Hi there, Mrs. 1500 once again, asking if you would invest in a local business. But before I give you all the juicy details of my opportunity, let’s recap last weeks answers.
If you recall, last week I asked you how you handled being “The Rich One.” The one in your group of friends or family that saves your money, rather than spending at least all you have. People notice that you don’t have a brand new car, or new clothes all the time, or designer watches, purses, shoes, etc. They make comments, they chide you for being a saver, but most of all, they expect YOUR money to be spent on them. So how do you deal with it?
save. spend. splurge. said “You call them out.” Her brother would always let others pick up the tab, until she finally made him do it. She is sure he has finally figured out that he needs to pay his own way now that she has said something. YAY!
Done by Forty agrees that sometimes, you get a sense of pleasure being able to treat someone. But when it isn’t my idea to do the expensive thing, it really doesn’t make me feel so good to foot the bill.
Reader Renee has family that just assumes that since she attended college on a bunch of scholarships and has no student debt, and since she doesn’t have cable and rents a cheap apartment, she should pay for everyone. She has explained that isn’t the way the world works, and thinks she might be getting through… Good luck. I would love to hear about how you made it through school without debt.
Mrs. Y from Live Happy, Retire Early has the friends that I want to have. The kind that don’t seem to care or expect them to pay for everything. Nice. She did make a very striking statement: “It is interesting how people tend to judge your financial status based on the material things you have.” How many people do you know, who have a nice car/phone/clothes etc, but live in a horrible neighborhood or live paycheck to paycheck because they spend everything they have?
Which is a sentiment Kay from Green Money Stream backs up with her comment about a friend of her husband’s, who has a high-paying job but can’t seem to save any money. “Meanwhile they always eat out, have tons of gadgets, and always buy coffee out in the morning (even leaving the house on weekends to get the coffee and drive back home with it).” There is a family down the street from me who is constantly having money problems, but I see them drive away from the house everyday, only to return with Starbucks cups after having been away for about 15 minutes. ARGGH! I think I see the problem…
Tara from Streets Ahead Living had a GREAT suggestion. The next time the freeloading person suggests something expensive to do, or something you KNOW they cannot afford, simply ask them if they will be paying for themselves. Brilliant! Of course, now I have to put it into action…
Thanks for all the replies. I really appreciate everyone taking the time to read and respond. You will notice I did not reply to many of your responses. I did read through them all, and actually thought I had responded to most of them. No idea why they didn’t show up… Maybe I did that thing where you THINK you respond, but you actually don’t?
Let’s forge ahead to this week’s question, Would you invest in a local business? Let me give you some details before you reply. When we moved to our first house in Colorado, we had seen a brewery/pizzeria in a strip mall. We didn’t know what to think of it, and didn’t want to waste money on bad food or beer. A few weeks later, they were included in a coupon mailer so we tried them out. (The 1500’s are pizza fanatics. Check out our 10 Questions and a Pizza Place series!)
We loved their pizza. Mr. 1500 loved their beer. Microbreweries are experiencing a HUGE surge right now. Sales are through the roof, and increasing daily almost everywhere. Even the big breweries are noticing, and doing something about it.
So, would you invest in a local business that you believe offers a good product? The signs in the restaurant said they were looking to raise money, and you could talk to a manager about it. So we did, and we have an appointment on April 12 to discuss it further.
If you would invest, what questions would you ask them? We already know to ask about the obvious, finances from the existing location, plans for expansion, etc. Do you have any other questions you would ask?
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Here would be my conditions:
1. If my investment in the business constituted 5% or less of my net worth (unless I was an expert at investing in small businesses)
2. If I believed in the business’s chances of success (as your questions would address)
3. If I care about the community that I live in and believe the business will help
4. If I wanted to learn about small business investment – if I may want to pursue this again.
1 and 2 would be absolute requirements and 3 and 4 would be strong preferences. I would build my questions around those conditions. For instance, if I wanted to learn about investing in small businesses, I would make sure to ask questions to see how involved I could be in the process, or if they are looking for more hands-off investors.
Dave @ The New York Budget recently posted…What’s Your Wardrobe Plan?
Thanks Dave! Adding these to the list of questions…
“If my investment in the business constituted 5% or less of my net worth (unless I was an expert at investing in small businesses).”
This is one of the first things that came to mind for me too. Actually, I think it will be much less. 2% is probably as high as I’d go.
Absolutely, provided the food and experience were great and I trusted the management. You may be able to work a particularly sweet deal structure with them, because in my experience traditional lenders don’t like to lend to restaurants or bar…..until they have an outstanding track record. I’m looking forward to hearing what you decide.
-Bryan
Income Surfer recently posted…Picking Through Stocks in Beaten Down Sectors
Thanks Bryan.
I think they have a good product, nut I want to know more, and talk to more of them, before I drop some cash down. You make a good point, you have to trust the management.
That sounds like a great investment, though this is primarily ruled by my penchant for microbreweries. 🙂 I don’t really have anything useful to ask, but I’d love to hear how the meeting turned out!
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Oh, I am sure I will post at least one follow up. Even if nothing comes out of it, maybe my experience can help someone else make a decision. Will let you know after we meet with them again.
Believe me Anna, I suffer from the same bias!
That’s a great question and I would say most of my experience would come from Shark Tank, so take that into my answers.
I agree with @New York Budget, having the investment consitute being a small blip on your radar would be one of the most important factors. If for example you gave them 10K and they used the money to spend on a whacky wild inflatable guy and then closed up shop the next day to move to Beliz, you would not be asking for change to feed the kids.
I would need to see the numbers for the last couple years, showing trends of sales, expenses, etc. Also very important would be the year to date numbers, what happened last month, did you lose money, is this place a money factory?
What would the money be used for would be my next question? One thing that always sticks in my head from Sharktank is they ask ok are you going to use this money to increase production or are you buying a new item to increase sales, another manager to run the staff? Because if for example they are using the money for marketing and want 10K, show me how that 10k is going to increase the customer base, which will increase sales(hard numbers, not possibilities).
I think lastly I would want to know the short term and long term goals, are they looking to sell to Budweiser, franchise the place, or keep it local and enjoy or become established in the community.
There is probably a ton of other questions you can certainly ask, but those are the key ones for me. Also remember it’s a business decision, I love the sushi place down the street from us, but I would not make it personal decision because of love there food.
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I am a big Shark Tank fan, too. I keep running through my head, what would Mr. Wonderful say about this? And I definitely wouldn’t invest it all. I am trying to diversify this year.
I would take a close look at the fundamentals of their finances:
1. What are the assets? What are the liabilities?
2. What are the short term and long term liabilities?
3. What has been the net income over the past month, quarter, year?
I would take a look at the cash flow of the business and estimate a conservative discount cash flow analysis into the future.
Outside of the financials, I would want all 4 of these questions answered with confidence:
1. Do I understand the business?
2. Does the business possess an attractive intrinsic value and/or durable competitive advantage?
3. Does the business have solid management that acts with integrity and honesty?
4. Is the business selling at an attractive price?
Conduct your due diligence. Since you are close by this potential business, you have the opportunity to do some investigative work to check out the flow of customers throughout the day, ask customers what they like about the pizza/what sets it apart from others, and many other inquiries to see the attractiveness from the ground level.
If all the points listed above pass with flying colours, it could be a nice business to invest into.
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Thanks for these reminders and suggestions. As with all investments, the amount invested could disappear overnight. (Enron anyone?) I want to lead with my head, rather than my heart. I don’t get the opportunity to invest in local companies, and would like to support them. But not if I think my money is going to disappear… I will add these questions to the list, too.
Umm, how do I hire TMSL to represent us in this matter?
Hehe thanks for the compliment 🙂
I think the most important factor for me would be the question on durable competitive advantage: does the pizza place have that extra star power that other pizza places don’t?
For example, Apple has an incredible durable competitive advantage: they can charge a huge premium on their products that no one else in the technology industry can, and people will actually PAY that premium to own Apple products. And come back for seconds, thirds, etc.
I think this is an incredibly important factor to consider when it comes to the pizza place because other existing pizza places can compete with this one solely on price if there is nothing special about it. Then your pizza place will in turn have to compete on price by lowering its own price. And this will lower profits. If this happens, all you ended up doing was investing your money in a mediocre pizza place.
TSML recently posted…Inflation: When $5 Billion Can’t Buy Bread
I would actually be more willing to invest in a local business that I could see and experience rather than invest in a “stock” of something. I guess I like to actually see and feel how my money is working rather than the alternative.
Michelle @fitisthenewpoor recently posted…Car Cost: Cutting Out or Cutting Down?
I have read a statistic that 50% of all businesses fail within the first year, and 90% fail within 5 years. While I would love to help a small business out, I don’t want to lose my money. Excitedly nervous about the meeting.
Invest in a local business? Sure.. if I believed in their business model and the person in charge.
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I want to add that the person in charge makes a difference for me. You can have the perfect business but if the one leading it all doesn’t understand business or have common business sense, you might as well burn your money.
saverspender recently posted…The Principles of a Practical Minimalist Shoe Wardrobe
Yep. Just a simple mistake like choosing the wrong location can kill a small business. There are a LOT of moving parts to consider.
That is the truth! There have been plenty of businesses that have gone under, simply because the owner/manager didn’t have a head for business.
In my area, I’ve seen so many small restaurants open and then close within a year. I’d want to make sure that the food quality was beyond stellar, that the marketing plan is strong and most of all that the level of service and quality don’t drop off within the first 6 months – ruining the early buzz and customer base. I’d also want to know the background of the owner/manager and whether they are doing this for a lark or have the knowledge and experience in running a restaurant in the past (and if they had failures as well and if so, why).
All great points. Restaurants scare the crap out of me as well. If I didn’t know one and the area well, I wouldn’t even hand them $1.
I would do it, and I’ve thought a lot about doing that someday. But I did have a friend who was invested in a local pizza place. He basically didn’t get any return from his investment and, worse, it was nearly impossible to get his money back out.
So I’d only invest money I knew I could lose and I’d be sure to do my homework. And never with a friend or family member’s business. Good luck!
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Yep, any money in this, I have to prepared to never see again. The key is to figure out what the chances of that are. In the end, it’s really no more than a very educated guess.
I would love to invest in a local business! I have been very pro-Small Business for many years, and I love buying from local business owners and families at farmers markets. I think helping your own community is just wonderful. I feel way happier handing my money to a small business owner – who I know will use it to feed his family, give his kids dance lessons, or music lessons – instead of to a Target cashier, knowing that money helps to fund a $20 million salary to their CEO.
Anything that helps boost local communities I think is a wonderful investment. Of course, like many have already listed, when it comes right down to the dollar, it’s good to make sure you’re investing your money in the right place. So if there’s an up-and-coming business that looks promising, it’s a win-win situation!
A Brunette out of Debt recently posted…“Someday” is not on the calendar
I like the way you think BooD! I think it’s great to support local businesses and causes as well. You help the people around you and the money stays local. Win-win!
Is free beer involved? My caution is that this business may be a huge emotional romaticized, idealized proposition for you. Keep hearts blocked, brain engaged! Get it all in writing, mull it.
“Is free beer involved?”
Ashamed (or maybe not) to admit that this question is on my list.
Can I at least mull it over a beer?
How would you get your money out? Investing in a privately held company is a relatively illiquid investment.
Yep, very true. And if the business fails, bye bye money.
They have a card on the table, advertising that they are looking for investors. It said “10% dividend” or something like that. Another good question for the list. Thanks!
I did a series way back on happiness, and one of the findings from the book I was reading showed that people are happier when they invest in a local business than, say, the S&P500. So even if your local investment under-performs a public company, you may get more enjoyment out of the deal. That’s worth something.
Done by Forty recently posted…That Time Someone Ran Over My Scooter
“So even if your local investment under-performs a public company, you may get more enjoyment out of the deal.”
True, it just can’t underperform it by too much. In the end, I just need to be more diversified.
Have you done any market research?
So many small businesses seem to decide that passion and “vision” trump research. Are you open in a spot that suits your business, and that’s going to bring in clients? You can’t open a sit-in restaurant where there’s no parking, or a seafood shop in the middle of a retail-based area and expect people to flock to you. Unless it’s an obvious choice, like a unique bar in an up-and-coming foodie neighborhood, I’d want to see some research.
One of my first questions is to ask about the next location and drive there and scope it out actually. So many moving parts.
Ooooh we love small businesses!!! But… while we’re interested in investing in a local business someday, we’d probably pass on this one for a couple of reasons.
1 – we’re more focused on full or majority ownership rather than a minority or non-voting equity investment. Unless this owner is looking to become a manager instead of owner, we’d probably pass.
2 – We’re also not huge fans of the margins and failure rates in the restaurant industry, particularly in our area. It’s REALLY common for retirees to come down here, open up a restaurant and realize after a year or two that “owning a restaurant” != “hosting a dinner party every night and making money having fun”.
That said, I’d ask questions about whether they’re looking for equity or bond-type investment. A bond might give you a lower, but more constant return, and has the benefit of being just behind the bank (secured creditors) if the business goes into bankruptcy. You also know your liquidity date (return of principal date). An equity investment has the potential for more upside depending how it’s structured, but will probably be a lot more variable and with no set end of when you’ll experience liquidity.
From folks we know, another sizable downside to having several owners (or over a dozen owners as is the case for one place we know) in a business like a restaurant is that they all expect to get their meals comp’d or heavily discounted whenever they come in, and that can really add up if every shareholder is bringing their family in and getting meals at cost once a week.
But I’d ask to see their books, and they should be able to show you several years worth of financial statements prepared by an accountant, though you’ll probably have to sign an NDA to see them. I’d also ask what they’re using the capital for and to see a specific business plan for the capital. Also, where else have they looked for capital (ie SBA loan?) and why were they turned down?
Someone who knows more about corporations and taxes would probably be able to say more, but I know that the different types of corporations pass profits and losses through to owners in different manners, which could have implications on you tax-wise. So you’d want to make sure you looked at that, too.
Oh, and I know I just wrote a small novel for you, but we love small business stuff!
No matter what happens with your decision on the investment, I think looking into it and talking with the owner and possibly their accountant will be a ton of fun for you! (It was certainly that way for us, even if we didn’t end up buying the business we looked at.)
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Oh yeah! And you might want to look into the laws surrounding microbreweries. Down here, there are very specific laws on how much they can sell and how – limiting things like retail, container size, etc before needing to significantly change operations and go through a LOT more scrutiny. This might limit potential growth if there are similar laws around you guys… or maybe that’s what they need money for, who knows?
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I’d consider it. People have already given some pretty good tips, but I’d reiterate that I’d most certainly look at their numbers, and marketing strategy to make sure they are doing everything they can to make sure they succeed. Also, I’d need to sample every piece of food to make sure it was good because who wants to invest in a food joint that has bad food? The taste testing would strictly be for business reasons… 🙂
One of my long time friends with zero money jabbed at me recently for “sitting on my musty pile of cash”.
I want to make a t-shirt that says “Just chillin’ on my musty pile of cash”.
When I’m retired at 48 and he has to work until 80 or death, the jabbing won’t be as fun.
Hilarious! I’d tell him that the view is pretty good from the musty pile! It keeps getting better too.
People are usually looking to raise cash for several reasons: Company is sucking wind and needs a bail out, owner has everything tied up in the business and needs to diversify, or expansion (may not necessarily be physical assets, as growth in sales could require more inventory, etc). Obliviously the last two are the only two reasons you would be interested in funding. From what it sounds like the brewery is up and running so the foundation of the business is already in place. If the business model is profitable, existing profits “should” be able to fund cash requirements for additional inventory, if they don’t, that is a serious red flag. Otherwise the owner may have these grand plans to grow the business with new locations, distribution lines, bottling, etc. Be real careful here, too. Too many entrepreneurs try to grow the business first then worry about profits later. This is a recipe for disaster an likely why bank funding is not an option. With these two items out of the way, it leaves only diversification the only plausible reason the owner would want to bring in an investor (a bank loan would not help). If the business was well established, had a proven business model, and seasoned management, this would be my preferred reason for investment. As others have mentioned, full disclosure is a must, not only on the business financials, but on the current owner’s history as well. If everything checks out and you do go in as an equity partner, you would need a way to control any salary payments to the current owner (assuming he draws one) otherwise he could take out all the profits in the form of salary leaving the other owners with nothing. This may require legal agreements that would eat up a significant portion of your limited investment right out of the gate. Choosing a business partner is a touchy thing, you need to be able to trust them as much as your wife, then check behind them. The sales (swindling, hoodwinking, etc) skills of some of these startup guys are incredible, they make their living running around, starting flashy business, bringing in investors, then when things go south, skip town, all the while drawing a significant salary for their “managment” skills. Unless you had known them for 20 plus years and witness their previous business deals, you could never really know if they are capable and honest. The only way I might be interested in a deal like this is if it was a crowd sourcing type deal where I put in a thousand or two and if it worked out, great, and if it didn’t I could just chalk it up to a learning experience without suffering any real injury. Breweries are popping up left and right, eventually the market will be saturated, only time will tell if the market gets oversaturated and they experience a crash. Oh, and if you do end up buying a stake, make sure you work out a deal where you get free beer and pizza for the family once a month!
Wow, what awesome advice. Thank you, thank you!
They want to open additional locations. My thought is that they should be able to fund it with profits from existing one. I’m think they are looking to spread the risk. Just because #1 is great and successful doesn’t mean #2 will succeed.
We are proceeding with extreme caution.