Due Diligence – basics

Due diligence is defined as investigation or audit that reasonable business and person undertakes before potential investment or before entering an agreement to confirm all facts. Most investor are doing research before buying a security but due diligence can be done by a seller who investigates buyer’s capability to complete the purchase. After the Securities Act of 1933 due diligence become common practice in United States when brokers and dealers became responsible for disclosing all relevant information about securities they were selling or they will otherwise be accountable and liable for prosecution. This put brokers into sensitive position where they could be unfairly prosecuted. In response creators of the Act set rule that says if broker performed due diligence when investigating companies whose securities they are going to sell and disclose that information to the public they are not held accountable.

Not only prospective investors perform due diligence but also broker dealers, fund managers, equity research analysts and companies that seek acquisition. While investors do due diligence voluntary, broker dealers are obliged to do it as stated in Securities Act of 1933. When companies plans to offers securities, before issuing final prospectus underwriter, issuing company and other parties involved such as accountants and attorneys will gather to discuss whether due diligence is exercised according to state and federal laws.

Performance of due diligence may vary depending on the security that is being researched. When doing DD it should take into consideration risk tolerance and investment goals of investor. However there are some questions that you need to answer in order to gain as much relevant information that you could. First thing you should check total value of the company because it is a good indication of stock’s volatility, diversity of investor base and size of target market. Size of the company, it’s stock price and revenues determine where the stock is going to trade. This brings us to “number research” meaning it is crucial that you do extensive financial research including revenue, profit, margin trends, ratios, financial metrics and balance sheet. Monitoring trends in revenues, operating expenses, profit margins and return on the equity is important part of the research process. Together with combination of various ratios and metrics it should be tracked over several quarters or years if possible. Balance sheet provides you information about company’s assets, liabilities and cash available; showing is company capable to pay short term expenses and debts. All the parameters should be compared with competitors in the same industry and get a bigger picture. This way it s easy to determine if company is a leader in the field and what is the size and growing potential of the industry.

Stock price movement should be analyzed, both short term and long term as well as correlation between stock price movement and profit. Pay attention to number of shares outstanding and any plans for future issuing of shares and subsequent dilution. When it comes to company’s management you should check their experience and area of expertise and how much shares they hold. If they have high ownership it is a good sign because it means they have vested interest in the company’s and stock performance.

In the end it is important to be aware of company specific and industry wide risks and how that fits in your investment style and amount of risk you are willing to take.

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The benefits of crowdfunding

Crowdfunding continues to grow globally. Total crowdfunding raised worldwide from 2014 to 2016 is $2.1 billion while in 2016 in US total crowdfunding raised was $738.9 billion. The crowdfunding industry is projected to grow over $300 billion by 2025. North America remains the largest crowdfunding market, having raised $17.1 billion in 2017. Asia with fast growing market is catching up with $10.54 billion raised the same year, while the Europe is in the third place with $6.48 billion.

Crowdfunding can be used as a free marketing tool. Crowdfunding platforms make new projects easily discoverable giving exposure to a lot of new people on the platform. In addition, most platforms incorporate social media making it easier to share and spread the message via Facebook, twitter and other platforms. Also, media often picks up on the popular projects, providing them with more publicity.

People with limited resources can test their product by using the crowdfunding platform to do pre-sale and market research. Platform will help with pre-sale by providing an insight on how big is the demand for the product. That insight is collect from number of people that back the project and their comments. Potential customers can give a valuable feedback on the ways to improve the product which can mitigate the risk of going into the market.

Special thing about crowdfunding that not all supporters want to make a quick buck. It attracts loyal customers and patrons who want to be a part of a great idea by supporting it from the very beginning. Having people united by a belief in the same product can elicit great things in business. in order to find people that are willing to fund your project be sure to spread the word to various investors and don’t be afraid to make some changes on the way to meet the demands. It is normal to see your project involve as more people get involved.

Attracting that early contributors is important because they can help drive more people to your crowdfunding project. You can use type of reward crowdfunding where some rewards can be offered to early backers which will encourage them to inform more people about the project and in that way minimize the risk of project failing.

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Mergers and Acquisitions

Mergers and acquisitions (M&A) are defined as a combination of companies. When two companies combine together to form one company, it is termed as Merger of companies. While acquisitions are where one company is taken over by the company.

  • In the case of Merger, the acquired company ends to exist and becomes part of the acquiring company.
  • In the case of Acquisition, the acquiring company takes over the majority stake in the acquired company, and the acquiring company continues to be In existence. In short one in acquisition one business/organization buys the other business/organization.

Definition:

Merger – When two companies combines together to form one company, it is termed as merger of companies. The two companies end to exist and new company is formed.

Acquisition – In case of acquisition, the acquiring company takes over the majority stake in the acquired company, and acquiring company continues to be in existence.

Companies:

Merger – The companies of same size are combines together.

Acquisition – The larger companies acquires smaller companies.

Challenges:

Merger – The two companies of the same size combine to increase their potential strength and financial profits along with breaking the trade barriers.

Acquisitions – The two companies of different sizes come together to conquer the challenges of decline of business.

Agreement:

Merger – A buyout agreement is known as a merger when both owners mutually decide to combine their business in the best interest of their firms.

Acquisition – A buyout agreement is known as an acquisition when the agreement is aggressive, or when the target firm is unwilling to be bought.

How Can Mergers & Acquisitions Take Place?

– by purchasing assets
– by purchasing common shares-
– by exchange of shares for assets
– by exchanging shares for shares

Types of Mergers

–   Horizontal Mergers
Horizontal mergers happen when one company merges or takes over another company that has similar products and services, which means that both the companies are in the same industry.
–  Vertical Mergers
In the vertical merger, there is a combination of two companies that are in the same business of producing the same goods and services, but the only difference is the stage of production at which they are operating are different.

–   Concentric Mergers
Concentric mergers are between firms that serve the same customers in a particular industry, but the products and services offered are different.

–   Conglomerate Mergers
When two companies that operate in a completely different industry merger together to form a new company it is known as a conglomerate merger.

Reasons for M&A

–   Mergers and Acquisitions (M&A) improves the quality of companies performance by reducing the redundant cost of operations
–   Removes Excess capacity
–   Accelerate growth
–   Acquire skills and technology

 

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How to create positive corporate image

An undeniable fact of business life as we enter the 21st century is that market became a highly competitive place with a complex business climate so companies need to do effective and cost efficient job of marketing themselves than ever before. Corporate image describes the manner in which a company, its activities, product and services are persevered by public. In order to stay relevant many businesses actively strive to create and communicate positive corporate image to their customers, shareholder, potential investors and general public.

If you ignore the importance of corporate image in order to avoid associated costs it will end costing you more in the long run. Some of the negative consequences are high employee turnover, lack of or losing important customers or drop in stock value. Contrary to popular belief many of the tools for creating corporate image are time tested and require only a commitment and energy. While expensive advertising campaigns will certainly help with awareness of your business there are other tools that can also raise awareness while building credibility and competitive distinction. Hiring a good investor awareness and strategist company you will be able in no time to increase your market presence and build positive corporate image. Some of the methods that you can use are:

  • Make sure that you have clear customer focused message that will set you apart from competition as well as unique reason why they should do business with you and then put that message everywhere, on your business cards, thank you cards, brochures, etc.
  • Cultivate relationship with media sources, using carefully written material, containing solid information accompanied by visuals. You can sponsor targeted TV shows and appear in them if appropriate. Public speaking can only help you when reaching audience.
  • Internet is another platform that can be used to create awareness and good corporate image. Promote yourself trough e-mail signatures, articles, web sites and discussion group. This way you can really reach wide base of customers. It is not a bad idea to create contests and awards as a means to build goodwill and name recognition.
  • You can organize and promote newsworthy events but also get involved with community service and where is that possible make more than financial commitment. Often environmental and social image of firms are affecting customers decision to purchase products or services from particular company.
  • The more you communicate the company identity to audience important to the firm the more you will experience benefits that come with good awareness of your business and positive corporate image. If investors know about and they are conscious of your company and aware of your products and services chance that they will invest in your business are higher. Good corporate image will very likely rise motivation among employees, attract new customers and retain the old ones. Customers always remember extraordinary service and they will reward you with loyalty.

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Why companies split stock?

Stock split or forward stock split is a corporate action where board of directors decides to issue more shares by dividing existing outstanding shares into multiple shares defined by the predetermined ratio. Most common ratios are 2 for 1 or 3 for one where investors for every share they own get two or three shares respectively. Likewise, price will be divided accordingly. If for example you originally owned 100 shares, each worth $15 in 2 for 2 split you will receive 200 shares each worth $7.5 and in situation where 3 for 1 split is done it will be 300 shares with $5 price per share. As you can see no real value is added and market capitalization is the same just like with reverse stock split.

Companies do this for various reasons. Some stock price can reach astonishing level and company’s official might want to lower the price to make it more appealing to small retail investors. Some argue that there is a psychological effect which makes owning more stock at a lower price more satisfying than owning a smaller number of shares with higher price. Stock exchanges have standardized number of shares as a trading unit and it is usually a 100 shares so it will be easier for small investor to buy one hundred shares at a lower price. Higher number of shares results in greater liquidity because of course there is a bigger float and popular trading price will almost certainly renew interest in the stock. This is shown through narrow bid – ask spread which reflect supply and demand for certain company’s shares. After stock split price decreases but it can be followed by an increase because of the interest of small investor who now perceive stock as more affordable and boost demand in that way.

Popular media service provider company Netflix has split stock twice since it started trading publicly in 2002. Company’s success has been followed by dramatic increase in price which company lowered by doing two for one stock split in 2004 leaving share price to $40. A little more than ten years later Netflix undergoes seven for one stock split lowering share price from $700 to $100. Other companies like Apple, Amazon and Berkshire Hathaway also undergone stock split mostly to expand shareholders base and make their stock more affordable to average investor.

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How to find Angel Investors

Public Angel Investors

  • The advantage of “public” angel investor is that they are easy to find. The disadvantage is that because they are easy to find, they are constantly being approached with investment opportunities and can only fund a tiny portion of those that they see.
  • Public angel investors are angel investment groups or individual angel investors that you can find online and/or specify themselves as angel investors.
  • The other type of “public” angel is someone who publicly identifies themselves as an angel investor. By going to a site like LinkedIn and searching the keyword “angel investor”, you can probably find such individuals.

Private Angel Investors

  • Private angel investors are people who have either made just one or a small amount of angel investments or who have the financial ability to make an angel investment, but has.
  • Most “private” angel investors have the means and interest in making an angel investment, but they just don’t know about them. Because “private” angels have much less to choose from, there is a high likelihood that they’re going to choose you.

Finding private or “latent” angel investors

The name of the game here is networking. Networking allows you to find other business owners, executives and/or other people with money.

How to get started

The easiest way to get started is to target “public” angels and then start your networking process to find “private” angels. While these angels are much harder to find, remember that when you do find them, they have a much higher likelihood of funding you.

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Being a public company – what it means?

In simple term public company is company whose shares are publicly traded on one or more stock exchanges or over the counter market (OTC) and that ownership is dispersed among the many investors. History of public market dates back in early modern period when Dutch helped lay foundation of modern financial system. Publicly traded companies usually have many investors while privately held companies had fewer, but company with big number of investor doesn’t have to be public company. Securities and Exchange Commission (SEC) states that every company with more than 500 investors and more than $10 million in assets must register with SEC and adhere to its regulations. Most public companies where private and after that they meet requirements to become publicly traded company mainly because it brings many advantages.

Public companies are able to raise capital through the sale of stock in a way shares become company’s currency which is then traded on the market. Before it was difficult to obtain larger sums of capital. It was only possible through wealthy investors and banks willing to take the risk. Investors can profit from stocks dividends – payment made by corporation to its shareholders, usually as a distribution of profits. Once that company goes public it can generate new revenue through sale of new shares (secondary offering).

When a company is public it is under a lot of scrutiny, having to meet all the needed requirements and regulations. Those requirements include disclosure of financial statements and annual reports that truthfully represent the state of the company. SEC requires hat public companies report to their major shareholders each year, including institutional shareholders, company’s officials who own shares and any other investors that own more than 5% of shares. Many stock exchanges require from companies to have their accounts regularly audited by an outside auditor. This requirement for audited financial is not imposed by OTC Pink. What this means is that more information is available to the public in order to help investors deciding whether to add particular stock in their portfolio.

Being a publicly traded company can have a certain amount of prestige, especially if your stock are traded on one the big exchanges like The New York Stock Exchange (NYSE) and NASDAQ. Public companies with many shareholders tend to be more recognizable to public than private companies. Initial public offerings are, especially of big companies are usually covered in media, creating a buzz of excitement and attracting more potential investors. It is a way for initial shareholders to share the risk or provide an exit strategy while increasing assets liquidity and avoiding bank debt. Giving shares of your company to the management and employees is a good incentive program that will inspire them to work harder and ensure company’s success.

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