not options because he has a big goal that would take a large amount of cash. He and his partner had already exhausted their own cash reserves, the profits from the Austin location were not great enough to take away and apply to another location, the banks are too cautious and the venture capitalists and angels wanted to own at least 40% of the company if they were to invest. By doing a SCOR, Brad offered just 10% of equity in the company to a number of individual investors.
Q: Why would an investor buy stock in a privately-held company?
A: To make money and for a sweet tax break. A big part of figuring out if the SCOR is the right vehicle for you is determining if the investment would be attractive to others. Remember, there is no secondary market for SCOR investments. If you buy stock in a publicly traded company listed on a stock exchange, you can sell it when the price goes up or down and you want to divest yourself of the investment.
Not so with investments made under a SCOR. There have been several attempts to develop a secondary market based on SCOR offerings, but they have all collapsed becase the numbers are too small --too few businesses, too few brokers, and such little numbers -- the fellows in the big market just think it's a waste of time.
Individually, it could work for you if you are able to provide the investor with a return, e.g., a proposed dividend schedule and an exit strategy. The investor's exit is tied to yours. Ultimately, do you intend to sell the company? Go public? The investor will require answers to these important questions and a timetable to evaluate the investment opportunity.
Q: What does it take to execute a SCOR?
A: Unlike the initial public offering (IPO) under the Securities and Exchange Commission (SEC), a complicated, expensive process, the SCOR is under your state's Securities Commissioner; and by comparison, it is a fairly inexpensive and straightforward way to go public.
David Porter said you need an attorney, an accountant and a stock broker. Tom Stewart Gordon estimated a total cost of about $30,000. The IPO process costs well over $1 million in underwriting, legal and accounting fees. If you are interested in investigating a SCOR further, start by obtaining the downloadable SCOR issuer's manual, SCOR, Small Corporate Offering Registration, How to Complete the Question and Answer Disclosure Document for Your SCOR or Reg. A Filing from the website of the North American Securities Administrators Association at nasaa.org.
This 100+ page manual has a soup-to-nuts description of what you need to know about the application process. Here's an excerpt from the beginning of the issuer's manual: "Part I of this Manual informs you of the general requirements to use and file the Form U-7, called the "SCOR Form."
Part II of the Manual provides specific directions on how to fill out the SCOR Form. Once completed, the SCOR Form may be filed as the main disclosure document for offerings being registered in all states accepting SCOR." Part II has a separate section for each of the 50 questions of the Form U-7, making it a user friendly document when a number of different people contribute to the preparation of the prospectus. You could answer some of the questions yourself while employees and/or outside consultants answered others. That way you could minimize your cost and still produce a high quality disclosure document. At the same site, you can obtain the necessary forms for filing in MS Word, further facilitating the document preparation.
Think about it
Can you imagine having shareholders? What would you do with the money you could raise with a SCOR?
Clip from: From Equity to Exit Strategies - 8 Possible Paths
The world: Most of us small business owners do OK competing with the big businesses in our industries or we don't survive. But when it comes to our exit strategy and succession planning, most of us fall on our face.
This episode is to explore business valuation and exit strategies.
An exit strategy is just like doing a will, but here you try to maximize the dollars you get out of your life's work. Nobody wants to see you liquidate. That's getting pennies on your dollars. Tangible assets get sold (fire sales) and the intangibles are lost forever. Liquidation is the worst kind of liquidity.
Most of us will sell our business through merger or acquisition. But, if we get much over two-to-three times sales or six times earnings, we all think we've done very well. Yet, when big business sells, they usually begin at six times earnings. Then we see 40 times and even 300 times earnings on the open markets. Why should we be satisfied with so little?
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Small Business Owners Everywhere in the world, We all will exit our business someday.
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Sell Through a Public Offering (7)
HATTIE: Number seven. Sell it over time to the general public through one of the direct public offering instruments.
HATTIE: (Voiceover) The people of Blue Whale movers really move on the job, and that's one of the reasons this Austin, Texas, company has been so successful. When the owners wanted to grow the business, they needed additional money, and they raised it through a Small Corporate Offering Registration.
DAVID PORTER: It cost them a lot of money.
HATTIE: (Voiceover) Stockbroker David Porter has helped them.
DAVID: The company needs a very well-defined, thought-out business plan that will enable people to look at the company and be willing to put money aside for four years, five years, two years, whatever it turns out to be, while they're waiting for that company to effectively employ their money. That's generally the way it works. Generally, people are patient and their reward comes at the end of some period of time.
HATTIE: All right. But with a SCOR offering, the individual who bought into my business is going to hold onto those shares until they find someone to buy it from them.
DAVID: Well, there are several reasons that they want to do that, not the least of which is a tax reason. If you purchase most of these small corporate offerings, the majority will qualify under Section 1202 of the tax code, which means that if you hold them for five years or more, whenever you sell them, you get to exclude 50 percent of the capital gain from taxation.
HATTIE: So that's a good reason to buy a SCOR.
DAVID: That's one good reason to buy a SCOR. Another reason is, that the company may qualify under Sections 1244 or 1245, which say that if you sell that stock and make an equal investment in another qualified company, you at least defer that tax. You don't pay the tax on it right now. Additionally, you have the ability, if things really go badly for the company, that you may be able to write the entire investment off as a direct write-off against your taxes, rather than have to take it as a capital loss.
HATTIE: All right. So tell us why small business deserves our investment?
DAVID: Small business deserves your investment because it has the potential of making you more money with tax advantages that are not available in large companies.