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.