Much like it takes a village to raise a child, launching a small business isn’t a solo endeavor. The employees that are cutting hair in your salon, providing in-person tech support to clients, or dishing up fro-yo at your downtown eatery are the faces of your business. But behind the scenes may be the people that provide the most support to your small business: your financial investors.
An investor can provide just what you need—capital—but not every business pairing is a match made in heaven. As you might know from your personal life, mixing love and money is tricky. Pick the wrong investor and your business (aka: your passion) could suffer—or worse, go belly up.
Read on for five questions to help you land the perfect mate.
1. Do you need to see a formal business plan?
Traditional business acumen says that you need to have a formal, well-written business plan to present to a potential investor. This blueprint of your business lays out your goals and the strategies and tactics that you’re going to use to achieve them. But a surprising study from Babson University finds that unless you need significant funds or you are trying to woo an institutional investor (and you’re likely not), there’s no compelling reason to write a detailed business plan.
A business plan can be dozens of pages long and can take months to prepare. If a potential investor is okay with you presenting your business idea in a less formal way—like a PowerPoint presentation—why not take them up on it? You’ll still need to set goals and have a strategy for how you’re going to achieve them. And you’ll need to figure out how you’re going to convince someone that you’re worth investing in. But you can communicate your ideas in a document that’s significantly less time-consuming to create.
2. What kind of investment do you want to make?
Whether you’re looking for an investor to launch your business or you’re hoping to find someone that can help you grow your existing company, it’s important to find out what kind of ownership interests them: equity or debt. Those that give you cash in exchange for a percentage of the profits (and any losses) are equity investors. Typically when opening a new business, the percentage an equity investor receives is proportional to the overall amount needed to launch the business. For example, an investor gives you $140,000. You kick in an additional $560,000. That means they own 20 percent and you own the remaining 80 percent. If you’re an established business owner, an equity investor might be willing to put up the vast majority of the capital needed, but receive a disproportionate percentage of the returns. In either instance, being an equity financier makes them more vulnerable to risk—but there’s also more opportunity for larger gains.
Investors that are less willing to take risks will want to make a debt investment in your small business. Accept a loan from a debt investor and you’ll be on the hook for interest payments, as well as repayment of the principal. The investor could also ask you to secure the debt with your property. If your business goes bust and they have a lien on your building (or worse, your house!), they could claim your property if you fail to pay back the money. Financiers of established businesses might forgo securing their debt since they are investing in your company’s good name.
3. How much are you looking to invest?
You’ve always been told that it isn’t polite to talk about money. That way of thinking certainly doesn’t hold true when you’re a small business owner. While great, it’s not enough that someone is interested in financing your business. They need to provide an amount that you deem sufficient as well. Get down to specifics and ask a potential investor how much cash they’re willing to give you. You may be looking for $200,000 and they’re only willing to part with $15,000. If that’s the case, it’s best to know upfront. That way, you can move on quickly or hustle even more to find additional investors or alternative means of funding, like Clover Capital or a small business loan, that can make up the difference.
Looking to divest your ownership of a business that is under performing? In this instance, you might need to be more flexible in negotiating how much money you’re willing to accept. That’s because the financier, not you, is likely in the position of power.
4. What do you think should be done with the profits?
Success in business can come with its own set of problems, namely what you’re going to do with any profit once all overhead is paid. Some owners will want to receive cash in hand; others will think that it should be reinvested in the business (for upgrades, expansion, etc.). There is no right answer about what to do with your profits, but the answer could determine if and how fast the business could grow. (If you never make additional investments, growth is unlikely.) This is also worth mentioning because it’s important that both you and your investor are on the same page. Otherwise, this conflict could carry over into other areas of the business.
5. What kinds of interactions do you have with founders after investing?
Are you looking for a co-owner in name only? Or is this your first foray into entrepreneurship and you’re looking for an investor/mentor? Some investors are extremely hands on and want to be consulted before any decision involving the business is made. They may even introduce you to others (potential investors, suppliers, workers, etc.) in their network. Others, not so much. They’re more of the silent partner type. You probably have an idea about what you’re looking for, so asking up front will give you an understanding about what kind of relationship you’re entering into. If it’s a match made in heaven, it could mean good things for both your bank accounts.[image: Investor Key by Mike Lawrence on flickr]
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