Ready to raise capital? Consider crowdfunding

The recently passed Jumpstart Our Business Start-ups (JOBS) Act opens new doors for entrepreneurs seeking capital. Small businesses and start-ups will no longer have to rely solely on banks, venture capitalists and angel investors to finance their companies.

The “crowdfunding” provision of the JOBS Act empowers businesses to use crowdfunding platforms to raise as much as $1 million in capital per year from individual investors without registering with the Securities and Exchange Commission (SEC).

An idea that was pioneered by charities and arts projects, crowdfunding involves soliciting relatively small investments from a very large number of people.

Online crowdfunding platforms can reach individuals within the entrepreneur’s personal network as well as potential investors from around the world.

The SEC is expected to finalize regulations for crowdfunding platforms later this year or early next year, but in the meantime, here’s how entrepreneurs can get ready.

Set a target capital amount

Figure out how much capital you need and how you’ll use it. It’s important to perform a cost-benefit analysis. Businesses will have to provide certain types of financial statements to investors, depending on the level of capital raised.

If you’re looking for $125,000 in capital, regulations will require that a certified public accountant review your financial statements.

Will the cost of the reviews outweigh the benefit of the added capital? If so, it would be prudent to adjust the amount of capital your company is seeking.

Create a Business Plan

A solid business plan will tell investors what your company is all about and explain the strategy behind your ideas.

Make sure it clearly states your mission, outlines your operations and details your marketing plan.

If possible, include financial projections based on past performance. For start-ups, market research can help determine expected costs and revenue, and inform financial projections.

Prepare financial statements

All companies that receive crowdfunding will be required to issue financial statements at least once a year.

If you raise less than $100,000 through crowdfunding annually, internally generated statements will suffice.

However, if you raise $100,000 to $500,000, you will need CPA-reviewed financial statements, and any business that raises between $500,000 and $1 million in capital per year will be required to submit audited financial statements to investors.

If you plan to seek this amount of funding, identify and engage a public accounting firm early to get a better understanding of the process, including the costs and time involved.

Determine the value of your business

Potential investors will want to know what your business is worth, and the JOBS Act mandates that businesses communicate a set price per share before selling any securities.

Therefore, any company interested in attracting investors should start valuing its equity.

Where can you start? Look for information about comparable businesses within your industry online using websites such as bizquest.com, which has more than 35,000 listings of businesses and franchises for sale.

For a more in-depth valuation, business owners may opt to seek the services of a financial professional who can use several methods to determine the value of a company, including the excess earning method, the cash flow method, and the balance sheet (asset valuation) method.

Nicole Denny, CPA, MBA is a member of Kaufman Rossin’s audit practice. Kaufman Rossin is one of the top CPA firms in the country. She can be reached at ndenny@kaufmanrossin.com.

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