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I have to be hazy on the details in order to protect identities on both sides, but the situation is very real and I want to make sure we approach this the right way. Basically, the wife of a local celebrity has been a patron of my wife's business since its inception and wants to help her grow. She wants to invest in my wife's business but wants to see a business plan first. My wife owns and solely operates a photography business (legitimate, licensed, insured, two years running). The status of the business is that she is able to pay off all expenses each month, and funnels the little profit back into the business. It's a side-business so the little money she does make is usually funneled back into the business or she uses to treat herself or the family. The long-term plan is to grow the business so that she could leave her regular corporate job. Currently all clients are scheduled on weekends. Current issues stymying growth: 1) not enough clientele to justify scheduling M-F, 2) not enough access to her target segement [wealthy, stay-at-home moms], and studio location. As a business student, I'm taking on the writing business plan but could use your advice on how to structure the financial part of the deal. What questions should I be asking about the business? What figures should go into the asking price, and do I make her client a part-owner? If so, what's an appropriate percentage? Do we ask for a figure based on expected revenue or expected worth a year from now and make her a minority owner based on the percentage of the investment compared to the expected revenue/worth of the business a year from now? Any book recommendations are also welcome. Thanks a bunch, BFC.
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| # ? Jan 14, 2013 14:21 |
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| # ? May 21, 2013 21:47 |
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The studio location is probably the only capital intensive thing you listed. I would be extremely wary of allowing anyone else an equity position in the business, because once she takes on a absentee owner she will be working for them and not herself anymore, which will increase her stress level tenfold. The other two issues you list (access and lack of clientele) come down to marketing. Direct maketing to affluent neighbourhoods during that gets done on the evenings during the week is probably a better solution to resolve those issues.
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| # ? Jan 17, 2013 19:36 |
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zharmad posted:I would be extremely wary of allowing anyone else an equity position in the business, because once she takes on a absentee owner she will be working for them and not herself anymore, which will increase her stress level tenfold. Yep. The business is positive cash flow, and appears to be expanding at a slow rate. I wouldn't consider it unless you truly needed it (e.g., loss of other job or major life changes). My favorite book to recommend in these types of threads is MKTG. There's a new edition every year, so the 2011 edition is < $10 shipped. It's a good, basic primer to marketing concepts, which a lot of business owners don't have a good understanding of. Marketing is not the same thing as advertising, and it doesn't matter if you're the best cake artist/website designer/landscape architect/boudoir photographer on the planet if you can't market your product effectively.
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| # ? Jan 21, 2013 17:37 |
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Would this investment be in the form of equity of debt? Both situations have potential pitfalls that are very different from each other. An equity investment would indeed mean that your wife would, to varying degrees depending on the arrangement, lose the ability to make the calls alone. An investment in the form of debt (i.e. a loan) would allow your wife to keep her 100% ownership stake in exchange for the financial obligation that is inherant in any debt agreement. After you figure out the investor's intention, you should sit down with your wife and write out exactly what she wants to achieve. Regardless, there will be tradeoffs. First of all, how long can she wait? As another poster already mentioned, the business seems to be growing, albeit slowly. Eventually the she would probably achieve her growth goals without the negatives of outside investment. If she can't wait to leave the desk job, does she care about retaining her ability to steer the company and her day-to-day work? If so, she should probably avoid an equity investment. Does she value the peace of mind that comes with being free of debt? If so, well, the answer to that one is obvious. There are of course combinations and so on, but the key point is that, before you charge head on into the time consuming process of writing a business plan, you should first clarify the basics.
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| # ? Jan 21, 2013 19:15 |
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Thank you three. This is why I started the thread; I didn't know what I didn't know. She would prefer a loan investment (I would to). Neither of us are keen to the idea of giving up equity when she's not in dire straits or anything. We're going to propose a loan investment with interest payments each quarter, as her busy/slow cycles are seasonal. A loan investment would simplify the process of figuring out how much principal we should ask for and what an appropriate interest payout would be. The investor is leaving the plan structure up to us. We present it, and if they like it and agree to it, they'll invest. They basically want to be philanthropers or supporters of local business. I guess it's a rich-person thing; I wouldn't know. This person has more money than they've ever seen before in their life and wants to give back to the community - it's that kind of situation. There is a level of trust because they've been working with my wife since way back when she started the business. She would like to be able to leave corporate within 2 years. That's when our kids start school. Without moving the studio, without improved marketing, and without a solid flow of clientele, that goal becomes many steps closer because she can immediately move, immediately improve marketing, and through those efforts, hopefully improve her inflow of clientele. I'm ok with charging into writing the BP because good questions are coming up in process (such as now) and I can't write an overly-detailed BP because its going to go over the heads of everyone involved except me. It's possible this will all be agreed to over a lunch, it has the shapings to be an informal - but still legally contractual - agreement. Canyoneer, I agree with you. I'm helping her understand that marketing should not be a shotgun approach, that it is most effective and most efficient when the target segment is identified, targeted, and is receptive to the image she is trying to deliver. Among many other things. I will check out that book, thanks for the recommend. Zharmad, we consulted with a friend who works in the mailing list industry (there's probably a better name for it) and the price to purchase the home addresses of her target segment in just one specific well-to-do incorporated area of the city would be around $800, which she can't afford right now. The legwork we can certainly do over the weekends, but the house addresses we wouldn't be able to generate ourselves. I'm not completely against direct marketing/shotgun approach in wealthy neighborhoods, but I am resistant to ineffecient use of our time since we have two kids and chores to do on the weekends. If only 1 out of every 20 homes has a pregnant mother or newborn (I have no idea what the ratio would be) then we're wasting time and resources on those 19 disinterested families. In a previous thread someone recommended becoming friendly with other local businesses like Starbucks or independent coffeehouses to share marketing opportunities. We're definitely doing that after the studio move.
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| # ? Jan 23, 2013 15:51 |
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Our business plan is nearly complete and almost ready to present to the investor. I just need to propose the terms of the loan and could use some guidance as I feel I have a good schedule but something's not quite adding up. Here's what I had in mind (keep in mind that this is based on the idea that we should be able to get a loan from a private investor that is better for us than the best offer from a bank): Principal: $10,000 Monthly Minimum Payment: $166.67 (this was a figure my wife was comfortable paying each month towards the principal) Interest: 2.0% fixed (monthly it is 0.1667%) Interest payment = .1667 * new monthly balance Loan Period: 60 months Repayment Schedule: Monthly So the first month: Balance $10,000.00 Base Charge $166.67 Interest Charge $16.67 Total Due $183.34 and 59 months later: Balance $166.47 Base Charge $166.67 Interest Charge $0.28 Total Due $166.95 Total interest charged would come out to $508.52...which is 5% of $10,000. That doesn't seem right if 2% IR was the target. What am I not taking into consideration here? Suave Fedora fucked around with this message at Feb 6, 2013 around 20:55 |
| # ? Feb 6, 2013 20:53 |
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Your interest rate is 2% per annum, and you're looking at a 5 year loan.
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| # ? Feb 6, 2013 21:44 |
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If you just want to pay 2% total over the course of the loan, your payments would be: $10,000 x 1.02 = $10,200 $10,200 / 60 (payments) = $170
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| # ? Feb 7, 2013 13:37 |
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Got it, thanks. I really over-thought that one.
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| # ? Feb 7, 2013 21:31 |
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It seems like an awful lot of risk for an investor to take on for a 2% return, despite the business being cash-flow-positive. I know I wouldn't invest for that little, even with a solid business plan. A lot can happen in five years. Hell, even a good savings account can get you almost 1% right now.
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| # ? Feb 7, 2013 23:24 |
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| # ? May 21, 2013 21:47 |
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crazyfish posted:It seems like an awful lot of risk for an investor to take on for a 2% return, despite the business being cash-flow-positive. I know I wouldn't invest for that little, even with a solid business plan. A lot can happen in five years. It is, if you're a rational investor like you and I would be, but that's not what we're dealing with here. The investor "believes in my wife" and has more money than you or I would ever see several lifetimes over. I'm convinced they are in full philanthropic mode. Either way, they can always say "no" and then we'll adjust the rate upward or the principal downward. I just want to keep it south of 6% because 6.25% (3%-4% + prime) is the rate we should be able to get from a government-subsidized small business loan, and why get a personal loan unless its a better deal for us than a government loan?
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| # ? Feb 8, 2013 15:55 |
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