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Thread: Should I Give away 20% Equity of my business?

  1. #1

    Default Should I Give away 20% Equity of my business?

    Hi Everyone

    I have been running a mens wholesale fashion company for over 5 years now. We are rapidly expanding and growing, and I have had 100% Ownership of my company. The bad news is because we are growing so rapidly, I now need assistance. I know the basics of math and business, and have a great accountant and lawyer but I need someone to really start focusing on saving every penny and cutting cost. Im great at making money but bad at managing it. I was looking for a CFO to assist with the growth.

    We did $250,000 last year and this year we are doing about $600,000 in wholesale sales. We are predicting to hit at least 800 - 1Million next year and i am at a stage of my company where I don't want to give away a piece of my company but I have too because I cannot afford paying someone salary to be a CFO. Also the other issue is Funding , because we get so many new orders we don't have the finance to fund it so the two main criteria i am looking for in a partner is Access to funding + advisory or hands on CFO position. My credit is no good so i am unable to get a bank loan, and i have got business loans but they were at 3%/month which is to high.

    We do have some loans on the table that need to be repaid so I need to be very careful on every decision that is made to make sure every penny counts in the next delivery of goods to retailers.

    I have had different offers on the table and it is all just making me very confused at this point. I guess my question now is who do you think is the better bet?


    Option 01
    This company is incorporated and has been running a successful tea company and just inquired a cheesecake company and stated he doubled the new cheesecake companies revenues in less then 3 months. It is a partnership of 3 owners that share equity in the corporation and is stating that they are worth about 1.2Million dollars and want to take 18% of my business. They seem extremely intelligent but do not have any background in fashion, as I would only need them for the number side of the business. They also want to make there own shareholders agreement, so they seem very strict on it and I get a sense they could try to screw me over somehow because they are all about money which is good and bad.

    The best loan they can get me ( example - 65K for 2% / Month ) - Which is very high.

    Which also includes :

    *No buy in ( because he said he is giving his resource )
    *Internal Loan (2%)
    *Accounting Infrastructure
    *Warehouse Space Downtown ( Basement though )
    *Moneris fee of 1.5% vs the 3% you're currently paying
    *Collections Infrastructure in Canada
    *Shipping Rates reduced in Toronto (24%-50%)
    *Advisory


    Option 02
    This guy has been in the fashion industry for over 12 years and has experience in running a retail shop. His company evaluation is at 1.2 Million dollars he claims. He is one of our biggest buyers who orders about 30,000$ in Wholesale orders with us per season which is about 60K per season with us. Only thing is he has tons of network and is much older then everyone else and has been in the fashion retail game for along time. He is 39 years old and wants to move into a brand instead of a retail store. He has finances he says but not Millions of dollars, enough to pass by.

    * Buy In 50,000$ For the evaluation of 300,000$ ( 20% Equity )
    * Willing to put on contract that if he does not triple revenues by 2018 he will dissolve himself ( becuase he is confident )
    * Advisory ( But he is not a numbers guys, he just understands the retail side and right now we need someone to handle our finances )
    * He has some contacts with lawyers and is currently looking for a good accountant
    * Very down to earth and seems honest and hungry
    * He said he would open new distribution channels in Europe & US by 2017 - 2018 or he will dissolve himself.
    * Along with other small perks.
    * He can get a decent bank loan at about 10% A year.


    Option 03
    This guy is a CPA graduate, and is about 27 years old, same age as me and is sick of working for companies. He is very smart and intelligent but does not have hands on experience with running his own business. He has about 500,000$ in his Investment account which he had showed me and he originally wanted 44% of the business and we negotiated down to 20% of the business. He said he has amazing credit and his dad is a lawyer and his dad has many connections to bank loans , he stated if he cant get a bank loan he will put down his own money at a low interest rate of 6% year or so. He claims he will put all his time into the business side and become CFO.

    * Buy In ( Not sure amount yet )
    * Wants to work in the business and grow it from scratch at 20%
    * Has funding and money and connection.
    * Very smart guy and understands numbers and financing.
    * Has no experience in fashion or retail
    * Has managed million dollar clients at his workplace.


    Let me know who you guys would go with, as im having such a hard time at the moment and I do need to make a decision because, at the end of the day, my business will fall apart if I dont have a good CFO guy and someone to assist with FUNDING the upcoming Purchase Orders that retailers placed.

  2. #2
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    I'm not sure I would take any of them. #2 might be really good, but I'm not sure I would do that without a better understanding of a few things.

    1. You talk sales, not income. Sales are nice, income is better. So what's the income growth? How are your margins? Without understanding income and income growth, I don't have a feel for what a buy-in amount should be, but I'd hesitate to offer advice about that.

    2. If you have purchase orders in hand, go talk to banks about a revolving loan against your receivables. They might look at your credit rating, but having a history of cash flow, they might be fine with financing your orders. Look for a community bank, not the TBTFs, who are too scared to do stuff like that any more when they can make more money other ways.

    It sounds like you have one overriding issue: you need help, but your margins aren't good enough to pay for someone to help you. Is that an accurate assessment?

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    I am with freelancer. I don't think you should take in a partner at all. My sales are more than 10 times what yours were last year and I don't have a CFO and it they doubled again I still would not have a CFO. One thing you might want to keep in mind is that the second leading cause of business failure is uncontrolled growth. You might be better off raising your prices and trying not to grow so fast. Keep in mind that every dollar you increase prices will flow directly to the bottom line assuming all other factors stay the same. It seems to me that you sales growth is better than your profit growth. The more you can keep your expenses low the more you will make. Borrowing money has a cost and decreases you profit. Anyone you bring in has a cost and decreases your profit. Every time you pay a late fee or miss a discount it has a cost and decreases your profit.

    If I had more time I could tell you a little about my hard earned lesson about costs but I don't today. There might be some tips in that story that would benefit you so if I get a chance tomorrow I may do that.

    You need to learn about finances and costs. Even if you have someone handle that you need to understand it so you can watch over them. You need to understand pricing and margins. As you grow you will need to add people but that doesn't mean you need to give up equity. Perhaps someone as a part time accounting person might be the answer for you.
    Ray Badger, Turbo Technologies, Inc.
    www.TurboTurf.com www.IceControlSprayers.com

  4. #4
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    I don't like any of the options above. I agree with what was said above, it sounds like sales are good, and you make enough money you just have no idea how to manage it.
    Before I entertained anymore partnerships I'd get a good business accountant and get a grip on your finances. If that means you lose a growth opportunity or 2 while you're getting things under control, so be it. But at the rate you're going someone else can't save you. You have to save yourself or you're going to end up pissing the whole thing away and wondering how you failed when so much money was coming in.

    "business" and "bad with money" DO NOT go well together. You need to fix that first before you're even capable of knowing what a good partnership agreement is.

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    I agree with the others here, I don't think you are at the point you need a CFO or a partner. You need to take the steps to manage your money yourself. It sounds like sales are good but profits are low add to that it sounds like you are carrying a lot of debt. Are you making a profit?

  6. #6

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    You might ask local universities if they offer a business consultant. They may be able to assist you with the number crunching you need. One of our local universities offers them free as goodwill to the community. I used one and it was well worth it.

    Personally I liked option two the most. He understands the business. I'd be careful about his definition of "dissolve" and concerned about the rapid growth.

    Option three was my next favorite. Hungry to do something else, knows numbers and business. Who knows, he may be very good with fashion retail.

    Then only thing I liked about option one is that it is a three person partnership. This way you have three different minds assisting (or impeding) the business.

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    I am going to disagree with most of the responses based only on assumptions I make in consideration of the broad overview you provided.
    It seems you have a tiger by the tail. I would actually go with a partner for a few reasons.

    First , you sound a little overwhelmed on your own and seems like you need some help. You are growing at a rapid pace and are facing the typical problem of financing and managing the growth.

    I would agree with the others about slowing your growth EXCEPT that fashion is a very fast moving competitive business. I would be afraid that if you can’t keep up with your customers immediate demands they will pass you over for someone that can. It could be a lost opportunity that may never be recaptured.
    The 20% is a small price to pay if it gets you to the next level and beyond. The alternative may be stagnation and lost momentum.

    Of course the challenge is choosing the RIGHT partner. That can only be determined by you. From the overviews my choice would be # 2. He is already in the business so there will be very little time wasted with a learning curve. He probably does have good contacts; he has experience and is mature. His older age and experience can add some gravitas. He is investing $ 50,000 for a minority position which is a pretty good commitment.

    Partnerships can be great or disasters. Just have a way to get out of it if needed

    PS I do agree you don’t need an official CFO. I assume you have looked at PO financing and factoring to help with your financing needs.

  8. #8

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    Hello,

    I think you have great opportunity to continue managing your business. This is because good revenue, and positive grow rate. You do not need business partners, nor CFO; but you have to have a good financial analysis to reduce your operation(s) cost and increase your profit. If you need cash for your current business obligation(s), you can create budget analysis and present it to potential lenders offering them 7%-12% yearly return. If you do not have good credit, your revenue and income for the last two years can help you to obtain any Small Business Loan.


  9. #9

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    Hey Dave,

    Have you considered consolidating your current loans? This way you can keep 100% ownership in your company? With such high rates, those sound like advances or receivables purchasing products. Looks like cash flow might help here...
    Last edited by vangogh; 04-16-2016 at 07:20 PM. Reason: removed self promotion
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