When you hire managers you should ask them to invest in the company. This is called "management buy-in". This gives you, the founder, a sense of security. The security is in the risk the management is taking together with you.
You should not sell a lot of your company equity though. 5% should be more than enough.
When you are in the start-up phase you should usually ask for a lead investor who will take the CEO position in the company. This lead investor/CEO will invest US$100,000 - US$200,000 in the company (or pay you this sum of money). This CEO will then lead the company and have a $100,000 - $200,000 at risk if the company should fail. This ensures that every manager do what needs to be done to ensure the success of the business. This is a very good thing for you, the founder. Nothing boost the founder ego more than the success of this act. Because you don't need to entice the managers as much, the money risk speaks for itself.
Also, the other good thing about management buy-in's is that the company value rises. As mentioned before: If you sell 5% for a given sum, then the value of the company rises 20 times the invested amount. This can be a big gain in your net-worth.
If you are really smart, you lead the company yourself until the company is bankable. You then borrow a little money at a very low cap rate and then you sell 5% of your company at the value you now get from using "earnings / Cap rate". If your company makes money the managers will be easier to entice.
tisdag 25 mars 2008
onsdag 19 mars 2008
Raise company value with loans
Sounds like a clear contradiction for sure, but the reality is that your company is worth what you can get for it.
So if you can sell a company for 10 times earnings, then you in fact have sold your company with a 10% interest to the investor. The same thing goes with borrowing money for your business.
If you can get a loan at 10% annual interest then your company is essentially worth:
Earnings X 10 (multiple) = A company value.
Example:
You have earnings of $100,000 and this earnings is after having included cost of capital from the bank. Company value based on the cashflow method alone will be:
$100,000 X 10 = $1 million.
So if you can sell a company for 10 times earnings, then you in fact have sold your company with a 10% interest to the investor. The same thing goes with borrowing money for your business.
If you can get a loan at 10% annual interest then your company is essentially worth:
Earnings X 10 (multiple) = A company value.
Example:
You have earnings of $100,000 and this earnings is after having included cost of capital from the bank. Company value based on the cashflow method alone will be:
$100,000 X 10 = $1 million.
söndag 16 mars 2008
Raising Capital - The easy way (An example)
I promised to give you a simplified example of how to raise capital the right way.
In this example we want to purchase a company with existing revenue and positive earnings.
This company has a CEO doing the day-to-day operations (he comes with the purchase). So you don't have to be a manager.
This business has $1 million in revenue. And earnings (after paying total expenses incl salaries, but not taxes) are $200.000. These numbers are annual numbers.
Each month this business makes approx. $200.000/12 months = $16.667.
If you have no cash, whatsoever, but you want this company and it's monthly earnings. What can you do to get it? Investors is the obvious answer. Sure you can get bank loans, but at least 20-30% will be reuquired as a down-payment. The down-payment will come from you or investors. But if you can get investors to cover the whole asking price then the numbers above will be accurate.
In this case the seller wants $2 million for the business (he is generous). In order to entice investors you will be forced to perform better than a bank or a bond. That means you will need to offer more than 8% in most cases. So in this case we will give investors 10%. So the business need to make more than 10% each year in annual earnings to make you any money. Let's see if this business qualifies:
Asking price: $2 million
Earnings per year: $200.000
ROI: $200.000/$2 million = 10%.
It would qualify to entice investors (because it gives a good return in regards to obvious placements), but you will make zilch. Nothing. The only way to make more money would be to either accept the current asking price and improve earnings (or improve revenues with the same earnings percentage) or have the seller lessen his/her asking price to under $2 million.
If you could get the seller in this case to take an offer price of $1,5 million, then you would make:
$200.000 / $1,5 million = 0,13 = 13% return. You will give 10% of this cashflow to investors each year. The rest of the 3% is yours to keep. This means an actual cashflow stream of $200.000 X 3% = $6000 a year (or $500 a month. In free passive cashflow). And remember, you don't have to do any work (yes, you need to visit company meetings of course, but that is not really work. It is just your way to look after your interests) you have a manager doing that, remember.
This how you could entice investors to work with you more freely. Of course, not all investors will accept 10% a year in ROI. Some investors want 30% or more even. Everyone is different. But I can tell you that pension funds etc ask for 5-8% a year. Maybe such investors would be the best bet for you with an investment like this. Have a business broker ask around.
In this example we want to purchase a company with existing revenue and positive earnings.
This company has a CEO doing the day-to-day operations (he comes with the purchase). So you don't have to be a manager.
This business has $1 million in revenue. And earnings (after paying total expenses incl salaries, but not taxes) are $200.000. These numbers are annual numbers.
Each month this business makes approx. $200.000/12 months = $16.667.
If you have no cash, whatsoever, but you want this company and it's monthly earnings. What can you do to get it? Investors is the obvious answer. Sure you can get bank loans, but at least 20-30% will be reuquired as a down-payment. The down-payment will come from you or investors. But if you can get investors to cover the whole asking price then the numbers above will be accurate.
In this case the seller wants $2 million for the business (he is generous). In order to entice investors you will be forced to perform better than a bank or a bond. That means you will need to offer more than 8% in most cases. So in this case we will give investors 10%. So the business need to make more than 10% each year in annual earnings to make you any money. Let's see if this business qualifies:
Asking price: $2 million
Earnings per year: $200.000
ROI: $200.000/$2 million = 10%.
It would qualify to entice investors (because it gives a good return in regards to obvious placements), but you will make zilch. Nothing. The only way to make more money would be to either accept the current asking price and improve earnings (or improve revenues with the same earnings percentage) or have the seller lessen his/her asking price to under $2 million.
If you could get the seller in this case to take an offer price of $1,5 million, then you would make:
$200.000 / $1,5 million = 0,13 = 13% return. You will give 10% of this cashflow to investors each year. The rest of the 3% is yours to keep. This means an actual cashflow stream of $200.000 X 3% = $6000 a year (or $500 a month. In free passive cashflow). And remember, you don't have to do any work (yes, you need to visit company meetings of course, but that is not really work. It is just your way to look after your interests) you have a manager doing that, remember.
This how you could entice investors to work with you more freely. Of course, not all investors will accept 10% a year in ROI. Some investors want 30% or more even. Everyone is different. But I can tell you that pension funds etc ask for 5-8% a year. Maybe such investors would be the best bet for you with an investment like this. Have a business broker ask around.
Enticing investors
The absolute simplest way to have investors invest in your particular business project is by bribing them. You read it right.
What many people seem to miss when they meet investors is: How do investors profit? How do they secure their money?
The best medicine in enticing investors to give you the money you need right now is to give them a monthly cashflow from the deal. Nothing speaks better than you giving them monthly cashflow. Everyone can say: "You will get this and this annual return on your money, but you will not get it in cash for years hence. The money will be returned to you in 5 years or so money years from now". Well let me tell you, if you came to me, asked me for an investment in your company and you told me I where to get my money back with a return in 5 years. Then I would tell you "NO, I will not in a million years invest in your company on those terms". Why? Simply, because I don't know if you're company will exist in 5 years. What I do know more certainly is that you will exist in 1 months time (that is more certain). And if I can have only a fraction of my money back in the form of a monthly cashflow from your company, then that would be better odds than having nothing in 5 years.
Wouldn't you agree? Wouldn't you see this as something you would feel would be a better proposition? If you where the actual investor, what would you choose: Little money back every month or all the money back in years with interest (perhaps you get it back), but nothing until then?
Read my next post, which explain what I mean. I will give you a made up example (please don't comment on my lack of detail. I want it as simple as possible for everyone to get this).
What many people seem to miss when they meet investors is: How do investors profit? How do they secure their money?
The best medicine in enticing investors to give you the money you need right now is to give them a monthly cashflow from the deal. Nothing speaks better than you giving them monthly cashflow. Everyone can say: "You will get this and this annual return on your money, but you will not get it in cash for years hence. The money will be returned to you in 5 years or so money years from now". Well let me tell you, if you came to me, asked me for an investment in your company and you told me I where to get my money back with a return in 5 years. Then I would tell you "NO, I will not in a million years invest in your company on those terms". Why? Simply, because I don't know if you're company will exist in 5 years. What I do know more certainly is that you will exist in 1 months time (that is more certain). And if I can have only a fraction of my money back in the form of a monthly cashflow from your company, then that would be better odds than having nothing in 5 years.
Wouldn't you agree? Wouldn't you see this as something you would feel would be a better proposition? If you where the actual investor, what would you choose: Little money back every month or all the money back in years with interest (perhaps you get it back), but nothing until then?
Read my next post, which explain what I mean. I will give you a made up example (please don't comment on my lack of detail. I want it as simple as possible for everyone to get this).
lördag 8 mars 2008
Fortune VS Cash Flow
People seems to draw a line between "Fortune" and "Cash Flow". But the real fact is that "Fortune" and "Cash Flow" are only two sides of the same coin. They may exist on the same coin, but the realities of the two aspects are far from equal.
Fortune is often defined as "paper-wealth". In todays world Bill Gates has most of his wealth in Microsoft shares (without them he wouldn't be the third richest man today, that also goes for the now richest man in the world Warren Buffet). And as you know shares are just a paper with a denominated value. It has a value because people accept it has some kind of value. It is not real cash in the bank that you can spend.
Jean Paul Getty ones said (in his Biography) that many people asked him for money. But, he said, what many of those people doesn't seem to understand is that rich people doesn't have all their millions in cash in the bank that they can spend vividly whenever they want to. Most of the rich people have shares in private companies, publicly listed shares, real estate ownership etc. In order for them to spend it, they need to sell their shares and real estate and what have you.
And believe me selling of shares in a privately held company isn't something you do in a day. And you won't be able to purchase milk with one of your shares either. Highly doubt it.
Poor people seem to believe the rich people who is worth $1 Billion are free to spend that $1 Billion because they have it all in cash in the bank. They would be surprised how many millionaires who have become broke because they had very much net-worth (a fortune more or less), but they went broke because their "Cash Flow" was terrible (i e they didn't have a billion dollars in the bank to spend).
And that takes us to the other side of the coin "Cash Flow". In order to survive you need good "Cash Flow" coming in every month. That takes more skill than building a fortune. It takes a lot more finesse and intelligence.
This is how you produce a Fortune in simple terms (how simple it is depends very much on how simple you are):
You form a company around a new idea that produces $100,000 a year in earnings. You sell 5% of this "Cash Flow" for 10 times earnings and get a $1 million valuation. You own 95% of that value after having sold of 5% (on paper you are now worth $950,000). In cash you get $50,000 (Cash Flow) which you pay taxes on. The rest is for you to spend as you please.
That is how you produce a "Fortune". The value you give in order to get wealthier is the earnings you can produce with your new idea.
The next step is how to produce "Cash Flow":
As mentioned above you can produce one sort of "Cash Flow" by selling part of your equity. But in order to get to that level you need to produce revenue and make high earnings first. This is trickier than producing a "Fortune" for in fact producing a higher valuation on your company is something you can do even on your own account. You may have another company that might invest a little bit of cash in the new venture for 5% of the company and voíla, you have a new "Fortune" on paper. You can very much build your way up on paper. But the "Cash Flow" will ultimately drag you down again if you are bad at managing that aspect of the business. "Cash Flow" is the blood and air of the business. Without it, the business dies. No matter how rich you are on paper.
One way of creating "Cash Flow" is by trying to sell something new. See if it sells at the price you want to sell it. If it does, then expand and sell more. And more. And more. Ultimately you will, step by step, create a business that is bankable and sellable to investors. And you may have a management team running the business for you. The key is to focus on the earnings base. Making a revenue isn't enough, you need to have high win margins as well in order to to get as high a valution as possible when selling part of your business.
In conlusion: "Fortune" is what you are worth on paper. And that is easy to manipulate to your advantage. "Cash Flow" is what really separates good companies from bad ones. No earnings usually means shallow contents. The business will probably soon die out.
Fortune is often defined as "paper-wealth". In todays world Bill Gates has most of his wealth in Microsoft shares (without them he wouldn't be the third richest man today, that also goes for the now richest man in the world Warren Buffet). And as you know shares are just a paper with a denominated value. It has a value because people accept it has some kind of value. It is not real cash in the bank that you can spend.
Jean Paul Getty ones said (in his Biography) that many people asked him for money. But, he said, what many of those people doesn't seem to understand is that rich people doesn't have all their millions in cash in the bank that they can spend vividly whenever they want to. Most of the rich people have shares in private companies, publicly listed shares, real estate ownership etc. In order for them to spend it, they need to sell their shares and real estate and what have you.
And believe me selling of shares in a privately held company isn't something you do in a day. And you won't be able to purchase milk with one of your shares either. Highly doubt it.
Poor people seem to believe the rich people who is worth $1 Billion are free to spend that $1 Billion because they have it all in cash in the bank. They would be surprised how many millionaires who have become broke because they had very much net-worth (a fortune more or less), but they went broke because their "Cash Flow" was terrible (i e they didn't have a billion dollars in the bank to spend).
And that takes us to the other side of the coin "Cash Flow". In order to survive you need good "Cash Flow" coming in every month. That takes more skill than building a fortune. It takes a lot more finesse and intelligence.
This is how you produce a Fortune in simple terms (how simple it is depends very much on how simple you are):
You form a company around a new idea that produces $100,000 a year in earnings. You sell 5% of this "Cash Flow" for 10 times earnings and get a $1 million valuation. You own 95% of that value after having sold of 5% (on paper you are now worth $950,000). In cash you get $50,000 (Cash Flow) which you pay taxes on. The rest is for you to spend as you please.
That is how you produce a "Fortune". The value you give in order to get wealthier is the earnings you can produce with your new idea.
The next step is how to produce "Cash Flow":
As mentioned above you can produce one sort of "Cash Flow" by selling part of your equity. But in order to get to that level you need to produce revenue and make high earnings first. This is trickier than producing a "Fortune" for in fact producing a higher valuation on your company is something you can do even on your own account. You may have another company that might invest a little bit of cash in the new venture for 5% of the company and voíla, you have a new "Fortune" on paper. You can very much build your way up on paper. But the "Cash Flow" will ultimately drag you down again if you are bad at managing that aspect of the business. "Cash Flow" is the blood and air of the business. Without it, the business dies. No matter how rich you are on paper.
One way of creating "Cash Flow" is by trying to sell something new. See if it sells at the price you want to sell it. If it does, then expand and sell more. And more. And more. Ultimately you will, step by step, create a business that is bankable and sellable to investors. And you may have a management team running the business for you. The key is to focus on the earnings base. Making a revenue isn't enough, you need to have high win margins as well in order to to get as high a valution as possible when selling part of your business.
In conlusion: "Fortune" is what you are worth on paper. And that is easy to manipulate to your advantage. "Cash Flow" is what really separates good companies from bad ones. No earnings usually means shallow contents. The business will probably soon die out.
Prenumerera på:
Inlägg (Atom)