Why UK Technology Companies Fail

Against any measure, British technology companies rarely achieve a fraction of the level of success enjoyed by American companies. By all measures there is no shortage of talent, innovation or opportunity for British Companies. Yet we fail on a wider stage, why?

In the UK we tend to build our companies around our technology, believing that, if we build a better product, customers will find us. Sadly this is not true. To add further to the problems we distrust sales and marketing. We think of it as a necessary evil, with the result that we do not understand how to understand markets and build effective to help our sales. Equally we do not fully understand the vital role of marketing, trusting instead to flawed marketing strategies and communications programmes.

The truth is, that in today’s highly competitive, busy and pressured markets, sales and are in many ways the critical elements required by firms to ensure that they survive, let alone thrive in their chosen markets.

Exploding the Myths

Before exploring why sales and marketing strategies are a key part of any firm’s route to success, we believe that we need to de-bunk some of the mythology –

Myth #1

Marketing is advertising – It is true that advertising is part of marketing, but in truth it is a small part of the overall marketing effort. Marketing should be a powerful tool that helps firms understand their markets, helps the firm develop products that really fit the market and then finally guides the firm to get the product to market in a way that ensures it is successful and profitable. Marketing provides sales with the tools it needs to be successful.

Myth #2

We aren’t making our numbers because the sales people are no good – That might be true. However in nearly 80 percent of the work we do, we find that while the sales team might need training, the real problem lies with the product, the way the firm relates to the market or the sales channels used by the firm are not in line with the market’s expectations. As a result, even a highly skilled sales person would find it difficult to succeed.

Myth #3

The competition is killing us – This might be true but in general if you have done your homework on the market properly, your product fits the market requirement and you are going to market the way the market wants, then you should be successful.

Myth #4

We’ve got a few customers, but we just can’t seem to win anymore – Did you build your product around your current customers and have you asked the rest of the market what they want? This is a common problem that many firms face in the development and growth.

Building Sales & Marketing Strategies

The first step in building your sales and marketing strategies is to understand that markets operate to a set of rules. This applies to all markets and you can ignore these if you wish, but if you follow the rules then you will give yourself a greater chance of success.

The Rules

1 The market is always right – even when it’s wrong
2 The market only buys what it perceives it needs
3 The market buys when and how it wants to – always
4 The market only buys products that make money, save money or deliver an intangible benefit
5 The market has a short attention span
6 The market does not care about its suppliers – even if it says it does
7 Your competition never has the ‘killer’ product and you are never the cheapest or the most expensive.

Key Marketing Disciplines

Companies who wish to improve all aspects of Sales and Marketing need to put in place the following key disciplines. These are not one-off events but a continuing process of understanding the market, it’s needs and it’s rules.

1. Market Verification – Unbiased and completely impartial research carried out to verify the real opportunity in a market for a company and its products and services.
2. Product Marketing – The development and management of a market led sales and marketing proposition for a company and its products, that is designed to increase the chances of success in the market.
3. Product Management – The definition of products and services required by the market.
4. Marketing Communications – The execution of the across the panoply of marketing outlets – both analogue and digital.
5. Channel Marketing – The development of sales channels in line with the market’s expectations and which are most likely to deliver success for the firm.
6. Channel Management – Managing the routes to market in line with strategy.

The Team

Market Transformations is a Sales and Marketing Consultancy company with more than 100 years combined experience in the research, development, launch and growth of companies and their products in the complex and fast moving high technology sector.

Can we help you?

If you are about to launch a new product, service or company; if you are unhappy with your current sales; if you think marketing is all about advertising and events; if you think there is another way, then we can probably help. Drop us an email or call our number, we’ll soon know, and so will you.

The proof of the pudding….we have built up a clientele that keep coming back to us for more, because we are straightforward and simple to deal with. We do what we say we are going to do and we keep the jargon to a minimum. We work with all sizes of companies and we always deliver value. We will tell you if we can help you, equally we will tell you if we cannot.

But we wouldn’t expect you to just take our word for it. We would encourage anyone who may want to do business with us to contact our clients, they will tell you the truth about their experience.

I Want to Sell my Healthcare Information Technology Company – Just After This Next Big Sale

You have made the decision to sell your healthcare information technology company. Maybe it was because your prospects are selecting the inferior product but superior safety of your brand name competitor. It could be that one of the industry giants recently acquired one of your small but worthy competitors and has removed the risk component of a buyer’s decision. You may think that you have a limited window of opportunity for your technology and you should sell it while it still enjoys a competitive advantage.

These are all good reasons to set your business sale process in motion. A critical element here is time. Good technology not achieving meaningful market penetration is vulnerable to competition. Given this scenario, the more rapidly you can get your acquisition opportunity in front of the viable buyers, the better your chance for more favorable sale terms and conditions.

All systems go, right? But wait. We have a major proposal out to that 30 hospital chain and when we get that deal our sale price will sky rocket. So we are just going to wait for that deal to close and then put our company up for sale.

Let me give you a gem here. We will call it the Moving Sales Pipeline Theorem. It states the sales pipeline always moves to the right. This is based on over 20 years in technology sales and sales management experience and many years of selling companies with sales pipelines. The sales either take much longer than projected or do not materialize at all.

Given this, the time critical nature of your pending business sale, and your desire to ring the bell from your 30 hospital chain deal, what do you do?

You engage a great M&A firm that specializes in Healthcare Information Technology companies (I know of one if you are interested) to sell your business. Let them focus on selling your business and you focus on running your business and closing that big sale. Get several buyers interested and negotiate for your best deal. There will be a lot of give and take here. At the right moment, as a counter to one of the buyer’s points, you ask for a 6-month window post acquisition to close that deal. You then ask, for example, for an earn out incentive of 50% of the contracted first year revenues of the hospital deal as “additional transaction value” payable 30 days after the one year purchase anniversary date.

Blogs for Technology Companies: Your Biggest Questions Answered

Business-to-business and technology companies often avoid blogging; it takes time, it feels more exposed than a website, and it has a lingering reputation for frivolity. But blogging brings new life to a static technical website and reinforces your marketing message for both readers and search engines. Those results are worth going after. Here are answers to some of the most frequently asked questions about blogs for technology and B2B companies.

What Can We Blog About?

White papers and success stories (or case studies) are strong marketing tools for companies that offer B2B and technology products, services, and solutions. Think of your blog posts as chapters or sections of a larger white paper and as a vehicle for your success stories. You might discuss the latest industry trends; solutions on the horizon; or research you’re undertaking. You might describe recent customer problems and their solution; the industry standards you meet or exceed; and your approach to compliance issues. Perhaps you have advice for customers on how to choose among the companies that offer products or services similar to your own.

Each of those topics, just a sampling of the many available, could generate several posts over a year.

Where Should We Blog?

You should first of all blog on your own site to gain the advantage of new content and repeated keywords. But also consider contributing to a group blog site that is specific to your industry, location, or field; your appearance on another blog confirms your expertise, and your post will be read by the exact audience you want to attract.

How Much Work Is Involved?

Don’t begin a blog unless you can commit to one new post per week. A lapsed blog proclaims that you don’t care about quality or timeliness, and you don’t care who knows it.

Drive traffic to your blog by announcing it to current and potential customers. Send customers to your blog for the answers to frequently asked questions. Link to your blog from Facebook, LinkedIn, Twitter, and other social media. Include your blog in your overall marketing campaign and mention it in your marketing collateral.

If you have no one in your company who can write, promote, and maintain the blog, hire a freelance writer.

Blog or E-Newsletter or…?

Blogs and newsletters are not mutually exclusive. An e-newsletter that provides a click through to an interesting post guides customers directly to your website, one of your major goals. Customers who would never write a letter to an editor will comment on a blog, giving you a chance to grow the relationship.

Old newsletter articles are a gold mine for current blog posts; a longer article can be broken up into several posts. By the same token, a group of posts is an excellent start towards a longer article or even a white paper.

Revenue-Based Financing for Technology Companies With No Hard Assets

WHAT IS REVENUE-BASED FINANCING?

Revenue-based financing (RBF), also known as royalty-based financing, is a unique form of financing provided by RBF investors to small- to mid-sized businesses in exchange for an agreed-upon percentage of a business’ gross revenues.

The capital provider receives monthly payments until his invested capital is repaid, along with a multiple of that invested capital.

Investment funds that provide this unique form of financing are known as RBF funds.

TERMINOLOGY

– The monthly payments are referred to as royalty payments.

– The percentage of revenue paid by the business to the capital provider is referred to as the royalty rate.

– The multiple of invested capital that is paid by the business to the capital provider is referred to as a cap.

CASE STUDY

Most RBF capital providers seek a 20% to 25% return on their investment.

Let’s use a very simple example: If a business receives $1M from an RBF capital provider, the business is expected to repay $200,000 to $250,000 per year to the capital provider. That amounts to about $17,000 to $21,000 paid per month by the business to the investor.

As such, the capital provider expects to receive the invested capital back within 4 to 5 years.

WHAT IS THE ROYALTY RATE?

Each capital provider determines its own expected royalty rate. In our simple example above, we can work backwards to determine the rate.

Let’s assume that the business produces $5M in gross revenues per year. As indicated above, they received $1M from the capital provider. They are paying $200,000 back to the investor each year.

The royalty rate in this example is $200,000/$5M = 4%

VARIABLE ROYALTY RATE

The royalty payments are proportional to the top line of the business. Everything else being equal, the higher the revenues that the business generates, the higher the monthly royalty payments the business makes to the capital provider.

Traditional debt consists of fixed payments. Therefore, the RBF scenario seems unfair. In a way, the business owners are being punished for their hard work and success in growing the business.

In order to remedy this problem, most royalty financing agreements incorporate a variable royalty rate schedule. In this way, the higher the revenues, the lower the royalty rate applied.

The exact sliding scale schedule is negotiated between the parties involved and clearly outlined in the term sheet and contract.

HOW DOES A BUSINESS EXIT THE REVENUE-BASED FINANCING ARRANGEMENT?

Every business, especially technology businesses, that grow very quickly will eventually outgrow their need for this form of financing.

As the business balance sheet and income statement become stronger, the business will move up the financing ladder and attract the attention of more traditional financing solution providers. The business may become eligible for traditional debt at cheaper interest rates.

As such, every revenue-based financing agreement outlines how a business can buy-down or buy-out the capital provider.

Buy-Down Option:

The business owner always has an option to buy down a portion of the royalty agreement. The specific terms for a buy-down option vary for each transaction.

Generally, the capital provider expects to receive a certain specific percentage (or multiple) of its invested capital before the buy-down option can be exercised by the business owner.

The business owner can exercise the option by making a single payment or multiple lump-sum payments to the capital provider. The payment buys down a certain percentage of the royalty agreement. The invested capital and monthly royalty payments will then be reduced by a proportional percentage.

Buy-Out Option:

In some cases, the business may decide it wants to buy out and extinguish the entire royalty financing agreement.

This often occurs when the business is being sold and the acquirer chooses not to continue the financing arrangement. Or when the business has become strong enough to access cheaper sources of financing and wants to restructure itself financially.

In this scenario, the business has the option to buy out the entire royalty agreement for a predetermined multiple of the aggregate invested capital. This multiple is commonly referred to as a cap. The specific terms for a buy-out option vary for each transaction.

USE OF FUNDS

There are generally no restrictions on how RBF capital can be used by a business. Unlike in a traditional debt arrangement, there are little to no restrictive debt covenants on how the business can use the funds.

The capital provider allows the business managers to use the funds as they see fit to grow the business.

Acquisition financing:

Many technology businesses use RBF funds to acquire other businesses in order to ramp up their growth. RBF capital providers encourage this form of growth because it increases the revenues that their royalty rate can be applied to.

As the business grows by acquisition, the RBF fund receives higher royalty payments and therefore benefits from the growth. As such, RBF funding can be a great source of acquisition financing for a technology company.

BENEFITS OF REVENUE-BASED FINANCING TO TECHNOLOGY COMPANIES

No assets, No personal guarantees, No traditional debt:

Technology businesses are unique in that they rarely have traditional hard assets like real estate, machinery, or equipment. Technology companies are driven by intellectual capital and intellectual property.

These intangible IP assets are difficult to value. As such, traditional lenders give them little to no value. This makes it extremely difficult for small- to mid-sized technology companies to access traditional financing.

Revenue-based financing does not require a business to collateralize the financing with any assets. No personal guarantees are required of the business owners. In a traditional bank loan, the bank often requires personal guarantees from the owners, and pursues the owners’ personal assets in the event of a default.

RBF capital provider’s interests are aligned with the business owner:

Technology businesses can scale up faster than traditional businesses. As such, revenues can ramp up quickly, which enables the business to pay down the royalty quickly. On the other hand, a poor product brought to market can destroy the business revenues just as quickly.

A traditional creditor such as a bank receives fixed debt payments from a business debtor regardless of whether the business grows or shrinks. During lean times, the business makes the exact same debt payments to the bank.

An RBF capital provider’s interests are aligned with the business owner. If the business revenues decrease, the RBF capital provider receives less money. If the business revenues increase, the capital provider receives more money.

As such, the RBF provider wants the business revenues to grow quickly so it can share in the upside. All parties benefit from the revenue growth in the business.

High Gross Margins:

Most technology businesses generate higher gross margins than traditional businesses. These higher margins make RBF affordable for technology businesses in many different sectors.

RBF funds seek businesses with high margins that can comfortably afford the monthly royalty payments.

No equity, No board seats, No loss of control:

The capital provider shares in the success of the business but does not receive any equity in the business. As such, the cost of capital in an RBF arrangement is cheaper in financial & operational terms than a comparable equity investment.

RBF capital providers have no interest in being involved in the management of the business. The extent of their active involvement is reviewing monthly revenue reports received from the business management team in order to apply the appropriate RBF royalty rate.

A traditional equity investor expects to have a strong voice in how the business is managed. He expects a board seat and some level of control.

A traditional equity investor expects to receive a significantly higher multiple of his invested capital when the business is sold. This is because he takes higher risk as he rarely receives any financial compensation until the business is sold.

Cost of Capital:

The RBF capital provider receives payments each month. It does not need the business to be sold in order to earn a return. This means that the RBF capital provider can afford to accept lower returns. This is why it is cheaper than traditional equity.

On the other hand, RBF is riskier than traditional debt. A bank receives fixed monthly payments regardless of the financials of the business. The RBF capital provider can lose his entire investment if the company fails.

On the balance sheet, RBF sits between a bank loan and equity. As such, RBF is generally more expensive than traditional debt financing, but cheaper than traditional equity.

Funds can be received in 30 to 60 days:

Unlike traditional debt or equity investments, RBF does not require months of due diligence or complex valuations.

As such, the turnaround time between delivering a term sheet for financing to the business owner and the funds disbursed to the business can be as little as 30 to 60 days.

Why High Technology Companies Can Benefit From Call Center Outsourcing

Outsourced call center services for high technology companies can be extremely beneficial. Sales professionals in the high tech sector are generally highly compensated relative to other industries. It makes sense to outsource some if not all of the business development functions to only it that specialize in the high tech sector. This enables your sales representatives to focus on closing business as opposed to prospecting. You should consider using a business to business service provider that focuses on the technology industry, especially if you are pursuing C-Level executives for enterprise solutions.

In the interest of discovering new opportunities, your business development people need a combined skill set. A knowledge of your product or service offerings along with an advanced skill set of using the phone effectively to penetrate an organization. Business development professionals at technology companies typically don’t have the years of experience in handling telesales and telemarketing programs by phone compared to agents that specialize in the tech company sector. Many have never had any formal telephone skills training for sales professionals. They are challenged with working around obstacles such as gatekeepers, meetings and voice mails to reach the decision maker and share their value proposition. Call center teleprofessionals know how to overcome these obstacles. They know how to secure appointments, pre-qualify potential clients for your services or handle a complete telesales program. By using it outsourcing for your technology company your sales representatives are able to move onto the next step in the sales cycle.

Another advantage of call center outsourcing for high tech companies is the avoidance of considerable expenditures by setting up and maintaining your own internal operation. The top-tier it have already made a solid investment in world-class technology infrastructure and customer relationship management systems. You can avoid the costs and gain the efficiencies by outsourcing.

In conclusion an important differentiator in the call center selection process is the qualifications and capabilities that you require of your outsourced vendor. You may need it that has years of experience in telesales and telemarketing to Fortune 500 companies promoting software, hardware or consulting services to senior level executives. You need to engage a highly specialized it with the appropriate experience to ensure that you’ll increase leads, increase appointments, increase sales, increase profits, increase market share and decrease overhead expenses. The ultimate benefit of it outsourcing is to increase your return on investment by selecting the right call center partner.

Rising Trend in the Auto Industry – Reaching Out to NFC Technology Companies

Rising Trend in the adoption of NFC technology by Auto Industry

The technology of near field communications (NFC) has been growing by leaps and bounds in the last couple of years and many technology providers who have been providing mobile software application services have jumped in to NFC bandwagon. NFC Technology business application developers have been continuously establishing relationships with the Auto majors to come out with such innovative NFC applications. If the trend seen in the recent CES 2013 show is anything to go by, NFC technology is going to continue on its strong growth trajectory in the coming years. One industry vertical on which the NFC technology companies are betting big is the Automobile industry. NFC companies are trying to come out with a series of NFC applications used in streaming content and transferring data in the automobiles.

NFC in Auto Industry

Most of the cars in different utility segments come with state of the art entertainment, infotainment and navigation features built in to it. NFC technology providers have been doing significant research on the usage of wireless connectivity inside the cars. Wireless connectivity inside the cars has become critical in transferring content from various personal tablets and smart phone devices to the entertainment and navigation systems used in the car. These wireless systems would eventually replace the existing expensive cabling system for communication and data transfer inside the car.

NFC Chips for Vehicles

NFC Technology developers such as Texas Instruments have come out with a NFC chip that helps in achieving wireless connectivity in side cars. The new system called the WiLink 8Q system-on-chip family integrates technologies such as NFC, WI-Fi, Blue tooth and GNSS to achieve wireless communication between the device used by the driver and devices owned by the different passengers sitting in side the car. NFC enabled tablets and smart phones require a NFC tag to engage in NFC enabled data communication. One can buy NFC tags in e-Commerce portals such as Amazon. Texas instrument is planning to come out with a prototype of the equipment model in the 2nd quarter of 2013. They are planning to start production in early 2014. This solution has been developed for auto manufacturers that manufacture cars in high volumes.

NFC Car Keys for opening Hotel Rooms

Among the different NFC technology manufacturers, Ving Card Elsafe is one company that has been specializing in coming out with hotel key cards based on NFC technology. Ving Card Elsafe has partnered with BMW to develop a new technology that would enable car drivers to book hotel rooms from their cars and use their car keys to open the room. This would be very much useful for business travelers who are in constant need of last-minute hotel bookings.

Using the built-in navigation system available in side the BMW car, BMW car drivers can search for the nearby hotels that are within the range of NFC standards. The driver can select a particular hotel and complete the booking from their BMW car. Once the reservation is complete, the vehicle navigation system informs the driver regarding the room number in the hotel and also guides the driver to that particular hotel. The access code that is required for opening the hotel room door gets downloaded automatically to the NFC enabled car key. BMW drivers can walk past the hotel check in counter and directly enter the booked room. Drivers can use their NFC enabled car key to open the Vingcard Elsafe Contact less door lock.

More and more top NFC technology companies are beginning to partner with reputed auto manufacturers to come out with such innovative NFC applications.

Technology Companies: Grow Or Sell?

The excitement and buzz of Silicon Valley is definitely what makes it the technology capital of the world, but the peer pressure in the area tends to make many entrepreneurs lose sight of reality. In the Silicon Valley, almost every entrepreneur’s checklist includes: get venture capital, grow beyond wildest dreams, and do an IPO or sell to Google. With less than 1% of startups getting funded and less than 10% of those companies having a great exit or going IPO, you have a 1 in 1000 shot of meeting the goals on such a checklist.

Of the other 999, most of them generate very little if any revenues and just fizzle away. Some become viable technology businesses with none or little outside funding and achieve significant growth until they get somewhere between $5 and $20 million in sales. While such companies are growing, most think that their growth path will continue for quite a bit longer than it actually does. Generally, once they get to that plateau, they get stuck and have a difficult time growing due to one of several reasons:

Their technology or offering starts becoming obsolete due to a new technology, service or website
Their well-funded competitors start to take their customers due to more expensive marketing campaigns, lower cost, or a better service
A company like Google starts to offer the product for free

Once you get to this point, it is very difficult to reverse the damage. At this point, many technology companies feel that if they just add value to the customer, they can usually offset the above negative factors. Sometimes, they can continue to grow, but usually either the competitor is one step away or the increase in value doesn’t warrant the increase in cost to the customer. So what is the best way to beat the plateau? When your company is at a long-term plateau, the answer is to sell the company or take on a majority partner that can help you grow through synergy, capital and management. If you don’t do one of these, you are definitely not getting the best return on your investment and there is a good chance you could lose your entire investment in a few more years.

In fact, the best time to sell a technology company is when you are growing. Our rule of thumb is that while the company’s revenues are growing greater than 20%, it is best to keep growing the company. When it starts teetering around 20% or dropping below 20%, it is best to sell the company. The reason is that selling a company exhibiting growing forecasts is much easier than selling a company exhibiting flat or nominally increasing forecasts. Buyers are typically looking at the forecasts of your company to determine its value, so it is much better being in a position to offer strong, growing forecasts that a buyer can believe.

Thus, the take-away here is that if you are self -funded or a bootstrapped technology company that saw or is seeing good growth, most likely, it will come to an end. Therefore, you have to make a decision whether you will continue trying to grow the company or whether you will capture the value you have already created for the company by selling when your company is in a strong position. If you attempt to continue to grow, there is a good chance, you will plateau and probably decline. Think objectively and choose the right path.

Neil Shroff is the Manging Director of Orion Capital Group, a mergers and acquisitions advisory firm. Neil is well-versed in mergers and acquisitions, operations, business development and management consulting. Prior to founding Orion Capital Group, Neil co-founded an overseas manufacturing outsourcing firm. During his tenure, Neil acted as the lead for two strategic acquisitions, and eventually worked closely with the board of directors to lead the sale of the firm.

Previously, Neil was a Managing Director for a Jefferies Capital Partners portfolio company where he led the company’s transition from a position of financial and operational distress to position of profitability. In his early career, Neil was a management consultant at SRI International and another small consulting firm where he focused on developing strategic recommendations for numerous clients in the biotech, medical device, and material technology industries.

Technological Companies Will Survive, by Innovating and Expanding Across Borders

The current economic situation worldwide continues to be one of crisis. Once in a while, some gurus predict the end of the crisis, but they usually do not agree on the exact date. Over time, management teams of most organizations have understood that the key to survival is standing out from the competition. The main elements to pursue in order to reach this goal are innovation and multinational presence.

As such, technological companies have a great responsibility: they must be the leading sector in the path towards economic recovery. In fact, they already play an increasingly important economic part, as large technological enterprises have become economic leaders around the world, and the role of small and medium-sized companies on a more reduced scale should not be underestimated either. In other words, technological companies of all sizes will act as triggers for recovery, as they boost the efficiency and productivity levels of other sectors.

Innovation is team work

Guido Stompff, an OcĂ© designer, highlights the importance of collective thinking for R+D in his PhD thesis, which he defended at the Delft University of Technology. “Innovation is often a new concept that usually arises from the interaction between experts, due to the fact that, when their knowledge is combined, new ideas appear that nobody had thought of before”. This new process, which Stompff refers to as “team cognition”, is the binding mechanism that aligns and coordinates group activities into a whole: the product.

When a company decides to invests their efforts in a product, their success basically resides in whether they are capable of standing out from the competition and positioning themselves correctly. In this sense, experts underline that it is not the rivalry among different products, but the customers’ view of these products that matters. This means that defining a target audience and highlighting product features essential to this target should be fundamental parts of the strategy.

Likewise, technological firms dedicate a large part of their revenue to R+D and adapt their processes to their clients’ needs. In other words, in addition to maintaining active players in the market, they are feeding back their experience from the field into their own processes. This ability to adapt and be flexible when needed will, without a doubt, mark the difference.

On the other hand, the competitive edge of small and medium-sized companies lies in their proximity to their clients. These close relationships enable these companies to innovate, as they turn direct first-hand information into new product development.

Future Perspectives

The Cluetrain Manifesto is a document written in 1995 that contains 95 ideas about how business relationships should develop in the newly connected market. One of its theses states that “Markets are now interconnected on a human-to-human level and, as a direct result, markets are getting smarter and profoundly joined in conversation. Companies that do not understand this evolution, are losing their best opportunity.”

International presence, both physically and virtually, means an added value for any company when competing in a globally connected market. In this sense, one of the Manifesto’s ideas highlights that “There are no secrets. The online market knows more than companies about their own products. Regardless of whether the news is good or bad, everyone is informed. ”

From the beginning of the crisis, management teams of technological companies have reconsidered their strategies and repositioning methods to adapt to the new global situation. The goal is to sell their knowledge, structure and technologies outside their borders, as close relationships in their immediate environment are making way for a more international presence, with more opportunities to obtain resources if they are competitive.

A company’s international presence may consist of different levels, which may or may not be mutually compatible. Establishing business in one or more countries tends to be a valid option mainly for large enterprises, while expansion strategies through partner alliances seem to be the most interesting option for small and medium-sized companies as these alliances maximize the organization’s presence abroad. As such, English is without a doubt the language of technology worldwide. However, other languages, such as Russian, Chinese and Portuguese, should also be taken into account, via Website translation and/or direct communication, in order to better reach these important markets. Finally, there are the social media platforms, of course. Social media has become an essential means for companies to spread information and create fluid interaction with their public.

Revenue-Based Financing for Technology Companies With No Hard Assets

WHAT IS REVENUE-BASED FINANCING?

Revenue-based financing (RBF), also known as royalty-based financing, is a unique form of financing provided by RBF investors to small- to mid-sized businesses in exchange for an agreed-upon percentage of a business’ gross revenues.

The capital provider receives monthly payments until his invested capital is repaid, along with a multiple of that invested capital.

Investment funds that provide this unique form of financing are known as RBF funds.

TERMINOLOGY

– The monthly payments are referred to as royalty payments.

– The percentage of revenue paid by the business to the capital provider is referred to as the royalty rate.

– The multiple of invested capital that is paid by the business to the capital provider is referred to as a cap.

CASE STUDY

Most RBF capital providers seek a 20% to 25% return on their investment.

Let’s use a very simple example: If a business receives $1M from an RBF capital provider, the business is expected to repay $200,000 to $250,000 per year to the capital provider. That amounts to about $17,000 to $21,000 paid per month by the business to the investor.

As such, the capital provider expects to receive the invested capital back within 4 to 5 years.

WHAT IS THE ROYALTY RATE?

Each capital provider determines its own expected royalty rate. In our simple example above, we can work backwards to determine the rate.

Let’s assume that the business produces $5M in gross revenues per year. As indicated above, they received $1M from the capital provider. They are paying $200,000 back to the investor each year.

The royalty rate in this example is $200,000/$5M = 4%

VARIABLE ROYALTY RATE

The royalty payments are proportional to the top line of the business. Everything else being equal, the higher the revenues that the business generates, the higher the monthly royalty payments the business makes to the capital provider.

Traditional debt consists of fixed payments. Therefore, the RBF scenario seems unfair. In a way, the business owners are being punished for their hard work and success in growing the business.

In order to remedy this problem, most royalty financing agreements incorporate a variable royalty rate schedule. In this way, the higher the revenues, the lower the royalty rate applied.

The exact sliding scale schedule is negotiated between the parties involved and clearly outlined in the term sheet and contract.

HOW DOES A BUSINESS EXIT THE REVENUE-BASED FINANCING ARRANGEMENT?

Every business, especially technology businesses, that grow very quickly will eventually outgrow their need for this form of financing.

As the business balance sheet and income statement become stronger, the business will move up the financing ladder and attract the attention of more traditional financing solution providers. The business may become eligible for traditional debt at cheaper interest rates.

As such, every revenue-based financing agreement outlines how a business can buy-down or buy-out the capital provider.

Buy-Down Option:

The business owner always has an option to buy down a portion of the royalty agreement. The specific terms for a buy-down option vary for each transaction.

Generally, the capital provider expects to receive a certain specific percentage (or multiple) of its invested capital before the buy-down option can be exercised by the business owner.

The business owner can exercise the option by making a single payment or multiple lump-sum payments to the capital provider. The payment buys down a certain percentage of the royalty agreement. The invested capital and monthly royalty payments will then be reduced by a proportional percentage.

Buy-Out Option:

In some cases, the business may decide it wants to buy out and extinguish the entire royalty financing agreement.

This often occurs when the business is being sold and the acquirer chooses not to continue the financing arrangement. Or when the business has become strong enough to access cheaper sources of financing and wants to restructure itself financially.

In this scenario, the business has the option to buy out the entire royalty agreement for a predetermined multiple of the aggregate invested capital. This multiple is commonly referred to as a cap. The specific terms for a buy-out option vary for each transaction.

USE OF FUNDS

There are generally no restrictions on how RBF capital can be used by a business. Unlike in a traditional debt arrangement, there are little to no restrictive debt covenants on how the business can use the funds.

The capital provider allows the business managers to use the funds as they see fit to grow the business.

Acquisition financing:

Many technology businesses use RBF funds to acquire other businesses in order to ramp up their growth. RBF capital providers encourage this form of growth because it increases the revenues that their royalty rate can be applied to.

As the business grows by acquisition, the RBF fund receives higher royalty payments and therefore benefits from the growth. As such, RBF funding can be a great source of acquisition financing for a technology company.

BENEFITS OF REVENUE-BASED FINANCING TO TECHNOLOGY COMPANIES

No assets, No personal guarantees, No traditional debt:

Technology businesses are unique in that they rarely have traditional hard assets like real estate, machinery, or equipment. Technology companies are driven by intellectual capital and intellectual property.

These intangible IP assets are difficult to value. As such, traditional lenders give them little to no value. This makes it extremely difficult for small- to mid-sized technology companies to access traditional financing.

Revenue-based financing does not require a business to collateralize the financing with any assets. No personal guarantees are required of the business owners. In a traditional bank loan, the bank often requires personal guarantees from the owners, and pursues the owners’ personal assets in the event of a default.

RBF capital provider’s interests are aligned with the business owner:

Technology businesses can scale up faster than traditional businesses. As such, revenues can ramp up quickly, which enables the business to pay down the royalty quickly. On the other hand, a poor product brought to market can destroy the business revenues just as quickly.

A traditional creditor such as a bank receives fixed debt payments from a business debtor regardless of whether the business grows or shrinks. During lean times, the business makes the exact same debt payments to the bank.

An RBF capital provider’s interests are aligned with the business owner. If the business revenues decrease, the RBF capital provider receives less money. If the business revenues increase, the capital provider receives more money.

As such, the RBF provider wants the business revenues to grow quickly so it can share in the upside. All parties benefit from the revenue growth in the business.

High Gross Margins:

Most technology businesses generate higher gross margins than traditional businesses. These higher margins make RBF affordable for technology businesses in many different sectors.

RBF funds seek businesses with high margins that can comfortably afford the monthly royalty payments.

No equity, No board seats, No loss of control:

The capital provider shares in the success of the business but does not receive any equity in the business. As such, the cost of capital in an RBF arrangement is cheaper in financial & operational terms than a comparable equity investment.

RBF capital providers have no interest in being involved in the management of the business. The extent of their active involvement is reviewing monthly revenue reports received from the business management team in order to apply the appropriate RBF royalty rate.

A traditional equity investor expects to have a strong voice in how the business is managed. He expects a board seat and some level of control.

A traditional equity investor expects to receive a significantly higher multiple of his invested capital when the business is sold. This is because he takes higher risk as he rarely receives any financial compensation until the business is sold.

Cost of Capital:

The RBF capital provider receives payments each month. It does not need the business to be sold in order to earn a return. This means that the RBF capital provider can afford to accept lower returns. This is why it is cheaper than traditional equity.

On the other hand, RBF is riskier than traditional debt. A bank receives fixed monthly payments regardless of the financials of the business. The RBF capital provider can lose his entire investment if the company fails.

On the balance sheet, RBF sits between a bank loan and equity. As such, RBF is generally more expensive than traditional debt financing, but cheaper than traditional equity.

Funds can be received in 30 to 60 days:

Unlike traditional debt or equity investments, RBF does not require months of due diligence or complex valuations.

As such, the turnaround time between delivering a term sheet for financing to the business owner and the funds disbursed to the business can be as little as 30 to 60 days.

Businesses that need money immediately can benefit from this quick turnaround time.

Top 5 Sales Tax Nexus Issues for Technology Companies

Do you make internet sales? (On all internet sales, sales tax is due…assuming the product/service is taxable. The issue is whether the seller has a duty to collect and remit or whether the buyer is required to self report.)
Do you have affiliate relationships (for generating sales) with out-of-state companies?
Do you have sales representatives travel outside of your home state?
Do you engage in trade shows outside of your home state?
Do you have employees or agents that perform services on your behalf outside of your home state?

If you answered “yes” to one or more of these questions, you could be creating a sales tax liability outside your home state. Also, remember income tax nexus is not equal to sales tax nexus. The rules apply differently.

Overview

Nexus is a “connection” or “link”. Sales and use tax nexus refers to the connection between a person or entity and a taxing jurisdiction sufficient for that jurisdiction to require the person or entity to comply with its sales and use tax laws.

The current basis for determining when sales and use tax nexus exists is found in two Supreme Court cases; Quill Corp. vs. North Dakota [May 26, 1992], and National Bellas Hess, Inc. vs.Department of Revenue of the State of Illinois [May 8, 1967]. In both Quill Corp. and National Bellas Hess, Inc., the Supreme Court ruled in favor of the taxpayer, limiting the states’ ability to impose its taxing authority over interstate commerce. The guidance derived from these two cases can be employed in today’s markets to manage sales and use tax compliance responsibilities.

While most States continue to reference these cases when defining sales tax nexus thresholds, the States continue to pursue expansion of their sales and use tax authority. With nexus being the foundational element that requires a company to collect and remit sales tax, it’s important to note some of the difficulties in determining whether a company has sales tax nexus or not.

As with most sales and use tax related matters, determining whether or not sales tax nexus exists requires some level of interpretation of a state’s statute as it applies to the activities of the entity. With that backdrop, here are the most common issues that technology companies struggle with from a sales tax nexus perspective. Also, it should be noted that sellers do not actually “charge” sales tax. Rather, seller’s “collect and remit” sales tax. This can be important. For example, as in the case of internet sales, sales tax is always “due”. This issue becomes whether the seller has the obligation to collect and remit the tax or if the buyer is obligated to self report.

#1. Affiliate Nexus, “Amazon Laws”, and Click-Through Nexus

The internet has resulted in a shift in our buying patterns and a decline in sales tax revenues. With our current tax system and the nexus rules as outlined above, an out-of-state retailer (translation – a retailer without nexus in the state) selling goods to a consumer or business over the internet is not required to collect sales tax. It is the buyer’s responsibility to self-assess the tax and voluntarily remit use tax to the state. Most businesses are aware of this nuance but many consumers are not.

States ensure compliance with these laws through business audits; however, the states don’t have the bandwidth, nor is it practical, to audit every consumer. So instead of going after the consumer, states are looking to implement taxing rules that require the out-of state business to collect the tax.

This is why “affiliate nexus”, and the “Amazon Law” or “click through nexus” have evolved. These are ways in which states have tried to use the existing nexus standards to require out-of state retailers to collect the tax that otherwise would not have been collected. The typical scenario occurs when an out-of-state business forms a relationship with an in-state business (often referred to as an affiliate) for the sole purpose of customer referrals via a connection to the out-of-state business’s website. For this referral, the in-state business receives some type of commission or other consideration. The relationship established through the affiliate programs creates nexus for the out-of-state business, creating an obligation to collect and remit local sales tax. Multiple states including Illinois and California have introduced recent affiliated nexus legislation mainly targeting large internet retailers such as Amazon, hence the title “Amazon Law”. In reaction to this legislation, Amazon has dropped their affiliate programs in most of these states. By dropping the affiliate programs, the company intends to terminate its nexus with the state and avoid prospective sales tax collection responsibility. However, this can be problematic as most states deem nexus to exist for a period of at least twelve months subsequent to the activity that created nexus.

The State of New York has passed legislation, called the “commission-agreement provision,” that creates a rebuttable presumption that a person (seller) making sales of tangible personal property or services is soliciting business through an independent contractor or other representative if the seller enters into an agreement with a New York resident under which the resident, for a commission or other consideration, directly or indirectly refers potential customers, whether by a link on an internet website or otherwise, to the seller (click through nexus). The presumption applies if the cumulative gross receipts from sales by the seller to customers in the state who are referred to the seller by all residents with this type of agreement with the seller is in excess of $10,000 during the preceding four quarterly periods ending on the last day of February, May, August and November. The presumption may be rebutted by proof that the resident with whom the seller has an agreement did not engage in any solicitation in New York on behalf of the seller that satisfies the nexus requirement of the U.S. Constitution during the four preceding quarterly periods. N.Y. Tax Law 1101(b)(8)(vi).

Technology companies should review their affiliate programs and understand which states, specifically, have “Amazon Laws”, “affiliate nexus” rules, or “Click-Through Nexus” rules. This is a constantly changing area that requires close monitoring. At the time of publication, California passed a 1-year repeal of their “Amazon Law”.

#2. Traveling Sales Representatives

The idea of a sales representative sitting in a home office in a state other than where corporate headquarters is located is a clear example of an activity which establishes sales tax nexus in the state where the sales representative is based. However, what happens when that sales representative travels into other states to meet with prospects or customers? This type of activity frequently occurs with technology businesses as the sales representative meets with the prospect to demonstrate their product. Whether or not this type of activity creates sales tax nexus will depend on the state and the frequency of the activity. Each state’s rules are slightly different in terms of the threshold that needs to be met to create nexus. However, for some states, a sales representative traveling into the state for a single day will create sales tax nexus. While other states have more lenient thresholds, a general rule-of-thumb is that three days of activity of this type will create nexus for sales and use tax purposes.

Texas prescribes that out-of-state sellers engaged in selling, leasing, or renting taxable items for storage, use, or other consumption in Texas must collect use tax from the purchaser. “Retailer engaged in business in this state” can include, in addition to other activities, any retailer: Having any representative, agent, salesman, canvasser or solicitor operating in Texas under the authority of the retailer or its subsidiary to sell, deliver or take orders for any taxable items. Texas Tax Code Ann. 151.107(a)(2); Texas Tax Publication 94-108, Engaged in Business (Sales and Use Tax), 11/01/2006.

Nexus Strategy: Instead of face to face customer presentations, technology businesses may consider conducting product demonstrations via the Internet through Webex, GoToMeeting, or another similar application.

#3. Trade shows

Technology companies are frequent participants in trade shows. Typically, companies attend trade shows to promote their products and services. A company may promote its products and services via representative employees or agents and/or display its wares via a kiosk or booth. In either of these scenarios, the company is performing a type of solicitation.

It is the solicitation activity that determines whether or not nexus has been created. However, a number of states have established specific thresholds (number of days in attendance at a trade show) in order to establish when a company attending a trade show has created nexus in the state. For example, California has set a standard of more than fifteen (15) days – i.e. if you attend trade shows in California for fifteen days or less, you have not created nexus in the state of California (assuming this is your only activity within the state). Cal. Rev. & Tax. Cd. 6203(d); Cal. Code Regs. 18 1684(b).

Nexus with Michigan is not created if the only contacts a person has with Michigan consists of: (1) attending a trade show at which no orders for goods are taken and no sales are made or (2) participating in a trade show at which no orders for goods are taken and no sales are made for less than 10 days cumulatively on an annual basis. However, this rule does not apply if a person also conducts the following activities: soliciting sales; making repairs or providing maintenance or service to property sold or to be sold; collecting current or delinquent accounts, through assignment or otherwise, related to sales of tangible personal property or services; delivering property sold to customers; installing or supervising installation at or after shipment or delivery; conducting training for employees, agents, representatives, independent contractors, brokers or others acting on the out-of-state seller’s behalf, or for customers or potential customers; providing customers any kind of technical assistance or service including, but not limited to, engineering assistance, design service, quality control, product inspections, or similar services; investigating, handling, or otherwise assisting in resolving customer complaints; providing consulting services; or soliciting, negotiating, or entering into franchising, licensing, or similar agreements. Michigan Revenue Administrative Bulletin 1999-1, 05/12/1999.

Technology businesses should carefully plan where they will attend trade shows and understand the sales tax nexus thresholds associated with each state for this type of activity.

#4. Employees or Agents Performing Services

Technology businesses that send employees into a state to provide implementation, installation or repair services are creating nexus for sales and use tax purposes. The fact that this is a non-selling or non-solicitation activity does not mean this activity does not create sales tax nexus. On the contrary, these activities are more likely to create nexus for sales and use tax purposes.

The Washington State Supreme Court, in a recent ruling, asserted that a manufacturer whose employees traveled into the State with the sole purpose of meeting with customers simply to manage the relationship was sufficient to create nexus. This activity was seen as a mechanism that created a market in the State and as a result created nexus for the manufacturer. R W R MANAGEMENT, INC., Appellant, vs. STATE OF WASHINGTON DEPARTMENT OF REVENUE, Respondent, 10-332, 06/27/2011.

Using non-employees to support clients can have a similar effect. For example, a technology hardware business that uses a local resource to repair or perform other maintenance for its customer is providing the service via an affiliate and is deemed to have created nexus for sales and use tax purposes. Whether the person providing the service to the customer is an employee of the business or not is immaterial to the states. The fact that the person is present in their state and performing a service on behalf of the out-of-state business is sufficient to create nexus for the out-of-state business.

Technology businesses should evaluate non-selling related activities they perform in each state including installation and maintenance/support services as well as services provided via a third-party representative when assessing their sales and use tax nexus foot print.

#5. Income tax nexus does not equal sales tax nexus

There’s often an assumption that where a company has income tax nexus, they also have sales tax nexus. End of story. This is true, but only partially true. The second half is that a company can have sales tax nexus without having income tax nexus. The threshold for sales tax is much lower than that of income tax. For example, the solicitation of sales is generally considered a sales tax nexus creating activity whereas this same activity will not, by itself, create income tax nexus (See P. L. 86-272). The most well-intentioned CPA firms are prone to assuming that because nexus has not been created for income tax purposes, sales and use tax nexus doesn’t exist. This is certainly not intended but is the result of limited knowledge of sales and use tax laws.

In Pennsylvania, out-of-state vendors/sellers who maintain a place of business in Pennsylvania and sell or lease taxable tangible personal property or taxable services must register and collect Pennsylvania sales and use taxes. Pa. Stat. Ann. 72 7202; Pa.Stat. Ann. 72 7237(b); Pa. Code 61 56.1(a) “Maintaining a place of business” in Pennsylvania includes, in addition to other activities: Regularly or substantially soliciting orders within Pennsylvania through a solicitor, salesman, agent or representative regardless of whether the orders are accepted in Pennsylvania; Pa. Stat. Ann. 72 7201(b); Pa. Code 61 56.1(b).

Technology companies should be aware of the specific expertise their CPA firms have in providing sales tax advice. Sales tax is a unique discipline with differing rules from state to state.

Conclusion

Establishing sales tax nexus is often the culmination of multiple nexus creating activities. For example, a technology business may spend three days in a state, soliciting orders, two days at a trade show, and a day or two implementing their products. Each of these activities can create sales tax nexus by itself but should also be viewed in relation to other nexus creating activities.

An important note is that once sales tax nexus has been created, the need to collect and remit sales tax is triggered (assuming what you are selling is taxable in the particular state). Sales tax nexus is associated with the legal entity and spans all sales channels. For example, if you have a direct sales channel and an internet sales channel, once nexus is established in a state both channels are subject to the sales and use tax laws of that state.