Investor/Partnership thoughts

[Onlinesupply]

Hi all,

I was hoping to get some thoughts on an Investor/Partnership inquiry I've had for my business.

The story so far is,

I have established and have been up and running my supply business for almost 12 months now with myself and my two staff members. The business is having a very good response and is growing at a rate of about 15% each month.

I have been looking to expand on the business in terms of purchasing bulk product and greatly building on our current range where I have sourced all products needed and secured my suppliers to do so. After interacting with my suppliers and securing the best possible prices for each bulk order needed for this growth/expansion, I have calculated the capital needed to be $350,000.

This also covers further equipment purchasing, extra staff and securing the larger distribution warehouse
needed.

I now have an investor interested in putting forward the money needed for the business to expand and we
have been discussing and going through all plans present and future over the last couple of weeks.

At this stage there are no agreements made or signed other then business and investor confidentiality. The
Topic of shares is now on the discussion table after identifying what each of us has to bring to and into the
business.

The investor will bring the money needed and only this one time investment. Also, he will bring his further knowledge with transport,logistics and distribution and will take on this role within the business part time.

I will bring the established business along with my regular buying customer base of just over 2000 (and continually growing). As well as full supplier contacts and established relationships with these suppliers and the customer base, my industry experience of 7 years and the knowledge of building and running this particular business after working and successfully growing two businesses in the same industry over those 7 years (who are now my competitors). The business itself also has a working capital of $40,000 that will be used solely for the purpose to keep the business operations flowing while expansion is happening. I will as normal be working full time in the business as the director.

I am after any experience and thoughts on how to move forward with splitting shares as fairly as possible.

My first and forth most concern is purely the continued success of the business, growth and establishing a working business partnership. I have no complex over ownership or trying to rule the roost. I am only concerned about what is best for business and how to enter this correctly.

Any help and thoughts would be greatly appreciated!

[huggytree]

cant you just keep growing at 15% a month and get there w/o any investors in a year or two?

by stretching it out you will become a better businessman in the mean time and have better odds for success

by trying to jump into the big leagues instantly arent you taking a larger risk AND giving a stranger a % of YOUR company?

id be thrilled with 15% a month.....most people would be thrilled with 15% a year.....

i would rather take a conservative approach and just keep building the way your building..it should all pay for itself w/o any need for a loan

[nealrm]

I will agree with huggytree. It is better to grow naturally, at a rate supported by the cash flow of the business. This will result in a stronger, more secure business.

[Onlinesupply]

Thank you for the replies so far, this is something I have given quite a lot of thought into over the months gone by.

Due to to the large demand from my customer base and also further potential customer inquiries to offer a much wider range of product and also at larger quantities at a time, my major concern is losing these clients and not being able to capitalise on the potential clients seeking the full range of goods needed.

With this investment in place, my current customer purchase value will not only double per order placed but having all the products needed in the one place, will also prevent these customers from shopping to my competitors (which at the moment is happening due to the minimal range we have).

To me, this seems to be a better move forward for the business. I have always planned at some stage in the business to take on a investor/partnership (even though this stage has come quicker then thought) who will also contribute in specific areas. As foreseen when first beginning the business and laid out through my business plan, I've specified the future grow needs involving investment, strategery and exit plans for any investment as well as my own.

As there is a great deal to be considered and agreed upon before any concrete is set, I am only looking at options for splitting shares in this type of situation. At the end of the day, I know any final decision for a working agreement will come down the both of us.

Thanks again for the replies!

[ArcSine]

I have always planned at some stage in the business to take on a investor/partnership (even though this stage has come quicker then thought) who will also contribute in specific areas. As foreseen when first beginning the business and laid out through my business plan, I've specified the future grow needs involving investment, strategery and exit plans for any investment as well as my own.

Kudos on that thinking; the most lucrative exits usually come from having kept the end game squarely in view from the first day.

What you indicated elsewhere in your post--a sense that the firm's growth opportunities are heightening the need for outside capital--is frequently a reality that escapes some folks simply because it seems contrary to common sense: Strong organic growth (such as what you're experiencing, congrats!) should, one would think, lessen the need for outside funding thanks to the increasing profits.

The counterintuitive reality, though, is that the more robust the growth, the more likely external financing will be needed to sustain the engine. Indeed, there exists some growth rate at which it becomes mathematically impossible for the business to self-sustain on internal profits alone.

Not the time nor place to drift off to TheoreticalVille, but I just wanted to mention the gist as a way of saying that your interest in at least exploring this financing opportunity as a way to capture some potentially lucrative expansion ops, is certainly supported by business realities.

That said, though, external financing comes in many flavors all along the spectrum, and it's very important to avoid any deals whereby you end up giving away too much of the pie, growth or not. Whether or not this particular opportunity is the right one depends, of course, on a boatload of variables unique to your situation. The net value of your expansion opportunities (with careful consideration of the uncertainties involved), the structure of your balance sheet (receivables, payables, inventories), your cash flow cycle, and so on. And in the end, as you've noted, it'd come down to a matter of negotiations between you and the other party (i.e., whether you can keep his money from being too expensive).

Unfortunately, your more specific question of how best to "split the shares" is also very case-specific. It may be that you'd do better if you could structure his infusion more as a loan and less as pure equity. But still, such general rules of thumb are useless without considering all of the context. Definitely have your accountant help you crunch all the numbers to help sharpen the view.

But if your analysis of the variables suggests that now's not the right time to grow with outside money, then Nealrm's advice to "...grow naturally, at a rate supported by the cash flow of the business." is solid. Internal cash flow won't support 15% a month very long, but even a fraction of that, long run, makes for an impressive retirement plan :).