Evan Vitale

Accounting Professional

Evan Vitale – Accounting for Startups

by

There is no better feeling like bringing home a newborn baby for the first time, the first and most common thing you will probably do is to check if your baby is healthy and well. You may perform several tests like checking their breathing patterns and heart rate, and then compare it to the typical rate for newborn babies. As time goes on and your child ages, you’ll learn new methods for checking your child’s health and condition. This can include their mental, physical and emotional health and development.

This can be compared to when you just started a business, your accounting needs will grow as your business grows and become more and more complicated. Brian Hamilton, the chairman of financial information company Sageworks has mentioned that one of the most common mistakes new entrepreneurs make is that they feel that they don’t need an accountant or that accountants aren’t necessary until their business has grown to mature a bit more.

Bran Hamilton has stated “Most businesses are very simple, and the vast majority of them are sole proprietorships.” This results in the mindset that their primary focus should be to increase revenue and gain new clients. “In most cases, you don’t need an accountant on day one. If I’m going to start, for example, a landscaping company, I’m not going to count money until I make money.”

There are a variety of available accounting systems, including Xero, Peachtree and QuickBooks, all of which can assist the new business owners in handling accounting related affairs such as recording sales and expenses and their growth over time. Developers of tax-preparing software like Intuit ensure that sole proprietors submit their Form 1040 along with a Schedule C attached.

At some point, the questions get asked “If you’re running a fairly simple business, why do you need an accountant on the first day?” You might need an accountant for advice, because you usually need advice once you get going. Accountants handle more than just your business’s financial information, they can provide strategic advice regarding how best to run your business from a financial point of view. Also, if you decide to obtain a loan or purchase property to expand your business, accountants can provide invaluable advice.

However, it is important to understand that an accountant is needed most during different stages of the business cycle, and can also depend on the type of business. The most common strategy for new business owners is to start a business and run straight for new clients and sources of revenue.

Brian Hamilton says, “A lot of the time, entrepreneurs and others seem to have a kind of checklist in their head about what ‘real’ businesses do and have. They think that all businesses ‘need’ an accountant, a lawyer, a business plan, to be incorporated. All they’re doing is setting big obstacles to getting the first customer.” The best approach in simple terms is to gain new clients and then look for an accountant.

To determine how well a business is performing, private-company owners will consistently check a few key financial metrics. The most common being sales as that is what determines the revenue of a business. For most, tracking sales is simple and shouldn’t require extensive analysis unless your business is offering credit to customers or is project-based. Just by recording your business costs and revenue from all sources it will allow you to keep track of your profit.

In order to determine your profitability, there are two key factors to keep an eye on.

Gross margin: This is a company’s revenue minus total costs directly involved in producing the product or delivering the service, divided by revenue. This shows what percentage of sales is left over after direct costs, and it’s an important measure of efficiency. Examining this can guide you on when you need to adjust prices or volume in order to keep more of what you sell.

Net margin: This is a company’s net profit measured against sales and takes into account all expenses related to the business (such as bank fees and other general overhead). This margin tells you how much of every dollar in sales your firm is keeping after all expenses are paid.

Other metrics become more important to understand and track as the business grows. The best time to start tracking such metrics depends entirely on which stage the company is in, and the type of company. However, when it comes to new companies and are developing the ideas behind their company, the key metric they track is sales.

 

Evan Vitale – Florida Reaps Sliver of US Venture Capital

by

Florida reaped just a tiny sliver – about a third of 1 percent – of the U.S. venture capital pie in the third quarter, according to statistics released Friday. In the state, $36.7 million was invested in six deals. That’s down considerably from $113.9 in 13 deals last quarter and the lowest total since the first quarter of 2013.

Florida companies receiving dollars in the third quarter were: Sancilio & Company ($20 million); LensAR ($7.85 million); Informed Medical Decisions ($5 million); OBMedical ($2.1 million); Neoreach ($1.5 million); and Contactus.com ($300,000).

Next quarter’s Florida numbers are likely to look off the charts with reports that Google Ventures and Andreessen Horowitz are involved in a $500 million round for Broward-based Magic Leap, the cinematic reality company founded by Rony Abovitz, cofounder of Mako Surgical. Magic Leap closed a $50 million Series A round in February.

So far in 2013, $232.3 million has flowed into Florida-based companies.

Nationally, venture capitalists invested $9.9 billion in 1,023 deals in the third quarter, according to the MoneyTree Report from PricewaterhouseCoopers LLP and the National Venture Capital Association, based on data provided by Thomson Reuters. Quarterly venture capital investment declined 27 percent in terms of dollars and 9 percent in the number of deals, compared to the second quarter when $13.5 billion was invested in 1,129 deals.

The third quarter is the sixth consecutive quarter of more than 1,000 companies receiving venture capital investments in a single quarter. With more than $33 billion invested through the first three quarters, total venture investing in 2014 has eclipsed total venture investing in all of 2013, which totaled $30 billion.

“The emergence of non-traditional investors, including hedge funds and mutual funds, is contributing to the increase in venture investing this year. Another factor that can’t be ignored is the changing nature of our economy, where startup companies are disrupting entrenched industries and, in some cases, creating new industries altogether,” said Bobby Franklin, president and CEO of NVCA, in a statement.

“Another factor driving the strong investment levels is the increasing prevalence of mega deals, deals exceeding $100 million, which we’ve seen over the past few quarters. We’ve already counted more than 30 mega deals in 2014 compared to only 16 in all of 2013,” said Mark McCaffrey, global software leader and technology partner at PwC.

The biggest deals were Vice Media ($500 million); Palantir ($165 million), Houzz ($165 million), Box ($158 million) and Lookout ($150 million). Next quarter Magic Leap will likely be joining the top five list.

MoneyTree Report results can be found at www.pwcmoneytree.com and www.nvca.org.

Evan Vitale – Bramson and Electra Butt Heads Again

by

Edward J. Bramson, the managing member of Sherborne Investors Management, already made a play earlier in the year to get three seats on the board of Electra Private Equity. His request for the seats was rejected. But that didn’t stop him from trying again.

Ian Brindle used to be the chairman of Pricewaterhousecoopers Britain but he is now seeking a seat on the board at Electra

Ian Brindle used to be the chairman of Pricewaterhousecoopers Britain but he is now seeking a seat on the board at Electra

This time, he is only after two seats on the board of the prestigious private equity firm, one for himself and one for a friend and associate, Ian Brindle. Brindle once was the chairman of PricewaterhouseCoopers in Britain and has long been an associate of Bramson. To get them he has employed some rather grand tactics.

He sent a letter to all of Electra’s shareholders last week and said, in not so many words (or maybe in more) that if they wanted to see a gain of over one billion pounds, they should remove the current director Geoffrey Cullinan and vote to have himself and Brindle join the board. Electra did not hesitate to fire back. The Electra chairman, Roger Yates said, “We are surprised that Sherborne’s letter demonstrates considerable misunderstanding of how Electra works. Exuberant and unsubstantiated claims are no substitute for Electra’s consistently superior track record. Your board aims to continue this record without the destabilizing efforts of Mr. Bramson. The board of directors of Electra strongly urges all shareholders to vote against the resolutions.”

It is true that Bramson did not outline anywhere in his letter a plan to raise the value of the shares the billion pounds that he claimed he could, but that might not stop investors from voting him in anyway. After all, an investor should theoretically care less about who makes the money as long as they make it (barring criminal activity, of course). And one billion dollars is a lot of money.

Curious members of the public will have to wait until October 6th, the date of the next shareholders meeting, to see what happens.

Evan Vitale – Lincolnshire Management Feels the Heat

by

T.J. Maloney and the private equity firm he controls, Lincolnshire Management, are under scrutiny once again. The last time one may have heard about Lincolnshire was in 2011 when they ran into some trouble after gaining $99 million in a lawsuit. Trouble is not something you expect when you have a courthouse win of that size and to add to the surprise of the predicament, it arrived from an unexpected source to boot. Lincolnshire’s investors themselves filed a suit against the private equity firm arguing that they were not given their fair share of the legal gains. That case seems to have been more bark than bite, however, as the case remains pending to this day.

The S.E.C. took action against Lincolnshire Managment

The S.E.C. took action against Lincolnshire Managment

This time around, the Securities and Exchange Commission is the one bringing the suit and they have managed to do more than just bark. In fact, Lincolnshire has agreed to pay 2.3 million dollars to settle with the SEC. The charges stated that Lincolnshire had improperly allocated expenses between two funds that it controlled. Both of these funds were acting as owners in what, in the eyes of the SEC, was the same company. Lincolnshire, for one reason or another, decided that it would exchange resources between these two companies as if they were the same. For example, one company, Peripheral Computer Support paid the entire payroll and 401(k) administrative expenses for employees of both companies.

Now, this would not be an issue if both companies decided to do this to their mutual benefit. The issue arises when one company clearly suffers while the other profits from such a relationship. As the co-chief of the asset management unit in the enforcement division of the SEC Julie Riewe said, “Lincolnshire’s decision to integrate two portfolio companies owned by separate private equity funds resulted in the misallocation of expenses between the two companies. Advisers that commingle assets across funds must do so in a manner that satisfies their fiduciary duties to each fund and prevents one fund from benefiting to the detriment of the other.”

Because the SEC could prove that Computer Technology Solutions – the name of the other company – was benefiting and Peripheral Computer Support was suffering, or perhaps because Lincolnshire did not want the SEC to look any deeper, Lincolnshire agreed to pay the damages and settle the dispute. Hopefully, Lincolnshire doesn’t have any more run-ins with the law for a few years, their reputation could use a break.

Evan Vitale – Russia Sanctions Prove Difficult to Manage

by

Russia continues to bear down on the Ukrainian forces in support of the Ukrainian separatist forces. In the face of this, America and the EU have put in place certain economic sanctions to encourage Russia to stop. These sanctions include such rules like: no US concern shall be allowed to do business with a concern that is controlled (over 50%) by a sanctioned Russian concern. Other sanctions are targeted at the Russian controlled shale-oil projects in the Arctic. Clearly, these sanctions affect a large variety of businesses and, due to the complex nature of the global economy, not all of those concerns will be Russian.

Putin is in charge of not just the fate of Russia and the Ukraine but of a lot of American firms as well.

Putin is in charge of not just the fate of Russia and the Ukraine but of a lot of American firms as well.

Many private equity firms have issued orders to special teams to look into their investments and decide which could be affected by these changing sanctions. This is something that all firms have to face and those who are the best informed are also the most prepared should the sanctions continue past the end of this month (if Russia complies with the 12 point peace plan and removes all Russian material and forces from Ukraine by September 30 the sanctions will be lifted). And, should the sanctions continue, they will only get stronger. Experts suspect that sanctions could grow to deny all but short-term investments in Russian concerns by American firms. Russia is the eighth largest economy in the world today so, this will have an effect on the whole world.

To make matters even more difficult to handle, Russian law permits companies to have as many as six different aliases. Private equity firms trying to identify which of their concerns will be affected must wade through this murky water which is a far from simple task. Hopefully, Russia will comply with the sanctions soon so that the effects of these sanctions will not be so long lasting or detrimental to private equity firms and the global economy alike.

Evan Vitale – “Fundless Sponsor” Deals Becoming a Trend

by

Fundless sponsors are brokering big deals in the world of private equity

Fundless sponsors are brokering big deals in the world of private equity

Private equity is a difficult business. In order to get started, one has to raise capital but, in order to raise capital, one must showcase a track record of success. In the past this was done very slowly, with the private equity executive hopeful brokering small deals in an effort to build credibility in the industry before moving up to larger and larger deals. That is a tough, long road for anyone to walk. It is made even more difficult in today’s market where the competition is as fierce as it has ever been and, therefore, prices are through the roof. The new entrant to the world of private equity is beaten out by bigger firms before he can even get out of the starting gate. So what is he or she to do?

An interesting direction some entrants into the market are taking when they find a deal but are unable to raise capital themselves is to broker the deal out to a larger firms, acting as a “fundless sponsor” for the deal. These deals have become more and more prevalent in the world of private equity over the past five years. In fact, according to Michael B. Shaw, a partner in the Chicago office of law firm Much Shelist PC, the number of “fundless sponsor” deal has doubled since 2009.

That is not to say just anyone can broker these deals and act as a “fundless sponsor.” In many of these cases, the deals are being brokered by private equity executives who have decided to leave their company and strike out on their own. They usually have the benefit of knowing many people in the private equity world and have an area of expertise that would rival anyone in the industry who is currently working for a private equity firm. Because of these connections and level of industry-specific knowledge, these emancipated executives are able to act as a middleman between a business and a private equity firm. They get noted as the “fundless sponsor” of the deal and can reap great financial reward, besides the track record they build for when they look to raise capital for future deals.

Will this mode of interaction between businesses and private equity firms persist into the future or is it just a fad? In the mind of some professionals, these “fundless sponsor” brokered deals will continue to grow because it is becoming increasingly difficult for firms to find deals on their own. If they allow these freelancers to bring the deals to them, firms can actually save money, in some cases. So, perhaps these “fundless sponsors” are here to stay.

 

Evan Vitale – Private equity performance not dictated by how fast capital called — study

by

Private equity funds that called a greater percentage of capital than other funds in the same vintage year did not outperform their peers, a new study by private equity fund-of-funds firm Pantheon shows.

Contrary to popular belief, calling capital quickly compared to other funds raised in the same year, “doesn’t say anything about final outcome,” said Nik Morandi, partner and head of research and portfolio strategy at Pantheon. Mr. Morandi is the author of the Pantheon study, titled “Private Equity Cash Flows and Performance Patterns.”

Calling capital quickly did not result in a higher probability that the fund would produce top-quartile returns over the life of the fund. The result was the same when performance was measured by internal rate of return and by total value to paid-in return.

However, there is a relationship between distributions and returns, the study found. Private equity funds that distributed more than funds in the same vintage year during the typical five-year commitment period were more likely to produce top-quartile returns over the long term. For this analysis, performance was measured in multiples since the results would be skewed when measured by IRR because funds with distributions will have better IRR, Mr. Morandi said.

Private equity funds whose distributions were within the top 25% of funds in the same vintage year in terms of distributions outperformed their peer groups.
What’s more, the deeper a fund’s J-curve — indicating a fund’s negative cash position, the lower probability the fund would generate a top-quartile return.

Pantheon’s study was based on data for 322 U.S. buyout funds raised between 1992 and 2007, using fund performance data through the second quarter of 2013.

Evan Vitale – Private Companies’ Stock Hard to Access on Secondary Market

by

SecondMarket continues to dominate secondary trading volume during 2014. The company has already traded almost four times more in 2014 than it had for all of the previous year. The 900 million dollars that SecondMarket has traded in secondary stock sales continues to rise as the year wears on.

This year’s secondary market transactions are expected to total over $17 billion, a number that is nearly 30 times greater than the secondary volume from a decade ago. It’s also double the volume of the 2011 peak – when a variety of internet companies (such as Facebook and LinkedIn) went public.

Secondary market volume continues to rise, nearly doubling the volume of the 2011 peak when Facebook went public.

Secondary market volume continues to rise, nearly doubling the volume of the 2011 peak when Facebook went public.

SecondMarket has carved out a niche in the trading world, facilitating the trades of private-company stock — mostly shares that are pre-initial public offering. Barry Silbert, founder and chairman of SecondMarket, says that he “wouldn’t be surprised if turnover among its private stocks was similar to turnover in some publicly-traded stocks.”

Many are attributing the Jumpstart Our Business Startups Act of 2012 as a reason for why the secondary market has been so active. The act helped raise the number of shareholders in a private company, increasing its threshold from 500 shareholders to 2,000. By also expanding investors ability to buy private company stock, the JOBS Act helped startups raise more money. However, companies started placing restrictions on secondary trading by placing a right to veto trades in the contracts.

This changes the landscape of the secondary market as private companies are hosting the secondary transactions – setting their own price and choosing those who can buy the stock. This limits the startup employees’ ability to cash in on shares while also shutting out retail investors. Since the secondary market doesn’t raise capital for startups, they can afford to be picky. These companies are choosing buyers who are respectable institutions, acting as a “stamp of approval” for the startup. They are also looking for shareholders who will offer valuable, unique advice to the company.

As a result, the most desirable technology companies are the hardest for the average Joe to access. The ones that are accepting anyone’s money are the companies that are young and desperate.

Evan Vitale – Private Equity Firms are Linking Up With the Insurance Industry

by

Over the past few years, private equity firms are moving further and further away from home runs; instead, they’re deciding to play small ball with some singles and doubles. During the late 1990s and into the early 2000s, this would have been nearly unheard of. Private equity firms were known for their high-risk, high-reward strategies. These firms would take on massive amounts of debt to acquire companies and then change the structure by eliminating unprofitable operations while also putting more efficient management strategies in place. This allowed private equity firms to knock it out of the park when it came to the initial public offering (IPO).

Since 2011, firms such as the Ares Private Equity Group, Blackstone Group and Apollo Global Management have moved into a more secure sector – insurance. By purchasing these insurance companies, there is much less risk involved.

Private equity firms are purchasing more and more insurance companies due to interest rates and the baby boomers.

Private equity firms are purchasing more and more insurance companies due to interest rates and the baby boomers.

There is some speculation, however, as to why these companies are investing in fixed annuities in this sector – ones that have a lower rate of return. However, the payoff seems to be evident; by establishing themselves in the life and annuity insurance sector, these private equity firms are adding billions in assets. This allows firms to put their investment expertise to use, allowing fairly predictable and steady returns.

One reason why these private equity firms are jumping into insurance now is because of the realization by insurers that interest rates are remaining low, squeezing their profit margins. Thus, these insurance companies need to inject more capital into their businesses. This need for capital is where private equity firms come into play.

While interest rates are currently low, they are expecting these rates to take off in the near future. Because of new capital coming in the door, better return on investment will be achieved through the rising interest rates. Combined with the fact that the baby boomer generation is due to retire soon, insurers could see much greater investment returns than usual.

A problem that private equity firms are running into, however, is the fact that insurance is highly regulated. States must approve changing ownership within the insurance industry – giving these firms another hoop to jump through.

Evan Vitale – Blackstone Group to Buy Majority Stake in Service King

by

Blackstone Group has agreed to buy a majority stake in Service King Collision Repair Centers from the Carlyle Group with a view to fund the company’s future growth, according to sources familiar with the matter. The Wall Street Journal reported Tuesday the deal values Service King at about $650 million, citing a person familiar with the matter.

Carlyle will recognize a return of nearly four times its initial investment from the sale and will retain a significant minority stake in Service King, whose management will increase its own minority stake as part of the deal, sources said.

Washington, D.C.-based Carlyle acquired a majority stake in Service King in August 2012, with plans to expand the company nationally. At the time, the Richardson, Texas-based company operated 49 collision repair shops in or near Texas’s major cities. The company, which traces its roots to 1976 when its founder Eddie Lennox took out a $10,000 loan and repaired vehicles from his own garage, now operates 177 centers across 20 states.

Blackstone’s investment in the company comes as another private-equity-backed collision repair chain is on the auction block. Palladium Equity Partners LLC has hired an investment bank to sell ABRA Auto Body & Glass, which could fetch $500 million or more, sources familiar with the matter said last month.

The move underscores Blackstone’s pursuit of smaller, high-growth deals as steep market valuations make traditional buyout deals more expensive. As of the end of the second quarter, the firm had $17.7 billion available to spend on private-equity investments.