Once you’ve got your business idea, you’re going to need funding for it. In the previous Franchise Insights video, Franchise Direct CEO Sean McGarry discussed how to go about finding financing your business. In the latest video below, he discusses the very delicate issue of equity.
“It’s what we call the debt-equity relationship: the balance of our own funds to borrow funds within your business," Sean says. "The make up of equity is normally people getting together to front their own savings. They would decide to release some equity into their own home, or indeed, they could involve one of their family or friends."
Involving other investors in your business start-up, especially loved ones or close friends, can be a sensitive matter, and Sean urges entrepreneurs to be very clear and transparent when making your pitch.
“If you are approaching your family or a friend about your business, be very clear about what the business does, and what you’re looking for. Most important of all is what is the exit mechanism is for people trying to get their money out. How do they get their money back and when do they get it back. When we go into something with a family or a friend, we should be absolutely clear what their motives are, what our motives are, what the expectations are in relation to the return on that investment, and most important of all, the exit mechanism for that investment.”
If you decide to build equity from an organised group, Sean urges you to do all the necessary preparations.
“They will need a business plan. A clean plan that sets out what the objectives of the company are, what the return on the investment will be and what the exit mechanism is," he says.
Finally, when pursuing equity, be sure your business idea has the potential for profit to make it worth the investment.
“Somebody putting an investment into your business is going to need a significant return on it. If you’re a start-up business, there’s a lot of risk attached to it in terms of the investor and therefore you’re going to have to be able to demonstrate clearly to them that if they put in a million dollars, they’re going to get a significant return on that. They’re not putting that risk money in for a return of four or five percent. That they can get in a much more secure way.”
Sean finishes by urging entrepreneurs to keep the exit mechanism in mind when talking to investors. Come to the blog next Friday for a brand new Business Insights video.