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by
Bill Dueease
President
The Coach Connection
Copyright © 2007 by Bill Dueease
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! 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.
Where will the money be used in the business? Consider what 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.
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 want to purchase the money that will generate 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 in the
activities that are performed to create the additional profits 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.
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.
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.
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)
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.
Here 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.
This is probably the most common form of business investment for most
start up businesses. 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.
.
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.
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.
Potential investors are set up 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.
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.
Why is business coaching worth
so much more than you pay?
The value of the goals you achieve will greatly exceed what you
pay for coaching. You set your coaching
goals and you will surely set goals that are the most valuable and
important to you. In fact, business coaching clients have found that the
value of the goals they achieve through coaching are inevitably priceless.
Results
of a Study to Determine the Return On Investment (ROI) of coaching!
There are also other, more hidden benefits of coaching that are frequently
worth more than the value of the goals achieved. The benefits from improving
as a person to achieve your coaching goals are frequently priceless. Getting
your ideal income position (a very common coaching goal), will frequently
entail reducing or eliminating your business stresses, improving your
attitude about business, improving your relationships with others, and
much more.
Telephone coaching has proven over the
years to be the , the , the , the
, the , the , and
the of coaching available.
In fact, over 91% of all successful coaching is conducted
over the telephone. Click
here to
discover why these statements are true.
There is one more very compelling reason to use telephone coaching. By
using telephone coaching, ,
since you will not be limited to the geographical area near you.
You will want your telephone business coaching sessions
to last at least 30 minutes. You begin to get your money's worth at the
30 minute mark of each business coaching session.
However, you will want to keep your telephone business coaching
sessions below 60 minutes in length. The reason is that the sessions will
be very focused and energetic and you will start getting tired as the
session gets closer to an hour.
Choose your ideal business coach!
You will select your ideal business coach after
experiencing business coaching from at least three ideally matched TCC
Member business Coaches. TCC has 138 Active Member Coaches located in
41 States, Canada, and the United Kingdom. The Member Coaches were thoroughly
interviewed and rigorously screened from over 1,150 applying coaches.
Click
here to read the required personal characteristics of TCC Member Executive
Coaches.
Get Started Now!
1. Call TCC for your confidential consultation
2. Be coached by three prescreened Business Coaches
3. Choose your ideal Business Coach
4. Turn your activity
into Profitability
It's Easy:
1. Call us for your Free, No Obligation,
Confidential Consultation to learn more and decide about coaching for
yourself at: 800-887-7214 (toll free in the US and Canada) or 239-415-1777.
(We answer the phone by the fourth ring.)
2. Request that we call you for your Free
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4. Attend a teleclass entitled:Is
Engaging a Coach Right for Me? or Is
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5. Or learn more about coaching and TCC
before acting!
(after all, we made a lot of promises and business coaching and TCC
might be new to you)
You are invited to select the starting point that
best suits your level of knowledge
Bob has been instrumental in my development
as a businessman and person. His knowledge and experience are invaluable,
and his insight into a person's personality traits, tendencies, likes, dislikes,
strengths, and weaknesses is incredible. Bob's genuine caring shows in his
ability to listen not only to what is being said, but to what is not being
said. He is always assessing and reassessing to make certain I'm moving
in the right direction, and is always patient and encouraging. I would gladly
recommend his services to anyone and would love to have him on retainer
for the rest of my career.”
Raul S.
Entrepreneur, Businessman
Fountain Valley, California
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