Attract the right investments for your start up, or existing business.

Most business owners feel the need at one time or another to invest money into their business, whether at the start up stage or during growth spurts. Acquiring the right money under the right conditions for the owners and the business are critical to the success of the business. Acquiring the wrong money under the wrong conditions, no matter how much is obtained, will often doom the business.

There are eight basic questions about investment money that the owners must answer for themselves, BEFORE they embark on actually purchasing or renting the money. That’s right! Owners will Purchase or Rent investment money. They will pay something for it. If the owners clearly and honestly answer all eight of these questions, that only the owners can answer, then their quest for the right amount of money, under the right conditions, will almost certainly be successful. And as the buyer or renter of the money, you the owner can be considered THE CUSTOMER. Not the other way around.

1. What EXACTLY do you intend to spend the new investment money for?

Where will the money be used in the business? Consider the activities you would perform because you now have the money to fund them, in excess of what you would be doing, WITHOUT the money. Possible activities can include buying more inventory, purchasing advertising or PR work, adding personnel, increasing production, etc. Be specific and plan as if you have the money to spend. The intention is for you to eventually get it.

2. What additional profits will the activities performed generate, BECAUSE you have the money to perform them.

These must be considered incremental profits. If your business is making $10,000 a year without the investment you seek, and you calculate (accurately) than an investment of $100,000 will cause your business to generate at least $35,000 a year, the additional profits the investment will generate will be $25,000 a year.

You will ONLY want to purchase the money that will generate ADDITIONAL profits. This can be profits to the business or to you the owner, an original investor, and to your other original investors, if any. If the activities you want the money to pay for do not increase profits then you will not want to purchase that money.

The additional profits you will generate for the money you invest must produce a Return On Investment (ROI) that YOU want. We will calculate the ROI on a yearly basis first, and then consider a total ROI later. The differences might amaze you.

Example A. If an investment in your business of $100,000 (for additional inventory of $85,000 and one time storage and handling costs of $15,000) will generate at least $25,000 in additional profits per year, you will have an ROI of $25,000/$100,000 or 25%. Or put another way, the one time investment of $100,000 will generate $25,000 PER YEAR and recoup the original Investment (without money purchase costs) in 4 years. $100,000 divided by $25,000 per year equals 4 years.

Example B. If you calculate that the $120,000 investment (for buying a warehouse) will only generate $6,000 per year in additional profits, then the ROI would be $6,000/$120,000 or 5%. The recouping period for this $120,000 would be $120,000/$6,000 or 20 years.

Obviously you would be wise to only acquire and invest the amount of money that will generate enough profits per year to make the investment worthwhile in your mind. But the calculation of the ROI for your investment is critical for a host of reasons that will become more apparent in the next steps.

3. How long do you wish to keep the investment in the business?

This often-overlooked detail is frequently dictated by the ROI the investment generates.
In example A. you would not want to return the entire $100,000 investment for at least 5 to 10 years. The first 4 to 5 years will allow you to generate enough profits to break even on the purchase of the original $100,000 and the remaining 5 years will allow you to generate more profits you and the business get to keep. KEEPING the profits is the reason you want to invest in generating profits in the first place.

In example B. you would not want to return all of the money in less than 28 to 30 years to once again allow you to recover the principal and money purchase costs AND generate profits for you and the business to KEEP.

The length of time will also greatly affect the type of investments you will want and will affect your negotiating position to attract the best money you can buy.

4. How do you want to return the money to the investment source?

This is a step that many owners forget to consider. The ROI that you calculated above will have a big impact on how you wish to return the money to the source. Investments with low ROI’s will naturally require you to keep the investment longer. What you use the money for will also affect how long you wish to take before you return all of it. In example B. you are using the money to purchase real estate, which can be used as collateral and provide an easy way to obtain a long-term loan of 30 years.

Always try to remember that you want to eventually return the investment money to the source, because you can be assured that the investment source will always be figuring out how the money WITH THEIR PROFITS will be returned. In fact, determining how and when you want to return the investment will greatly affect the types of sources from which you buy or rent the investment money. And knowing when and how you want to return the investment will also greatly enhance your negotiating positions to attract the best money purchase for you.

5. How much money do you want to invest into the business?

Notice this is not the first question, because it must be calculated from completing the previous 4 questions above. Unfortunately, too many owners feel obligated to guess this amount before answering any of the other four questions, and they almost always guess the wrong amounts. Guessing the wrong amounts makes it very difficult for the owner to find the best source, if at all. Not knowing all of the answers to the other four questions will virtually assure that the owner will have serious difficulty finding willing money sources.

The clear determinations of the answers to the first four questions will help you to determine the amount of money investments you WANT, to suit your desirable goals and ROI. Of course the timing of your money purchase will also be important and play in calculating the mounts needed. In example A. the increase in inventory might be very important just before the Christmas retail season when customers create far more intense immediate buying demands. But inventory depletion might be a welcome situation during the beginning of the year when buying activity normally diminishes (In my example)

6. What forms of investment do you want?

There are several forms or ways you can purchase investment money. The answers to the previous questions will greatly assist you in choosing the best form to suit you. Lets discuss some possible forms that you might want to consider.

Borrow Money

In this form you are RENTING the use of the money. You will be expected to return all of the money borrowed and pay a rental fee, normally in the form of interest to have the money. Normally the lenders of these funds will require some form of protection or assurance that they will at least get their original loan amount back, if things do not work out. This protection is normally structured as collateral. You the borrower, provide the lender access to something of value called collateral (Assets) that the lender can get control of, if you cease making repayments under specified agreed terms. In real estate borrowings, the title and control of the real estate itself is often provided as collateral to the lender. Access to ownership interest in your business can also be used as collateral.

But remember, you must always RETURN the money borrowed, AND pay an annual RENTAL FEE (Interest) for borrowed money.

Using Credit Cards. This is another form of renting money. The ease at which the money is rented (as long as the card company will let you, you just pay bills with the card) is offset by the high cost to rent it. Credit cards charge very high interest, up to 26% for the money not paid down within 30 days. You do not normally have to provide collateral to borrow from credit cards. But the amounts you can access will vary, based upon the evaluation of the card companies of your personal and business creditworthiness.

Buy Money

Yes, you actually purchase the money. You normally do not pay actual cash to buy the money. Normally you offer something else instead, that has monetary value, as payment for the money. Most business owners pay for this money by providing a percentage ownership in the business as payment for the money purchased. As an example, you might want to deliver 10% ownership interest (stock) in your business to purchase a $100,000 investment of cash in your business. Thus, the business would have an agreed value of $1,000,000, because 10% is valued at $100,000.

In this case you do not have to return the money purchased. You have already paid for it. However, the seller of the money will frequently want and expect to be able to convert the stock or ownership interest in your business into cash at some time, With Profits. Normally an early investment in a business by an investor is expected to result in an INCREASE in the values of the ownership interest or stock you paid the investor. In my example, if your business doubles in value from $1,000,000 to $2,000,000 after 4 years of operations, then the 10% ownership interest (stock) would then be worth 0.10 X $2,000,000 or $200,000. Your investor would then make a profit of $100,000 over 4 years for a 25% annual return, assuming of course there is someone who would be willing to pay $200,000 for the 10% ownership in your business.

Self Investments

You the owner contribute (sell) or loan (rent) money to your own business as seed or start up capital to get the business rolling. In this case you play both rolls. On the one hand you are the purchaser or renter of money as the owner of the business. On the other hand you are the seller or leaser of the money as the individual investor. Far too many owners fail to consider both aspects of this unique relationship. This is a situation where you really DO want and need to discover what you really want out of this two-headed relationship, because you are so heavily involved in all aspects. You are the investor AND the owner. Ideally, you want to create a relationship that will create the most benefits for you BOTH WAYS. The determinations of the ROI’s described above for both sides will be very important in assessing your best methods of investing in your own business. AND what you want out of the investments both as the individual and as the owner will also become critical.

As an example, many owners choose to build and finance the real estate buildings their businesses will use to operate the business. The business leases the buildings from the landlord building owners (you the investor) normally at a rate that exceeds the monthly costs and loan payments you the owner must pay to keep the building. The business is not saddled with the ownership or need to obtain investment money to build its own facilities. You the individual can finance the building with your own down payment and borrowed funds through a mortgage to build and operate the building. You have a very solid income through lease payments from your own business. The business has known consistent lease expenses to use the facilities from a reliable friendly landlord (you), which gives the business owner (you again) the confidence and comfort to focus on the successful operation of the business. You the investor will most likely enjoy the normal appreciation of the value of the real estate, that you will be able to sell in the future for a healthy profit.

7. How much are you willing to pay for the investment money you rent or purchase.

Now that you KNOW what you will be spending the money on, the profits and the ROI these activities will generate, how long you wish to take to return the investment, and how much money you want, you can calculate the costs you are willing to pay for the money you purchase.

Under example A if you borrowed (rented) the money on a 10-year note at 5% interest you would generate a total of $250,000 profits ($25,000 times 10 years =$250,000) during the 10 years of the note. But during the 10 years you would pay a total of 5% times $100,000 per year times 10 years for a total of $50,000, AND you will repay the principal of $100,000 for a total cost of money of $150,000 during 10 years to generate $250,000 in profits. Of course, you will greatly reduce the interest costs by prepaying principal to reduce the note amount.

Thus the Total ROI to your business for example A. would be $250,000 divided by $150,000 or 167%. Knowing this figure will help you determine how much you would be willing to pay for your investment money.

8. What is your exit strategy?

One of the key factors you will want to consider is what exit strategy you want to eventually separate you from your business. Starting and running a business is an exciting, challenging and focused process. You are in control of designing, building and operating a new living breathing, purposeful group of activities called a business. It is your baby. However, as you progress in time and growth of the business things change. You will have accomplished a number of unique goals and will have overcome a number of obstacles to create a thriving business. Yet, your roll might change because you will become more of an operator than a designer or builder. You might enjoy your new roll even more, or you might not.

Business owner burnout is a very important factor to consider that will greatly affect (most often negatively if not known and controlled) the success of the owner and the business. I have found that business ownerships frequently run in 5-year cycles. The first five years from design, start up, business building, business growth to eventually creating a profitable operating business takes an inventors’, builders’, risk taking, and excitement mentality and focus. These are exciting times with frequent rapid, sometimes instant gratifications as the business achieves more and more improvements, sometimes almost on a daily basis.

But once the business has been established, (The mountain has been climbed, the baby grew up) the focus becomes more on improved growth and operations. Do you as the founder/owner want to change your roll as an operator? Or do you want to create new babies or climb new mountains? Sometimes creating new babies can be done within the framework of the existing business, but most often they would best be done outside the existing business, so as not to risk the success of the operating business.

Recognizing these transitions will allow you to create exit strategies for you on your terms so you can either stay in the business and operate it for a while longer (another 5 year cycle) or leave on your terms to new adventures and challenges that best suit you.

Considering and creating some form of exit strategy on your terms will greatly enhance your success rate as a business owner, AND will also greatly enhance your ability to attract and select the best possible investment source for you. Remember, the investors want and need to know what exit strategy there is for them to retrieve their original investments with profits. If you have planned some form of an exit strategy for you and for them to retrieve their money, before you open your doors to investments, they, the potential investors will have much more confidence in investing in you and your business.

Negotiations

Potential investors prepare and focus on negotiating you to accept the best investment deal for them, which starts at the very first contact between the two of you. They have the resources, the time, and the focus to use many different negotiating tricks and methods to manipulate you into accepting their deals on their terms. You will normally not have the time, the energy, nor the understanding of the negotiating game to play by their rules, which are most often purposefully dragged out to wear you down. You have a business to run and a life to lead.

So how DO you win at this negotiation game? Easy! When you have clearly discovered and defined the eight (8) factors listed above to suit you and your business then you are much more prepared to win the negotiating game with less time and effort spent to get the investment deal that you want. You dictate the terms, of the investment based upon your determination of the 8 factors above. Because you already know the type and amount of the investment you want, you will only target the potential investors that offer and specialize in your desired investment. You will not waste your time on the others. And because you know what you want and what you will accept, you will not waste your time evaluating or dealing with potential investors who would not meet your criteria.

Set your terms, present them to realistic potential investors and allow them to accept or reject your terms. Remember, if they try to alter your terms, they are in affect rejecting them. Stick to your terms. The more you stick to them the greater your chances of getting them. Remember, they have to test you to see if you know what you want, if you are confident, and to see if you have the strength to walk away from them. The more you stick to your terms, the better you look.

Investor Market Options

One thing most business owners forget to consider is the issues and pressures that potential investors face. And they do have plenty. Especially today. Consider this. Where can someone today invest hundreds of thousands or millions of dollars and gain reasonable return on investment with reasonable or low risk? Putting the money in banking interest-bearing instruments yields very low returns, possibly lower than inflation today. Investing in mortgage or real estate would be a disaster. Investing in the stock market is iffy at best.

So where can they turn? Smart investors ARE investing in start up, small and medium sized businesses. The returns are higher and the risks are reasonable and even low, if the owner has the clarity of investment criteria that you will have. So you present a much better place for investors to sell or rent their money. You can easily shop money sources, much easier than they can shop successful businesses. It is like buying a pair of shoes. There are lots of shoe stores for you to visit and shop in, but you have only one pair of feet and you want to be sure you get a very good fit.

Have fun shopping! It is a buyers market.