Investing in a local business & when/how to expect return

MusoMan

Hi, I'm looking for some advice.

I've agreed to invest in a recent start-up company. It's a pretty standard local company providing a service (sports & recreational) with good turnover & growth/expansion potential. It's a great opportunity and I'm in for 20% for €25k if I want.

It's my first time getting involved in investing and I have little to no experience when it comes to negotiating certain parts of the deal.

I'd like to get advice on the different options that should be open for discussion in relation to repayment of investment, or dividend and when/how that gets paid. I really just don't know how these things work and when I can expect to see some or all of my €20k. I run my own small business and all revenue generated either goes back into the company or into wages (if business is good, I just pay myself more), so I guess I'm just curious to see if there are any clever or innovative agreements that I can propose.

Your help would be greatly appreciated

Duckett

Well done MusoMan, its really great to see new people putting hard earned cash into local enterprises.
A very useful resource is HBAN http://www.hban.org/ In addition to running events for angel investors they have an excellent website and some excellent publications. An example is the following which you should study:

http://www.hban.org/_fileupload/HBANGuide(Investor)1_4_7.pdf

drunkmonkey

Would you not have asked all these questions before agreeing to invest any money, you've no control of what happens the business, seen as a business can borrow money below 4% at the moment you'd have to question why there seeking private investors when they can borrow cheaper.
Are you getting 20% ownership of the business? Has it any assets, do you now own 20% of them as well an any liabilities. There's a load of questions you need clarity on.
I know I'd be going to the bank before giving away 20% of my business.

MusoMan

Thanks for your replies, and the helpful link Duckett!

Drunkmonkey, I've only agreed in principle to the investment as of yet, and I have a meeting with the owners on Tuesday to discuss the finer details of the investment, hence my post (I haven't posted here in donkeys but my missus suggested I try here).

Short answer is I don't know why they haven't gone to the banks. I don't think it's as easy to get the banks banking as you are making out. As a business owner myself I know how difficult it is, and considering the company I'm investing in has only been trading for 6 months, I'm sure that hasn't helped matters.

Yes, it's 20% ownership of the business which has assets of just under €10k.

If both of you were investing, and assuming everything went to plan, targets/revenues were met after 6mths and again after 12 mths, what would you expect in return and when? I guess that's the answer I'm looking for from people with the knowledge.

Thanks again!

MusoMan

MusoMan wrote: »

Thanks for your replies, and the helpful link Duckett!

Drunkmonkey, I've only agreed in principle to the investment as of yet, and I have a meeting with the owners on Tuesday to discuss the finer details of the investment, hence my post (I haven't posted here in donkeys but my missus suggested I try here).

Short answer is I don't know why they haven't gone to the banks. I don't think it's as easy to get the banks banking as you are making out. As a business owner myself I know how difficult it is, and considering the company I'm investing in has only been trading for 6 months, I'm sure that hasn't helped matters.

Yes, it's 20% ownership of the business which has assets of just under €10k.

If both of you were investing, and assuming everything went to plan, targets/revenues were met after 6mths and again after 12 mths, what would you expect in return and when? I guess that's the answer I'm looking for from people with the knowledge.

Thanks again!

What are the goals you want to achieve from investing in this business?

What was their Net Profit last year?

MusoMan

I want to help the company because I like their service and expansion plans, and like any investor, I'd like to see a quick return on my investment and continued performance of the investment. If the initial investment was paid back over the first 4 years, and the company was performing well, I'd be happy. This isn't the sort of business that will be sold on, there's no exit strategy, just put the cash in and work hard at making it work well... maybe I'm mad, I don't know.

They are only trading for 6mths so no net profit but their turnover to date looks promising.

pedronomix

Your investment values a six month old service business with 10K of assets at 100K. Unless is throws off lots of spare cash cash, you are unlikely to see any return of investment until, or if, it is sold. Why are you investing? What is your motivation? that is the real question. If you want a dividend and your cash back at some point, now is the time to specify your terms in writing.

If you do not understand the game, it is generally unwise to play.

MusoMan

Yeah fair point pedro. I do have faith in the business to generate cash, that's why I'm taking a calculated risk. I really like the business itself, the brand and I also have a lot of faith in the 2 guys running it.

I worked in the same business myself a few years ago so I know it's profitable (or at least, popular and revenue generating, never knew the extent of what the company I worked for was making). I guess that's why I'm investing, I see the opportunity.

Is it fair, for example, to say that if the company performs to X level after Yr 1, that I get X return and so on?

pedronomix

The issue you face is that the promotors effectively control the level of profits, just like you do with your own business, to have any chane of working it would need to be based on gross revenues. To be able to establish what is equitable you would need to see proper projections based on various revenue scenarios. Very few SME businesses throw off much "spare" cash especially in this kind of services sector.

MusoMan

Yeah exactly pedro, they control the level of profits and because it's a small business, it's not like they're going to be working up a healthy profit so they can send another 12.5% tax the way of the revenue. I've studied their projections, and turnover for their first 6 mths, they expect to make a small profit (€15k net) at the end of Yr 1 (to August) and the following year, this will jump to €68k net.

When you say base it off gross profits, what do you mean exactly?

pedronomix

Nor are they going to work it to max any payout to you!

I said the exact opposite, based on gross revenues not profits!

MusoMan

pedronomix wrote: »

Nor are they going to work it to max any payout to you!

I said the exact opposite, based on gross revenues not profits!

Sorry, that's what I meant

pedronomix

MusoMan wrote: »

Sorry, that's what I meant

So what do you not understand?

modmuffin

I have structured two similar scale investments as follows;

Founders salary agreed for 3 years, with bonus based on growth
Zero return on investment year 1 to allow all profits be reinvested in business
Repayments paid out from year 2 @ 30% return on investment.
Agreement reviewed at end of year 3 & option for founders to dilute or buy out my shares if performance exceeded expectations

Will receive first repayment from one business this month.
The 2nd looks set to fail

One thing you can do is ask for a royalty off each sale until your investment is paid back. If they complain well maybe your the only person offering the money so that gives you leverage.

The other thing you can put in is that whenever any of the principals take money out of the company, you get the exact same money out as per your share ratio.

Just don't put any trust in the people running the business despite how relations may be now. Things can turn sour easily so you need to be protected and think about number 1.

newacc2015

How much have they invested? IMO €25k for 20% seems very little for a start up company. Did they give you a personal guarantee to protect you if it fails? If not you might as well put your money into a few projects on linkedfinance, that appear more secure