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Seeds For Thought
Financing Your Venture
Starting your own business is going to require some investment of funds. It could be a few hundred dollars to rent a garage to sell used furniture or a few million dollars to acquire a national motel franchise. As you develop and refine your business plans, you will begin to focus on the amount of money your business will require. Don't be cheap. Aristotle Onassis, the billionaire shipping tycoon, advised only half in jest, "To be successful, keep looking tanned, live in an elegant building (even if you're in the cellar), be seen in smart restaurants (even if you nurse one drink) and if you borrow, borrow big."If you are starting your business part-time, you will have living funds from your full-time job. But, if you are starting your business full-time, you must incorporate monies for day-to-day living into your business plan. At the very least, you will need money for food, clothing, shelter and transportation. Entrepreneurs must be realistic and flexible. While others might be reluctant to compromise their present lifestyle, start-up entrepreneurs might need to voluntarily adopt the spirit of the "Rules of Saint Benedict." To be more monk-like, delaying gratification, at least until the fledgling business finds its feet. This is following the Catholic Action Principles™. An accepted rule-of-thumb is for an independent businessperson to have a minimum of six months of cash reserves to cover emergency living expenses. These emergency living funds would be in addition to any money that needed to start and operate the business. If you can live on $1,600 a month and it will cost $20,000 to start your business, your total capitalization would be almost $40,000. This six month cash reserve should remain a business constant. This money should only be used for emergency purposes and, if used, replaced as soon as possible. If circumstances force your expenses higher, your reserve should increase in kind. The money in the cash reserve will be a constant temptation. You will be tempted to buy that new van for your courier business. You will wish you had that new color copier for your printing business. You will swear to pay back the money quickly after you remodel the office. Don't touch the reserve. Again, this is living money and not business cash. Time and again, you may find it helpful to strengthen your resolve with a prayer to the patron saint of banking, Saint Bernardine of Feltre. In starting your own small business, you will naturally be enthusiastic. That's good. But, you must balance your positive mental attitude with cold, calculating pragmatism. Many small businesses fail quickly because of undercapitalization. In other words, the well meaning but failed entrepreneur was overly optimistic when projecting income and expenses figures and didn't have enough start-up capital to keep the enterprise going long enough for the business to take hold and become a success. Remember your edge; you are a thoughtful, spiritual person of action with a strong foundation in research. This research should provide you with the numbers you need to make informed decisions. You do things right and that includes proper capitalization of your business. Be levelheaded and wait another six months to raise additional money to ensure proper funding for your venture. This approach is infinitely better than impulsively plunging into the unknowns of the day-to-day operation of your new business. Err on the side of caution and start with more funding than you think you'll need, rather than less. With cautious optimism, your chances for small business success will increase enormously. Where do you get money? You have your investment savings. You may be able to seek financial support from family, friends or other relatives. You may have partners. As you do your research, you may find others in your industry interested in investing in your business. If you are buying an existing business, the owner will often "take-back paper", i.e. lend you money. If you are buying a franchise, the franchisor often has financing programs available. Also, many vendors and suppliers will have leasing or payment plans for their supplies and equipment to help get your business going and keep it primed. Banks, loan companies and credit unions are also funding sources for businesses with strong business plans and/or individuals with established credit histories Many budding entrepreneurs make the unwarranted presumption that traditional lenders such as banks are willing to play a large early role in their businesses. Unfortunately, this is not often the case. However, banks will be very interested in your venture, if you qualify for Small Business Administration (SBA) financing, since the SBA would be guaranteeing the bank repayment of your loan. For lots more information on small business financing, go to http://www.sba.gov. Cindy's Bake ShopDoes Cindy have any experience in this business? Does Cindy have demographic data to support a new bakery in her area? Does Cindy have comparable data to show that her income and expense figures are supportable? Does Cindy have a signed lease and guarantees from suppliers and vendors? Does Cindy have contractor estimates? All of these questions may be for naught, because a bank is going to look at the worst-case scenario, and you can't blame them. Let's look at Cindy's business from the bank's perspective. Cindy starts her business. No one likes her "natural ingredient" baking formulas. The business fails. Cindy walks. The bank forecloses on the business and has to sell the baking equipment for ten cents on the dollar. Actually, the bank will be lucky if the cost of disposing of Cindy's assets matches the funds generated by the foreclosure auction. As a result, the bank loses all its investment in Cindy's Bakery. If Cindy signed a personal guarantee on the note, the bank may have recourse against her personal assets. If Cindy's Bakery is a corporation, the bank will get nothing. The business of banks is to lend money. Banks have to lend money to stay in business. Therefore, banks always want to lend money. You should not be shy about asking a banker for money. But, listen to the guidance that the banker gives you. The banker wants you to succeed for one good reason - so that you can repay the money you borrowed with interest. Then, you will have positioned yourself to borrow more money and pay more interest. Don't be naive. Banks are not liberal social agencies with an obligation to see you succeed. The mandate of the bank is to see that the bank succeeds and that the people who own the bank make money. Banks want to see business plans with one bottom line - an assured ability to repay the monies borrowed with interest. Period. Many beginning businesses don't have a credit history or asset base to warrant bank financing. What can poor Cindy do? Poor Cindy can whimper and whine about the economy and the Federal Reserve's control on banks and interest rates. She can cry about what she wants and her inability to give the world a better organic corn muffin. Cindy wants enough money to start her gleaming new modern bakery and she wants it now. Or, Cindy can be realistic. She can stop and say a prayer to Saint Lawrence, patron saint of cooks and restaurants. She can take on partners and/or investors with experience and with other assets that they are willing to put at risk. She can work until she saves enough money and/or has other assets to pledge. She can buy an existing bakery with owner financing. She can apply for SBA funding. She can start on a shoestring. She can start in her home or in a small commercial kitchen where she would bake for other bakeries or restaurants or hotels or caterers. She can gradually build up a commercial baking business before she starts a retail operation. She can gradually build a credit-worthy business. In one, three or five years of operation, the banks may be bending over backwards to lend Cindy money. Remember, the banks must lend money. They just want a surety of being paid back with interest. Few outsiders will be interested in investing with you if your own money is not at risk. The higher your personal stake in the venture, the more secure your investors should feel. With the exception of your cash reserve, you will probably be putting all your other monies on the line. Your business can have several types of investors. One type of investor is actually investing in your business and becomes a part owner. This investor may lend you $10,000 with the hope of eventually receiving $20,000 or $50,000 back. Totally depending on your individual negotiations, this investor may or may not receive partial dividends as the business grows and before the business is sold. Or, you may have a buy-back agreement with this type of investor. With a buy-back agreement, within a specific period of time and at a specific amount, you would have the option to buy-back this investor's interest in the business. Other lenders, such as banks, may simply serve as creditors. Creditors will lend you a specific amount of money for a specific term at a specific interest rate. You repay creditors what you promised. When you are a success, the investors share in your success. The creditors, however, only receive what is promised. If your business is formed as a corporation, it may be possible to sell stock to shareholders. However, the filing and accounting requirements for selling stock make this a prohibitively expensive option for most beginning businesses. In some types of businesses, especially high tech, venture capital from venture capital firms might be a consideration. Google "venture capital" to start your learning curve on this more complicated topic. Venture capital is the financing method that funded most billion dollar dot.com start-ups. Traditionally, venture capital firms provide the funding to start-ups until the businesses are ready for their IPOs (Initial Public Offerings), which means selling stock to the public for the first time. Andrew Martin, InvestorFor his first year, he worked as a life insurance salesman. He sold policies to everyone in his family and every known acquaintance. Then, he found himself out of names, luck and enthusiasm. His next stop was retail computer sales. He liked the job but after a year and a half, the company folded. He tried selling cellular telephones and service at the mall. However the company he represented had the fewest cell towers and the most dropped calls in the area and everyone seem to know it. Even Andy believed in his product. He had chosen the wrong business or, at least, the wrong company. After four years on an employment treadmill, Andrew was getting nowhere fast. Yet, Andrew wasn't a slacker. He really tried. He really had a pent-up desire to succeed. He considered going back to insurance sales where, at least, he had learned the secret. Here's the secret: make a hundred cold calls. Cold calls are non-referral calls. Cold calls are unsolicited calls. Needless to say, cold calls have a low positive response rate. Get ten people to listen to you. Arrange five at-home appointments. Sell two policies. Start again. Make a hundred calls. Get ten people to listen to you. For over a hundred years, some insurance sales people have gotten rich and some insurance sales people still get rich with just this formula and patience and persistence. But, nothing is tougher than cold call sales, so before Andy voluntarily went back to 50 "No, thank yous," and 40 slammed receivers for every 10 folks who'd listen, Andy wanted to explore another commission business. Well, how about real estate? Real estate looked like an interesting and promising field. You're selling people something they already want to buy: a house. Homeownership is the American Dream. You really don't even have to sell. You just drive your customers around. The houses sell themselves. The people find the home they want. You fill out the papers. And, the money looks good. If the commission is, say 6%, the selling office gets 3% and the listing office gets 3%. Then, the selling office splits the 3% with the selling agent who gets 1.5%. So, for selling an average $200,000 house, the agent gets $3,000. Not bad pay for driving around town for the day. It sure beats driving a cab, another short-lived career from Andy's past. 
At real estate license school, Andy also learned that the same commission split of 1.5% also goes to the listing agent. So, just for listing a house for sale which another agent sells, Andy would still get $3,000. Sounds good. When he told his mother, she said, "Well, at least this time, you'll have a nice saint to pray to, Saint Joseph. Your Aunt Mae buried a Saint Joseph statue in her back yard and sold her house in five days." Andy did say a rosary to Saint Joseph. He needed a partner and the man who raised Jesus couldn't be too bad a choice. So, Andy gets his real estate license and a job with Taylor Realty. Taylor Realty was happy to have Andy on board with his contacts: Andy's family and Andy's acquaintances who might be buying or selling real estate now or at some time in the immediate future. Since Andy was on commission, Taylor didn't have to pay him anything unless he produced positive results. For four months, Andy sat. Oh, he showed houses and even made a sale. And, he rented two apartments, which paid $900 in commissions. A neighbor on Andy's street listed her house with Taylor Realty through Andy. In four months, Andy had made just over $4,000. No one seemed to find this unusual. No one in the office bothered Andy. No one in the office pushed Andy. In fact, Mr. Taylor thought Andy was doing a good job for a beginner. In fact, Mr. Taylor felt that Andy shouldn't have any trouble making the average salary that the average real estate salesperson makes in a year. That's just under $36,000. $36,000? If Andy weren't living at home, he'd probably have qualified for public assistance. Everybody at Taylor Realty seemed rather content. Mr. Edgers, a retired military man, came in every day and read five newspapers content to wait for the phone to ring. Mrs. Chambers did her knitting. Ann Brown did her Sudoku puzzles. Maybe Andy could find something to fill his free time at the office, like woodcarving or reading bird guides. Instead of remaining idle, Andy decided to further his real estate education and he began reading books on selling real estate, books like, "You Can Get Ten Listings A Month - GUARANTEED." And guess what the book said to do? Open the phone book. Make a hundred cold calls. Get ten people to listen to you, etc., etc., etc. Two people at Taylor Realty did not fit the Taylor Realty profile. One was Mr. Taylor himself. The other was Don Nardo. Mr. Taylor, having been in the real estate business for close to forty years, owned the block of stores in which the Taylor Realty offices resided. He also owned three small apartment houses containing 18 units. And Mr. Taylor had at least one easy sale or listing a month from his many years of satisfied customers. At least half the people who called or walked in to Taylor Realty with business asked for Mr. Taylor directly. Mr. Taylor also was friends with two of the largest builders in the area. All totaled, Mr. Taylor made about three or four times the annual income of his entire sales force combined. Except, of course, for Don Nardo. Don Nardo wasn't that easy to figure out. Don's specialty was investment real estate, income property. And Don wasn't in the office that often. He'd rush in with cellular phone in hand and grab some papers or scratch down an appointment and he'd be out again. Don Nardo was intriguing. From the office scuttlebutt, Andy learned that Don Nardo sold about $6 million dollars worth of property a year, and that he sold most of his own listings and that he was on a 80/20 split and not a 50/50 split with Mr. Taylor. Andy grabbed his calculator. $6,000,000 times 6% was $360,000 times 80% was $288,000. Very interesting. Don Nardo was obviously a man to watch. Andy watched and listened. He learned about the Sullivans. Over the previous 25 years, Jack Sullivan had been buying and selling income properties in the Newton area. All the properties were sold to Jack by Don Nardo. At present, Jack Sullivan owned 14 apartment houses. As each of his children reached age 21, Jack would sell them a property at a very favorable price. Jack Sullivan wanted to give each of his children a good start in the real estate investment business. Danny Sullivan was 23 years old, three years younger than Andy. Danny was in the office talking to Don Nardo about the pending sale of his three family house and barn for $245,000. Jack Sullivan had sold the house to Danny the year before for $180,000. Before selling to Danny, Jack had owned the property for ten years. Jack had paid $85,000. From what Andy could piece together of the story, Joe Edgers, the newspaper reader in the office, had a buyer who wanted a house with a large garage to accommodate his lawn mover and power tool repair business. Joe had alerted everyone in the office to keep an eye out for such a property. Don Nardo had the property. It was Danny Sullivan's three-family with barn. From snippets of telephone conversations, Andy pieced together from Don Nardo's and Danny's conversations that although from a rental income standpoint Danny's three family was only worth about $210,000, the fact that the barn would make a perfect repair shop might be an opportunity for Danny to sell his property at a premium price. Don and Danny decided to have Joe Edgers ask his buyer if he'd pay $250,000. The buyer saw the property. It was just what he wanted. He offered $240,000. The deal was made at $245,000. Joe Edgers had a sale. Don Nardo had a listing sold. After taxes, Danny Sullivan would have about $100,000 to reinvest. Don Nardo had Danny Sullivan primed to buy about $500,000 worth of investment real estate with the $100,000. Danny was already looking at a single-family house to buy for himself and a four unit apartment building. And, to Andy's surprise, he heard Don Nardo telling Danny about a possible buyer for the four-family, and Danny didn't even own the property yet. Danny Sullivan looked like a young man with a very bright financial future. Andrew Martin didn't. Andrew Martin had a choice. Be wild with envy or start doing something constructive himself. Andy chose the latter course. Andrew Martin was about to get serious about his financial future. The BackgroundAndy decided to feel out Mr. Taylor first. "Mr. Taylor, I'm very impressed with Don Nardo's side of the business, investment property sales. I was wondering if you'd allow me to sell investment property." Mr. Taylor shook his head half-listening, "Andy, you're here to sell real estate. Whether it's single family houses or apartment houses, that's up to you." Andy was relieved. "You'd have no objections, then?" Again, half-listening, Mr. Taylor replied, "No, I can't think of any. If you feel you'd do better selling investment property, then, give it a try." Andy wanted to cover his bases. "Do you think Don would object?" Now, Mr. Taylor was listening, and spoke, "Let's be frank. I don't think Don would be too intimidated by your interest. Don has mostly his own clientele of thirty or so investors. If you go after new business, there shouldn't be a conflict or problem. However, if you disturb any of Don's deals or interfere with any of Don's clients, you'll be shown the door fast. You'll be fired. No second chance, understood? Mr. Taylor continued, "You can cross over my tracks but not Don's. Any dispute between you and Don and, be assured, right now, that I will side with Don. I won't even care to hear your side of the story. Understood? Don and I go back a long way and although he may seem gruff, the man's a good friend and he's had a hard life. I owe a great deal of my business success to Don Nardo. Understood?" Mr. Taylor was very well understood by Andy. "Yes, Sir, I understand." Mr. Taylor offered his deal, "And, Andy, between you and me, our commission split arrangement remains as it is, 50/50. Is that understood?" Andy nodded, "Yes, understood. That's all fine. Well, Mr. Taylor, any advice for me on how to get started?" Mr. Taylor made his point, "Well, Andy, your first challenge is the fact that you don't know anything about investment real estate. I don't want to laugh but that's quite a handicap. So, I guess, I'd say that that's where you should start, learning something. As a start, why don't you make an investment property log of every piece of investment real estate in Newton? Catalog each building, recording as much property and ownership data as you find." This sounded to Andy like an almost impossible task. "Mr. Taylor, are you kidding? There must be hundreds of properties. That would be an enormous undertaking. It would take me a year. I wouldn't have time for anything else." Mr. Taylor took a breath and blew it out, "Andy, you're not making the right impression here. Do you want to sell investment real estate or not? Investors are knowledgeable people. We've already assessed what you currently know about investment real estate. Now, young man, start thinking like a winner. If there are hundreds of listings, you should wish there were thousands. You could say that hundreds of properties makes for hundreds of listing opportunities ... hundreds of sales opportunities ... hundreds of management opportunities ... thousands of rental opportunities. Or, you could forget this whole idea and ask Ann if you could borrow one of her Sudoku puzzle books. You decide who you are and what you want to do." There was more than a hint of sarcasm in Mr. Taylor's advice to Andy. But, why shouldn't there be? Andy hadn't exactly excited the residential real estate world by selling one house in six months. Why should Mr. Taylor or anyone expect Andy to do any better selling apartment buildings? Andy wasn't going to become a success by constantly changing jobs but only by changing himself. Once Andy changed himself, he would probably become a success at any job he chose. Go to Lesson Twenty One15 | 16 | 17 | 18 | 19 | 20 | 21 | 22 | 23 | 24 | 25 Index
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