Typical external investor terms / building a proposal etc.

Pacing Mule

I'm looking for thoughts / experiences with external business partners / investment. I understand there isn't a one size fits all formula to this but to use semi-hypothetical figures ...

I have a business that requires €60,000 investment to fund an expansion registered as sole trader / partnership - eg not a company.
The business has proven demand but requires a larger premises / operation to be viable as a scalable investment opportunity. In it's current form it threads water as such so does not show huge profits being made for previous years but it does clearly show demand for a unique product / service.
My own investment via own capital / parental loans to date is €60,000 with €40,00 being owed back to an informal parental loan.
Value of stock / equipment is €25,000.
(The other €35,000 of capital used up starting things up / getting established)
No chance of financing / getting further expansion loans myself.

The end goal being a new company, ideally with the €40,000 owed to parents being repaid. This new company would own all assets / stock / websites and goodwill of existing business etc.

Assuming a potential investor was interested in and believed the business concept was investable what kind of terms would typically be looked for.

To buy out parents as such the new company would require approx €100,000 investment. (€60,000 to expand the existing business and €40,000 to pay back existing finance) Is that something an investor is likely to be interested in or would existing finance be a stumbling block ?

Are investors typically looking for an exit strategy from the start ? ie would it be a case of wanting the €100,000 repaid over X years as well as gaining shares in a new company and sharing the profits etc.

Or would investors think along the lines of investment on a pure shareholding scale. Would a 50/50 split be anywhere near viable to an investor. I base this on a new company with €60,000 in the bank plus assets of €25,000 = €85,000 in tangible assets on day 1, investor at 50% owns €42,500 of that and has paid €100,000 for that. Effectively that would mean a payment of €57,500 has being made for the goodwill / websites / groundwork already done and potential of the business. Obviously I'd feel that this figure would actually undervalue the effort gone in so far but from an investors point of view is that laughable etc

Lastly would investors see past the pure maths of a situation like this and value the return on investment potential. Pure maths being - business not making big profits. Value of liquid assets lower than value of current investment. Therefore a gamble and look for a large portion of shares etc.

As I mentioned earlier I know there isn't a one size fits all answer but I'd be grateful for any thoughts the members here may have.

Thanks in advance !

lucky john

you have a business that is making no profit(threading water). your parents need to be repaid 40,000 which means a 40,000 loss on the business accounts.

you want an investor to "invest" 40,000 to cover that loss to bring the business back to break even again and then another 60,000 to hopefully help make a profit.

your investment is 20,000 and you hope to get a 50/50 share in the business. Good luck with that.

I dont know if you have done a business plan with proper projections but that would be a good start, both for you and future backers. you also need to find a way to work what you have harder or cut costs to prove this business can make a profit.
If you could do that would it then be possible to make monthly repayments with interest to your parents. it might also be an option to make them shareholders with a share of the profits as a reward.

Pacing Mule

Thanks for the input.

Speaking factually as opposed to hypothetically the parental loan in this particular case isn't the be all and end all of things. It could well be left out of things completely and repaid on a private basis over the next few years if needed and you could treat current personal investment as €60,000 not €20,000 in this scenario.

The threading water comment was more from an investment point of view. The business is profit making now but it took time and investment to get it there. The €35,000 "loss" as such is primarily start up costs - investment in infrastructure, kitting out the current premises, marketing and establishing a unique concept as well as web design and development etc. At this stage the premises is too small. It is running at full capacity at peak times. It needs to be bigger and in a better location than currently.

I suppose you could put the questions above another way. Would an external investor recognise the value of having all the ground work done and startup costs already factored in when investing ? If you had a business with no liabillities at all but assets of €25,000 what would an investor see a €60,000 investment as being worth ?

Would they see it as investor invested €60,000 cash - original owner invested €25,000 assets therefore the investor should have a 60/25 split or would a typical investor view it for arguments sake that he/she brought €60,000 and the original owner invested €60,000 (being €25,000 in assets brought to the new company and €35,000 of startup costs which would have been required if it was a brand new company)

I'm just trying to gauge what someone with an investors hat on would think like.

Peterdalkey

What does treading water mean, it is losing money?, you are working for nothing?, you only work it a couple of days a week?. From what I can see it has just been burning money to date.

Any investor is going to only consider a company investment. Your personal debt to your parents is of no interest to them and just like banks don't lend money to pay off tax, investors don't pay out to pay off loans or tax!! They want their money put to work!!
If I understand the numbers correctly your parents have put in 40K and you have put up 20K and you have assets of 25K.
Have you have earned a living from the business and taken a proper income to date?
The new company would have no liability to your parents, though you could offer them some equity for their share of the net assets.
You can also award yourself shareholding for your sweat equity on top of your share of the assets being introduced.
Now you have an investible structure and all you need to do is come up with an attractive investment proposal. You will need proper projections, forecasts and a business plan with worked models of different levels of sales revenues. Take it that any investor is going to expect a 20% gross annual return on their investment and see how much your models could reasonability to seek to raise.

Cheers

Peter

Peterdalkey

Your website, fixtures and fitting etc are also assets to be transferred in, your sweat equity also has a value. One would need the business plan and the trading figures to date to establish a figure for goodwill.
No investors will invest their cash for it to be used to pay off a bank, taxman, you or your parents or any other debts.


cheers

Peter

Pacing Mule

Thanks Peter

It is currently at a stage where it is profit making and a wage is being created within that. For the first 6 months no wage was taken at all. It's not a huge wage - basically covers household expenses and would be lower than if working for someone else in an established business but spare profits are constantly being reinvested to improve the business. Some part time staff are also being paid.

Any losses / burning of money is done. I could start taking a bit more out in wages if I was happy to leave things sitting as they are but that's not the plan. There's absolutely no point in owning a job as such. If I had a spare €60,000 to invest directly myself I would have absolutely no hesitation in doing so and keeping going without an external investor. The dilemna here is I don't at the moment and to grow the businsess organically to get to that point will take too long as it is stifled in the current premises. It may be better to do another year as is - show 2 years of profits within the business and then seek an investor when it doesn't look like as you say it is burning money. Or perhaps to scale up on a smaller more gradual level. It's all food for thought at this point.

The Apprentice

Have you went along the roots of enterprise grants ?? Its clear you have cleared the initial hurdles and are looking to expand to make it scalable.

You didnt mention banks etc ?? Assuming you cant or have went this root - ?
Making a revised bplan on your current profit/projections some banks may hit you up !!!

The value of a company to a disciplined investor is most likely to be 3x net profit + assets. If your taking a salary which has to be factored in, and then there is no profit well then the company is worth just the assets plus any intellectual property rights, trademarks, patents and so on or an existing loyal customer base. If you dont have any patents etc your business isn't really worth anything apart from assets, and they might tell you to come back to them when you have enough sales or profit to make it interesting for them. Otherwise if you think about it its not a very attractive investment since its being run for a while, has debt and is not making a real profit. The investor will be thinking when am I going to get my money back?

I dont think in your current scenario your going to get much action unless you are talking about going to friends/friends of the family who may believe in you personally and your concept and be willing to take a punt. This is not necessarily a bad route to take at all as long as you have a few people to hit!

RedRockets

Hi,

Just a few questions.

How long have you been in operation ?

Why are you not taking a normal wage ?

If the product is as you say in such demand why is there such little profit ?

How will an investment, larger premises and a new invester changes things so much that your going to suddenly get loads of sales in the door, pay your parents back, and give the invester a return ?

Is it time to cut your losses and move on to another idea ?

lucky john

I'm guessing your business is constrained by the premisis you opperate from rather than the manufacture of a product. you believe that this constraint would be sorted if you had more space in an area of more footfall and hence more customers.

You seem sure of this and you are most likley right. If you take that as your starting point and the info in El Rifle's post as where you want to be, your next step is to draw up a plan of action that gets to that investable point.

If you havent been to your local enterprise board I would approach them and see if they can help you. You employ part time staff. The prospect of a couple of full time posts would interest them.

I'm sure you have done a scout around for the right premises. If not why not see if you can find a suitable place thats available. You know your opperating figures already so you have a good idea of the rent you can afford to pay. chance you arm and haggle. You have your equipment already so could set up quickly.

Most of all do the business plan, especially the financial projections. Be honest with it and see where it take you.

The Apprentice

Deleted User wrote: »

The value of a company to a disciplined investor is most likely to be 3x net profit + assets.

Im not going to villafie you with this statement but may not be correct, the recent ipo of Facebook and Instagram purchase are clear examples which may lie outside of this assumption.

hey may have a small manufacturing facility where space is limited to production etc or he could be a hairdresser/service industry and cannot scale up even with additional staff.

Needs a little more info

Of course theres exceptions, it will depend on if the OP has something with exceptional potential!

Pacing Mule

The Apprentice wrote: »

Have you went along the roots of enterprise grants ?? Its clear you have cleared the initial hurdles and are looking to expand to make it scalable.

You didnt mention banks etc ?? Assuming you cant or have went this root - ?
Making a revised bplan on your current profit/projections some banks may hit you up !!!

We haven't ruled anything out - Getting an external investor is an option that I'm researching but it's not the only option. We're going to take another swing at enterprise grants etc. When first starting out we were refused assistance as it was a service not manufacturing / export etc but perhaps employment potential may be a factor this time round. Banks seem to be looking for 2-3 years audited profitable accounts.

RedRockets wrote: »

Hi,

Just a few questions.

How long have you been in operation ?

Why are you not taking a normal wage ?

If the product is as you say in such demand why is there such little profit ?

How will an investment, larger premises and a new invester changes things so much that your going to suddenly get loads of sales in the door, pay your parents back, and give the invester a return ?

Is it time to cut your losses and move on to another idea ?

In operation in this particular field 2 years. Field is leisure / service based and aimed at kids - in particular groups / birthday parties.

Demand is there and proven, customer feedback is very good but three factors are an issue:
1) Current location - not attractive as a go to destination. It needs to be located closer to Dublin / M50 ring. This is constantly being commented on by the customers.
2) Location is too small. We can only cater for one group at a time. Most groups understandably want to come in at weekends. We're running at full capacity at peak times and regularly turning away business. A bigger location with capacity to cater for more than one group at a time is required.
3) There are no parental facilities in the current location. It needs to be set up like most play areas etc where parents can meet for tea / coffee etc whilst the kids play which would extend the scope beyond groups of kids.

The expansion planned would address all of these issues. We're very good at what we do, kids love the place, we've built a demand for a service not being provided by anyone else (hence the difficulty and losses of the first 2 years as we're creating a market in itself) we've proven the concept works - we're just not in the right premises to do it to it's full potential.

We've thrown everything we personally have at it to get it to this point and therefore are considering external investment as an option.

CelticRambler

Are you renting your current premises? How easy (quickly) can you transfer from this one to the new one? How many return/regular customers have you got?

60k is not that much, if you're sure that that's really all you need, so you could consider pitching directly to your existing/potential clients with a lifetime or VIP membership card, or some other advance purchase. If, as you say, you're turning away business, then assuming a group of 20 children x 50weekends of 2days = 2000 entries. You just need to find a way of offering 30€'s worth of added value in the future (concentrate on the parents' facilities) and sell it well.

riveratom

Pageant Messiah wrote: »

We haven't ruled anything out - Getting an external investor is an option that I'm researching but it's not the only option. We're going to take another swing at enterprise grants etc. When first starting out we were refused assistance as it was a service not manufacturing / export etc but perhaps employment potential may be a factor this time round. Banks seem to be looking for 2-3 years audited profitable accounts.



In operation in this particular field 2 years. Field is leisure / service based and aimed at kids - in particular groups / birthday parties.

Demand is there and proven, customer feedback is very good but three factors are an issue:
1) Current location - not attractive as a go to destination. It needs to be located closer to Dublin / M50 ring. This is constantly being commented on by the customers.
2) Location is too small. We can only cater for one group at a time. Most groups understandably want to come in at weekends. We're running at full capacity at peak times and regularly turning away business. A bigger location with capacity to cater for more than one group at a time is required.
3) There are no parental facilities in the current location. It needs to be set up like most play areas etc where parents can meet for tea / coffee etc whilst the kids play which would extend the scope beyond groups of kids.

The expansion planned would address all of these issues. We're very good at what we do, kids love the place, we've built a demand for a service not being provided by anyone else (hence the difficulty and losses of the first 2 years as we're creating a market in itself) we've proven the concept works - we're just not in the right premises to do it to it's full potential.

We've thrown everything we personally have at it to get it to this point and therefore are considering external investment as an option.

Hey OP,

You have obviously demonstrated the demand for this service, and so a very obvious answer for me is crowdfunding? I know there is a UK-based site called Crowdcube, maybe have a look at that and similar sites? As mentioned, €60k is not a lot of money for something that is showing true demand, and where that investment could be made back in jig time...

Pacing Mule

@CelticRambler

The business that is being turned away isn't weekly / regularly demanded - it would be for example a birthday party that elects to do something different as they can't get a space around the weekends they are looking for. But that said your concept amended a bit might be a runner. Perhaps a kickstarter style concept could be used.


@riveratom

This is definitely worth looking into too.

Thanks to both of you.