Using One Business to Finance Another?

[vangogh]

I'm not sure how many here have more than one business. If you do have more than one do you use profits from one to help finance another or do you like to keep things completely separate?

Many of us who do have more than one business, particularly when those businesses are online, probably tend to tie them all in closely with out personal accounts and so may just see all the money as one.

It's also possible you operate several businesses under one business entity and the money will move back and forth.

In any scenario do you see all your businesses as ultimately one entity and move money freely between them or do you prefer to keep the finances of each completely separate?

[cbscreative]

I definitely favor the crossover. Success in one provides the funds to start another. Success in as many as possible brings income diversification. I think some caution is required though. You should have a stable income in at least one area before expaning to another. I view it as not having all eggs in one basket. I would want to be very careful not to let one drain the other and become a burden.

[vangogh]

I guess the important part is to keep all the accounting straight. Say you use one business to finance another. Would you loan the new business money, consider the first business as an investor in the second? Am I making this all too complicated?

[cbscreative]

Now you're venturing into those aspects I hate dealing with. My approach is to focus on making things work (earning the money) and turining over the details like that to someone who knows the answers (hopefully, someone like Evan or David will post an answer).

[vangogh]

I'm hoping the same in regards to Evan or David or anyone else who knows more.

I'm like you. I'd rather deal with earning the money and letting someone else deal with the other things and so far my finances have allowed me to not have to worry about those extra things. I'm expanding my business though and thinking it's good to be prepared. And while I don't like to deal with that extra stuff I do know a little and don't mind learning more.

[KristineS]

I think dealing with the money will be a challenge for me if I ever do go out on my own. My problem is the things I like to do I really like to do and those I don't I'd just as soon hand over to someone else. So I'm guessing, if I get to that stage, I'll find an accountant.

[Spider]

I think dealing with the money will be a challenge for me if I ever do go out on my own. My problem is the things I like to do I really like to do and those I don't I'd just as soon hand over to someone else. So I'm guessing, if I get to that stage, I'll find an accountant.Know this, Kristine - Never ever hand over so much control to someone else that you don't know what's going on. You want them to do the donkley-work but you keep control and make the decisions.

Secondly, don't worry about it now. Any problems having lots of money will cause can be easily solved when you have the money to buy a solution.

[cbscreative]

Secondly, don't worry about it now. Any problems having lots of money will cause can be easily solved when you have the money to buy a solution.
I love that. It pretty much sums up what I expect as those "problems" begin to materialize.

[KristineS]

Know this, Kristine - Never ever hand over so much control to someone else that you don't know what's going on. You want them to do the donkley-work but you keep control and make the decisions.



That would not be a problem for me Frederick. I like to know what's going on and I don't trust anyone else to make decisions for me or about me. Having someone else do the donkey work is lovely, but the final decision making power will always rest with me.

[Evan]

This can tie into your multiple businesses thread too. Are they all under one umbrella company, or are they seperate? I'd say it's critical to keep track of everything seperate. But to tie in your account software thread as well -- programs such as QuickBooks offer "class" tracking. All your income/expenses would then be associaed with each "class". So you could create an income statement and see that Biz A is losing major money, while Biz C is flourishing. If it's under one company, then there is no problem with commingling the funds. As for having seperate entities, I wouldn't commingle the funds. That's simply bad business.

If you have seperate entities, then you do need to use a bit of caution. Let's say you're XYZ Corporation, and the sole shareholder/officer/employee. You want to loan yourself money to start ABC Enterprises. Even though it is JUST you, and it seems minor, you really need to create a contract stating the amount of money being borrowed, the length of time, payment frequency, and the interest rate. The interest needs to be a reasonable rate, so no credit card offers of "0% for the first 2 years" deal. The IRS won't buy that. And that interest then legitimately becomes business income / expense, depending on the loaner and loanee.

If you are a corporation or even an LLC and you don't document these things in writing, you could end up "piercing the corporate viel" and losing the legal protection that you wanted. So tread carefully in those instances.

[vangogh]

I started both threads one after another and they kind of go together. I agree with you that how the money is handled will depend on how the businesses are set up. I've begun to think I don't need separate business entities and everything will be one company so intermingling the funds probably won't be a big deal.

Good point about making sure to keep income statements separate if just to know that one company isn't working so well and I'd be better off dropping it.

I hadn't even thought about the complications of moving the money around. Thanks for the reminder. It's another reason to keep everything as one one company.

[KristineS]

Unless you're doing drastically different things, or you have serious liability issues and so need to keep the companies separate, I'd say keeping them all together is much easier. I know from a money standpoint and an image standpoint managing separate companies is a lot more work and gives a lot more opportunity for things to get screwed up.

[Evan]

Unless you're doing drastically different things...

Risk is the biggest factor.

If you have two websites, one selling candles, and another that was selling non-FDA approved drug (but not illegal), I'd run them separately. The risk of being sued as a result of an injury (death, etc.) with this non-FDA approved drug is significantly higher than that of the candles.

[vangogh]

There really shouldn't be any kind of legal issues. I know there's always the possibility, but these wouldn't be sites with a high risk of lawsuit.

[KristineS]

Risk is the biggest factor.



You're definitely right about that Evan, and not only legal risk but risk of damage to your company reputation. If you're unsure about a new product or service offering, you might be better setting up a separate company to bring it to market. If all goes well, you can consolidate the companies, but if it doesn't than a crash and burn won't harm the reputation of the established company.

[vangogh]

That's a good point about the different companies affecting the brand of the other companies. In my case it shouldn't be an issue, but I can see how it could become one. Some of the sites I'm thinking about will be related in the sense that I'll be visible. Others may not be. I don't anticipate an issue with one hurting the brand of another. More like each will increase my overall brand. Still it's something to consider.

[orion_joel]

I think the issue of one brand affecting another, is maybe not just limited to funds being combined between two companies, having the same owner can create just as much a connection as sending money between two business, possibly even more so.

The number of news reports, that go along the lines, of "today ABC corp, who is owned by the same investor as XYZ Corp, has had a sizeable cash injection from an undisclosed source, to prop up it's failing widget division". I am sure there is a chance that most of you have seen that sort of article or something similar just with a different spin. The association is made between companies, not always between where the money comes from. While it may be obvious one company is support another, unless it is a public company, i do not believe that it is a requirement to publicly disclose financing sources, although i may be wrong.

[Evan]

While it may be obvious one company is support another, unless it is a public company, i do not believe that it is a requirement to publicly disclose financing sources, although i may be wrong.

Not unless you're publicly traded. Private companies do not need to disclose financing sources, though some people may want to know (i.e. any potential investors).

[orion_joel]

That is what i suspected, which would mean financing between two companies may not really affect the company to much of extent that other issues may do so. However as you said Evan it can make a difference to Potential Investor's that do the full Due Diligence.

[BillR]

The biggest danger in doing this is failing to make the second business stand up on it's own.

You can/should plan a one-time loan (or several at intervals) but do not keep giving money from one successful business back to the other new business. You need to focus on limited one-time capital so you force yourself to make the second business cash-flow positive in the shortest realistic amount of time.

[orion_joel]

Bill, i think even more important then trying to make the second business cash flow positive in the shortest possible time is the idea of making it cash flow positive at all.

The time frame for cash flow positive is not really as important as the fact that the business will become cash flow positive. This is where good fiscal planning i think comes in and really working to achieve goals that you set for the business. While fair enough setting a single one time investment to cover start up may be all it needs, what happens if it is not cash flow positive in a year most people would start to just keep feeding money in to keep the business operating. Even more so if it is only a little bit say a few hundred a month. This may not even really be noticed if the funds of both businesses are shared. I think this is where it required good reporting on every front with multiple businesses.

I am almost sure one business supporting another happens very very often in retail. For example if you have a chain with 50 stores, i can almost gaurentee that you will find one that is losing money, and even though it is losing money they will keep it open, unless it is because of lack of customers. Because some locations that this sort of company are expected to be seen may be costly but they operate the location purely for visability.

[Evan]

While a positive cash flow is critical to any business, it's really combining both of your ideas. You want positive cash flow in the shortest possible time and also to be able to maintain it.

Depending on what type of business you operate, generating a positive cash flow (from operations) can sometimes be easier than in other industries.

Some companies still have a difficulty producing any profits, despite their popularity. Think of Facebook. The company's profits are small and most investors haven't seen any return on their investment. Yet the brand is very strong. In this case, some argue that it's management that is preventing growth and profitability. It's not always the brand.

Regarding chains having multiple stores, while some are more profitable than others, the squeaky wheel gets the grease. Starbuck's closed down hundreds of unprofitable shops not because it couldn't afford to keep them open, but because they were burdening the company's overall profit. It was a (smart) strategic move. Sometimes you just cannot survive in certain markets and it could have been bad research on the company's part. It's important to know who the demographics of your customer and whether the areas you're located typically satisfy that demographic.

[BillR]

Bill, i think even more important then trying to make the second business cash flow positive in the shortest possible time is the idea of making it cash flow positive at all.

True - but the problem I've seen a few times is a successful business owner will start company #2 which does not do well.

Instead of cutting losses or forcing the cost cuts necessary to get into the black the person just keeps dumping profit from Company "A" into Company "B".

If you do that long enough you'll lose both of them.

[KristineS]

You're right about that Bill R. I worked for a television station that was family owned. The owner had long had the dream of starting another station in the Upper Peninsula. He finally started that station and practically drained our station dry supporting the other station. Instead of one station that was financially successful, he had two stations, only one of which was making money. It caused a lot of problems.

You have to know when to say when and cut your losses. If you don't, you could lose everything for which you've worked.

[Spider]

Still, one must also recognize that it is possible for a second loss-making company to be very good for the first profitable company. You could provide a top-notch service at loss-making rates in order to bring in customers for an associated business. In my wife's case, she is a very good master groomer but must compete with cheap groomers in the area, but to shut down the grooming business would put a big dent in the boarding business. She does the grooming (which she loves, anyway) at a loss or breakeven and makes her money boarding dogs.

I can see a computer programmer making a loss on selling computers so as to have access to new computer owners who would want custom programming.

I can see an auto dealer taking trade-ins at a loss to facilitate new car sales, and selling some of those loss-making used cars in the hopes of encouraging would-be buyers to opt for a new car.

I am told that McDonalds makes virtually no profit on their hamburgers and fries and make their profit on their soft drinks (¼ cents-worth of syrup + carbonated water that they sell for $1.99)

There can be many occasions making a loss on one business serves the purposes of another business. Don't be so quick to dismiss the idea.

[BillR]

There can be many occasions making a loss on one business serves the purposes of another business. Don't be so quick to dismiss the idea.

I can't disagree with anything you said. The real key is having a plan up front and a purpose and sticking with it in regards to the finances.

On another note - did you know most of McDonald's profit comes from real estate? They have two types of stores - corporate and franchise. When someone wants to open a franchise McDonald's buys the land and forces them to rent it from them. About 50% of McDonald's stores are franchises.