Holly Howard is our go-to business consultant. She’s helped countless small businesses in Brooklyn and beyond (including us here at Brooklyn Based) with her expertise and know-how. This summer, in an unprecedented program, 10 small businesses in Red Hook, Brooklyn have come together to work as a community to grow their businesses through Holly’s From Artisan to Entrepreneur® Business Growth Program. This program was made possible through the generous support from ReStore Red Hook, New York Business Development Corporation, and Southwest Brooklyn Industrial Development Corporation. Over the next 10 weeks, Holly will dedicate her weekly advice column to a specific business in Red Hook that is participating in her in hopes that their journeys will bring enlightenment and inspiration to your business as well. This week, she fields a question from the owners of Home/Made.
We have built our business with all of our own resources, and credit, not even a family loan. So, while we know a bit about running our business, we know nothing about partners and investors, and smart ways to structure those relationships, beyond the extreme things we see on TV, like “Shark Tank”!
We realize to grow, or to take on some of the projects we’d like to undertake, we need to consider bringing in funds from another source.
While we know every deal is different, we’d love some advice on standard relationships between “Partners” or “Investors”, and the differences between the two!
Does an investor get paid back, or do they just purchase a percent of the business, for better or worse? Splain us Lucy! How does it work???
Congratulations on building your business with your own resources! Your path mimics that of many small businesses who can often start the first one on their own, but want to do something bigger the second time out and generally need outside resources to make that happen.
When you’re lucky enough, and successful enough, to get to this point, you definitely need to spend a significant amount of time understanding what is the the best relationship for you going forward. Do you take on a business partner, do you take on a private investor, or do you seek out a loan from a bank or lending institution?
It’s smart that you’re already starting to think about this before you need it. The worst thing you can do is to wait until you absolutely need it to then have to sit down and consider your options.
Now as far as how you structure the deal with your investors or your business partners, that’s between you, your lawyer, your accountant and the investor. They may demand to get paid back and want their investment structured more like a loan with a guaranteed payment structure. On the other hand, they may take an equity deal and you may have to give up a percentage of your company in exchange for a less secure payback structure. You’re right that every deal is different so we won’t necessarily get into that part. But, what we can get clear on is what types of relationships are most appropriate for your business.
Let’s break it down starting with the relationship that has the most active involvement.
First, you could take on an actual business partner. That person would put money into the new venture, but would also participate in running the business in some capacity—maybe a business manager or a head chef for example. Now, I always say that business partnerships are like a marriage, so no matter how small or big a role they play, they’re still actively involved in decision making and daily operations. Suddenly you’ll be going from totally independent decision making to having to communicate and consult a second opinion. If you choose to bring on a partner, you have to make sure that you’re ready to release some control and be ready to enter into constant negotiation. That can be a dramatic change for most business owners that they don’t prepare for in advance. A business partner means you both need to share the same long term vision, have similar values for operating the business, have clearly defined roles so you both don’t get in each other’s way and be able to communicate openly and honestly with each other. This is what most business owners overlook. They see dollar signs and extra hands and think it will save their business or provide them with opportunity. But partnerships can often be more trouble than they are worth if you don’t prepare properly.
So, if that type of change doesn’t work for you, consider seeking out investors, but be clear if you will allow them to be silent or have a voice in the company. And let’s be honest, even when you declare them silent, they’ll always have an opinion. However, you won’t be negotiating all of the day to day decisions with investors. They’re going to come into play with big picture topics. So again, you’ll need to have stellar communication skills, clarity in your vision, and be able to set firm boundaries, but not necessarily be constantly engaged with someone else.
Finally, if you don’t want to add any new relationships to your business, I suggest you go with a lending institution. Now, I’m not saying they won’t have a voice and be a presence you’ll have to manage. But in no way will it be as personal as a business partner or an investor. Unlike an investor, your loan officer will not show up on a Friday night demanding a table for 4 at 8pm because they gave you money. But, lending institutions have much firmer rules on payback than investors and business partners. So if you don’t want to be held to such strict requirements, it might not be the path for you.
As you grow, remember it’s not just about the money and getting bigger. You really need to consider how much control you’re willing to release, and with whom you want to share your long term vision.