HOW DO I STRUCTURE BUSINESS WITH VENTURE CAPITALIST

CUPROGUE

I am trying to buy an existing business.  I have several years of runing this type of business for the owner.  Recently I found spoke toa friend who is an investor. He has interest in investing in me and this business . What I need to know is how to structure this.  He wants to know how much money he can make on his investiment.  Do I offer him a percentage of the net?  If so how much do I offer him?

CUPROGUE

Thanks Craig.
Tha lawyer may be a good idea but I would rther save the money at this point in time. This is in the very first phases.  All the investor needs right now is a game plan from me. The lawyer can come in later on. 
 
So what I would like opinions on is this.  Should I give him 10% of the net profit or 50%?  ETC

pepperlegal

What does the cash flow of the existing business look like?  What are your revenue and cost projections for the business?  How much capital is the investor looking to invest in the business?  Does he want any management or voting rights in the business?  Is he looking to invest a lump sum at once, or spread it out over time?  By the way, if I knew what kind of return I could make for each investment I`ve made, I could challenge Warren Buffett.  There will always be significant risk in any business investment.  I don`t want to sound self-serving, but unless you get some good legal advice for this structure, you could be setting yourself up for disaster.  If you bring a lawyer on board after you`ve already structured the transaction, it will probably be too little, too late.

CUPROGUE

Well at this early stage there is a great chance it wont work so the money spent could be a waste.  Any idea how much that would cost/
 
Anymore ideas on my origional question?

robertj

Well at this early stage there is a great chance it wont work so the money spent could be a waste.  Any idea how much that would cost/
Anymore ideas on my original question?

Remember that "free" advice is usually worth what you pay for it.
What type of return does your investor want/need/expect?
What do you think is "reasonable"? Return needs to be commensurate with risk (perceived by the investor). Since you say above that "there is a great chance it won`t work" - I`d say the risk is high. Therefore, the return should be high. Typical return objectives for high risk ventures is around 40%-50%  per year - which translates into a return multiple of 5 to 8 in five years. Since most businesses can`t generate the cash needed to provide such a return - the only way to reward the investor is by selling the business or going public.
On the other end of the spectrum, an investor can get 7%-10% return with virtually ZERO risk. So you will have to be able and willing to offer a return higher than that.
So I`d say your bracket is  >10% and <40% per year return on his investment.
Finally, I reiterate the previous recommendations. Get advice from professionals.

CUPROGUE

Ok let me put this in laymans terms.
 
As far as the business not working.  That is not what I meant. It does fine and I know this because my dad ownes it. 
What I meant by it not working is that the whole purchase might not work so I dont want to hire an attorney at this time. I would expect your 40%-50% per year thought would be different now since I have explained my self a little better.
I need non attorney ideas.
 

robertj

First of all, my intent was to give you a range of return as a starting point. It isn`t important what I think - but what your investor expects.
Point two - you are not dealing with a venture capital situation (although many might disagree) you are dealing with a single private investor.
Lastly, I said get professional advice. If you want non attorney ideas that is one thing. If you want good solid business advice about your specific situation - you will probably have to pay something for it.
All the best,
Robert Johnson

CUPROGUE

Single private investor?  Yes I am

CLA1

Whose actually going to own the business?  The investor, you, or
both of you?  If I was the investor and owned, say, 80% of the
business, I would want 80% of the profits (after taxes, interest, any
money retained in the business, etc).   If you owned 20% of the
business and ran it, your cut would be 20% of the profits plus your
salary to manage it.   If I was you, I would structure it with
healthy bonuses to you if the business did well.  Also have some
option in the deal to buy the investor out at a future date.  Why
not just borrow the money from the bank rather than having this
"investor" involved?  That way it`s your deal.   Chris

nevadascul

Hi CUPROGUE,

Pokerman

Get an attorney.... trust me on this one.
I failed to have legal advice during my initial phase of business (wanted to save the money and put it into the business instead) and now in hindsight, after having an individual I trusted with everything turn on me it would have saved me thousands of dollars.
Don`t be shortsighted... when it comes to money a good attorney is your best defense against unscrupulous persons you might have thought were your friends. 

YourLegalResource

 
Not sure if I can be of service to you or not, depends on what State you are located in.  I run a referral practice helping connect the right client to the right professional.  This often includes lawyers, business consultants, investors, etc.  Check out my website and I`d be happy to talk to you if you are in Michigan.  If you aren`t, there may be some other ways to help.  Many lawyers do not charge an initial consultation.
www.bestlegalresource.com</A>.
 
Best wishes,
Lori 
 YourLegalResource2007-4-24 19:59:37

CUPROGUE

Thanks to all for the help.
 
 
Travis

pagejames

Travis,
Just my two cents worth!  You have two kinds of financing - debt and equity.  Debt financing is getting a loan (like going to the bank) from your investor and you make payments that are either fixed or based on profits, etc.  Equity financing is where the investor shares ownership of the company with you.  My personal preference is towards debt financing because equity financing makes your friend your partner.  You may be able to set the transaction up so that you have all the control, but as was mentioned earlier, you may end up in a situation where your partner wants to be cashed out.  With debt financing, it`s all spelled out in a loan agreement and you give up no control of your company.
Debt financing isn`t always possible, but in my opinion, it`s the first choice.
Good fortune!pagejames2007-4-26 15:53:14

jycmba

I second some of the previous comments on 2 key issues - 1) do your planning before signing contracts / agreements 2) get help with this
My practice recently affiliated with BEI because we`re now connected to advisors around the country who specialize in helping folks with issues like yours.
Please contact me directly for referrals or subscribing to my e-newsletter on exit planning.