Q:

Hi Ty,

Entrepreneur, inventor, start-up, angel investor, business plans!!! I just wanted to create a product that would improve the game of golf! I believe we’ve done that. We’ve tested the working model; everybody loves it; it’s priced right; but how do we take it to market? Do we use infomercials, dealers, pro shops, off-course shops, license agreements, or go direct to the customers? I know I need to get in the car and start selling “The Idea,” but here’s my question: How do I write a business plan to attract an angel investor when I’m not sure about the marketing strategy for “The Idea”?

Check out my webpage at www.Nside10.com so you can see my concept. Our target market is between 20 and 22 million players between the ages of 10 and 40, and we are offering a 38 percent ROI for an 800K investment the first three years. If funded this year, we could introduce two models at The PGA Merchandise Show in January 2008.

Help in Augusta,
Walt Pendleton
Ira Electronic Golf Systems
wkp@Nside10.com
706-399-3344

A:

Hi Walt,

Thank you for sending me this great information about your business.

To answer your questions about how to market your idea and how to get investors interested, let me tell you how I look at things when I am considering investing in a business.

I always ask myself three questions:
    1. Do I understand the business/product?
    2. Do I love the management team?
    3. How am I going to get my money back?

When I’m deciding whether or not I understand a business/product well enough to invest, I always consider what the marketing strategy is. I need to know who the customers will be, how they will benefit from the product/service, and how you will reach them. Market research is a very important part of your presentation to an angel investor, and I haven’t met an angel investor yet who will invest in a product without knowing the marketing strategy.

So, to answer your question about how to write a business plan for an investor when you’re not sure about the marketing strategy for your idea, my answer is you have to figure out your marketing strategy before most angel investors will even let you in the door. Take a look at how others have marketed innovative sports-related products like yours, make sure you are targeting the right market, and have the numbers to prove it. It sounds like you’ve done some testing of the product, and it never hurts to do more.

Once you know your marketing strategy, then you can write the plan that will make it possible for you to attract angel investors. And just as a side note, I think it is important to point out to you that most angel investors like to invest in projects that are going on in their region. So you may want to go ahead and do some preliminary research to see what investors or groups are in your area.

I hope this has been helpful for you. If you have any questions, please do not hesitate to ask.

Best,
Ty

Q:

Ty,

Personally, I'm at the ripe age of 63 and have been involved in real estate for nearly thirty years. But to be honest with you, it isn't my passion. I never jumped out of bed wanting to do this. My wife does the same (we are both realtors and appraisers). I have read and done self examinations and everything possible to try and understand what my passion is and I'm afraid I will never know and that's sad. I have read several books that tell you how to go about finding one's passion and I never did. I've done some exciting things...flying airplanes, producing and directing radio and television shows as well as on air work...but I found no passion for these occupations. At my age, my wife often tells me just continue working a few more years and then in retirement I might become passionate
about something!?

Anyway, I thought I would just throw that out to you. Any thoughts?

George

A:

Hi George,

Thanks for your response! I found it to be very interesting as I know exactly how you feel. I’ve certainly gone through times in my life when I felt like I didn’t have any real passion for what I was doing. Thankfully, my father was there to teach me a couple of valuable lessons. He told me that life is all about accepting who you are and what you are meant to be, and then focusing that simple belief on others. He also taught me that the best way to get passion out of what you are doing is to think about how what you do helps you make a difference in someone else’s life no matter what you are doing, whether you’re a doctor or, in your case, a realtor (You’re helping people find their new homes, after all! That is a great service!).

One other lesson I learned from my father: Don’t spend all of your time looking for what’s missing in life, but appreciate what you already have. If we spend our time looking for some missing magic bullet that we think will make us instantly happy, then chances are we will be doomed to keep that search up our whole lives. My father taught me that if you just stop for a moment and think about how valuable other aspects of your life are you’ll realize that spending your time worrying about what’s missing is a waste of time.

Finally, life is all about the choices you make, and I’ve always found that passion simply comes out of being involved in something that is worthwhile, no matter how big or small. If you can find something to do that is worthwhile, even if it is outside of your job, then I think you’ll find a passion for what you’re doing.

All the best,
Ty

Q:

Hi Ty,

My name is Frank. I utilize your web page everyday and have been very eager to start a business over the last couple of years. I am 33, and married with two boys, who are 3 and 1 respectively. Since receiving a BA degree in 1996 I have worked for two companies. First as a personal assistant to the chairman and CEO of a Fortune 500 company, and now I work for a coal mining company.

I received my MBA degree in December 2006. During the MBA program, I met four other guys who are awesome and have the same morals and goals as I do. We recently started a holding company with holdings in the durable medical equipment industry. We operate a small company and holding in the hospice industry.

Although we lack financial infrastructure and working capital to allow for growth, we want to grow and expand our business. Please share with me your thoughts about small business funding and the best way to find investors and necessary working capital. I know we are in a great position to serve others and satisfy the market need of taking care of the aging population.

Thanks in advance for your help.

Regards,
Frank

A:

Hi Frank,

Thank you for your response. Based on what you’ve told me, it sounds like the market you want to get involved in is growing and now is a great time to get involved. It also sounds like you have several well-educated partners working with you.

Here are a few ideas on what you can do to raise some start-up money:

First, I would suggest you get your family, friends, and anyone you know from the industry excited about what you are doing in the hope that they will be willing to put some seed money into the company.
Next, think about who your mentors are in the business. Strike up a relationship with them, and use their connections to help you find paths to money.

You can also use their knowledge as well as your MBA credibility to write up a great five-year business plan, which should include information about your management team and information on how your angel investors will get out. When you have a great business plan, find an SBA-sponsored bank in your town and apply for an SBA loan. (Be sure to have the best public speaker of the group presenting the plan!) If you are able to get an SBA or other bank loan, you will become more attractive to angel investors.

Another thing you might want to research is the possibility of receiving grant money through the government.

And be prepared to put 20% of your own equity into the deal—banks and angel investors will be looking out for this.

Best,
Ty

Q:

Hi Ty,

My name is Jon. I have been very eager to start a business over the last couple of years. I am twenty-five years old, and I currently work in a typical corporate setting but would like to go out on my own and start something. I have many ideas (service-based businesses, franchises, etc.) but have not been able to move forward with anything yet. On top of that, I was recently offered an MBA as a gift from a family member. So now I am torn between launching a start-up and going back to school (for free). Do you see value in an MBA or do you see it as more time that could be spent building a business? Thanks in advance for your help.

Regards,
Jon

A:

Hi Jon,

You’re asking a very important question that will have an obvious impact on your future. At first glance, one would advise you to go get an MBA; then, if you still have a desire to run your own business, have at it. That advice would certainly make a lot of sense. If you then become an entrepreneur and find you don’t like the pressures of ownership, you can always lean on that MBA as leverage in pursuing a career working for someone else. In this instance, an MBA would certainly give you a leg up.

However, it has been said in many circles by many successful entrepreneurs that an MBA will just get in your way. Many of these entrepreneurs agree that MBAs simply teach students how to be great middle managers in large corporations. I will never forget many years ago, when the head of the MBA program at a local prestigious university gave me some great advice. He said that an MBA was a great prerequisite for a job in a company like IBM or Procter & Gamble, but as far as teaching students how to run their own businesses, they fall short. 

If becoming an entrepreneur is your main focus, earning an advanced business degree could be a big mistake. Typically, entrepreneurs are seat-of-the-pants players, who make decisions quickly, often based only on their gut instinct. An MBA could easily block these natural entrepreneurial instincts. The entrepreneur is an offensive player, while a degreed player can get bogged down in information and projections. As an entrepreneur, you won’t want to be slowed down by second guessing and trying to plan for every possible bump in the road; you’ll want to seize every great opportunity when it presents itself.

With that said, here’s my opinion on the decision you’re facing: I am inclined to say that if you have an idea (vision) for your own business, one that you are passionate about, and have the confidence to make a go of it, then go for it now without the MBA. There is never a better time than the present. Take one of your good ideas and run with it. You can always get an advanced degree down the road if you think you still need it.

No matter what decision you make, I would love to hear about your progress. Please keep in touch!

All the best,
Ty

Q:

Hi Ty,

I’m opening a new coffee shop and was just wondering if you had any advice on cash flow. As a new entrepreneur, I’m just not sure how much “extra” I’m going to need on hand to pay all my bills and cover unexpected expenses. I don’t want to get into trouble! Can you help?

Thanks,
Sam

A:

Hi Sam,

That’s a very important question. Your cash flow is going to be a key factor in the success of your business. Before you even get started, you need to know how much equity you have and how much money you can raise or borrow from a bank. One trick is to borrow more money than you think you’ll need (about 10 percent more!) and to put the extra away somewhere where it can accrue. If you’re going to need income during the first year of the business, you will want to be sure to take that into consideration when trying to figure out how much to borrow. You’re preparing for the proverbial “rainy day,” and when unexpected crises or hang-ups occur, you’ll be glad you did.

Find yourself an accountant who can help you manage your finances and help you figure out your breakeven point—the point where your expenses equal the amount of money you are bringing in in sales. The breakeven point is a key component in cash flow. It will help you determine how many cups of coffee (or any product) you will have to sell in order to cover your cost. Your accountant will also be able to set up your books, help you decide how much money you need for what, and can also help you with tax planning. It’s also great to set up software such as Quickbooks or Quicken that, with just a little training, can help you easily manage your finances and keep up with your cash flow.

Be sure to plan ahead for all of your expenses, including non-recurring expenses such as prepaid insurance, equipment to use in the store, rent for store space, repairs for broken equipment, or legal advice. When you start any kind of small business, non-recurring expenses tend to add up quickly. Take these into consideration when you’re estimating how much money you will need to get started. You don’t want to find yourself running to your family, friends, or bank for more money.

That brings me to the number one rule you need to remember with regard to cash flow: Never surprise your banker. Always make sure you have enough money left over to make your loan payments. When you’re starting a business, you want your banker to be on your side. The best way to do that is to make your payments on time and to keep him informed about developments in your business.

Also, be sure that you aren’t growing too fast. Even if your company is doing well, you can end up with cash flow problems. When you’re just starting out, it isn’t easy to judge how hiring a new employee, renting extra office space, or adding a new product line or service will affect your cash flow. You’ve probably made the decision to do one of these things because you want to build your business while things are going well, but be careful that you don’t overshoot how much money is available to cover these expenses. If you’re using money that you had previously committed to other things, make sure that you still have all of your bases covered. Again, it’s all about not surprising your banker!

For more information on this subject, please check out one of the articles I’ve written, Seven Cash Flow Secrets, in the Financial Matters section of my website.

All the best,
Ty

Q:

Hi Ty,

My name is Carol, and I’ve been planning to start my own catering business for years. I think I’m finally ready to jump into the entrepreneurial ring, and I was wondering what your thoughts were on taking on a partner. I think it would be great to have someone there with me taking on this huge task, but I know a lot of problems can arise out of business partnerships. Any advice?

Thanks,
Carol

A:

Hi, Carol! This is a great question and one that I hear all the time. You’re right, being an entrepreneur can sometimes be a lonely business, but taking on a partner isn’t always the best decision. From my own experience, 50-50 partnerships haven’t been great successes. The problem with partnerships is that at some point in the business you are going to reach a stalemate. One person will want to go one way and the other person will want to go another. You really learn a lot about someone when you get into business with him (even if the person is someone who’s already close to you), and all of those issues that make you and your partner different—family situations, work ethics, and so forth—can cause problems.

Instead of creating partnerships, I have always looked for extraordinary talent that will work with me and for my company in “partnership” fashion but still allow me to have complete control of the company. One way I do this is by creating what is called A Stock and B Stock that represent ownership in the company. Here’s how it works: A Stock is voting stock and B Stock is nonvoting stock. The B Stock is distributed among my employees and myself, while I keep all of the voting stock. While the employees have no vote in what happens with the company, they still receive all of the benefits of owning stock. For example, by retaining the A Stock and keeping the vote, I can decide to declare a dividend for all class B Stock. Your employees would get their participation in that dividend but would not be part of the vote. Using this system, my employees have a stake in the company and are equity owners, while I still hold all of the decision making power in the company and avoid a situation where there could be an unfair takeover, or a situation that results in an unresolved solution to a problem.

Another way to create a sense of employee ownership in lieu of taking on a partner is to create phantom stock. With this method your employees become stockholders in spirit. Phantom stocks give valued employees all of the rights and privileges of stockholders, but because they don’t actually own the stock, it prevents them from gaining control of the company. For example, if you sell the company and one of your employees has rights to 30 percent of the phantom stock, he wouldn’t receive 30 percent of the sale because he doesn’t actually own 30 percent of the shares. Phantom stocks operate as another great way to instill a sense of ownership in your employees while allowing you to retain complete control of your business.

Now, I realize that sometimes having a partner is necessary. If this is true for you, Carol, make sure you establish a mechanism from the get-go that will help you avoid problems if there is ever a dissolutionment. You must create a provision in the partnership agreement that addresses how to dissolve the partnership in a way that is fair and equitable for both parties. I advise that you do two things: 1) Acquire a key man insurance policy, and 2) Set up a formula before you get started that will enable you to value the company if one partner wants out of the business partnership. The formula will specify exactly how the seller will be paid so there won’t be a stalemate. The money in the key man policy will be used either to pay a disabled partner who can no longer work, or, in the case of an unexpected death, will pay the partner’s estate, so that the money left in the company itself can be used to develop new business and/or find a replacement for the old partner. It never works to say, “I’ll buy you out” or “You’ll buy me out,” when there is no plan in place. Putting the formula in place ahead of time will help you determine how much should be paid for your partner’s share at that particular point in the business. The formula should be addressed on a routine basis because the value of your business will always be changing. With the formula in place, if there is a dissolutionment, a fair price can be determined and no one will feel cheated or be driven to litigation.

I hope this information will help you begin making decisions about your business. Best of luck to you and your new venture!

Ty

Q:

Hi, Ty. I’m Chris, a small business owner in Michigan. I’ve been renting space for my business since I started my computer repair and supply business in 2000. I haven’t had any problems renting, but because of my success, everyone I speak to keeps insisting that I buy a space or building. I think it would be a great investment opportunity. Any reasons buying a space or property would be a bad idea?

Thanks!
Chris

A:

Chris,

Please don’t make the mistake of buying property for your business! It is a huge misconception that doing so will help your business and be a good investment for you. Buying property could throw your successful business off course, because it will take you away from working on the business. When you buy a property, you essentially become a landlord. You’ll be responsible for repairs, upkeep, and the general maintenance of the building, and the time you spend doing those things could take away from the time you should be spending thinking of new ways to grow your business.

You said that you are considering buying property as an investment. Think about it like this: you’ll be buying a property hoping that it will appreciate over the next ten to twenty years or so. What if it doesn’t? What if property in your area depreciates or stays stagnant? What if your business goes under and you can’t sell the property? You may think that if you continue to lease, you will be throwing away your money. That actually isn’t the case, because you can expense your lease payment, helping you save on the amount of money you pay in taxes each year.

Unless your business is one that is dependent on its location, such as a retail business might be, I strongly advise you to consider continuing to lease your business property. It has always been my belief that a business owner should spend his time growing and developing his business—not maintaining property.  

Best of luck,
Ty