What to ask as an investor of a start up

Discussion in 'General Business Forum' started by Richie121, Jan 13, 2019.

  1. Richie121

    Richie121 UKBF Newcomer Free Member

    2 0
    Hi, I am planning to invest in my cousin's company and I want to find out what share I can expect for my investment.

    Here are the details of the existing business (All figures are skimmed percentages)
    Business includes manufacturing and distribution of products
    It started 6 months back with an initial cost of 70k of which 20k is cash and 50k is a loan (brought with collateral of his property)

    Current revenues:
    Sales started 3 months back and ranging around 3k per month and expected to grow in coming months

    Current Expenditures:
    Operational costs including wages is around 2k per month
    Loan repayment 2k per month

    Products avg % profit is 200% (100 Cost Price Product is marketed at 300 Sell Price)

    Now business ran out of funds and I am planning to invest 25k into the business to support the wages and existing product commitments in next few months

    Assuming I go ahead with investing what is the share I can expect for my investment?
    I will just be investing the money. All the business operations/sales/management will be done by existing owner. I have no experience in business would like to know what should be taken care of before I invest.
     
    Posted: Jan 13, 2019 By: Richie121 Member since: Jan 13, 2019
    #1
  2. Clinton

    Clinton UKBF Big Shot Full Member

    3,624 1,199
    That is negotiable. Rather than trying to do this on the cheap, go pay a corporate finance expert to not just calculate this for you but also to give you the financial arguments you need to negotiate the best deal. Given your lack of experience it would be crazy to do anything here without expert advice.

    (The normal comeback is to say, "Yes, I'm going to get expert advice, I just wanted to get some free advice first." I just thought I'd save you the trouble of spinning us that line.)
     
    Posted: Jan 13, 2019 By: Clinton Member since: Jan 17, 2010
    #2
  3. billybob99

    billybob99 UKBF Regular Free Member

    573 99
    R.I.P £25,000.
     
    Posted: Jan 14, 2019 at 12:00 AM By: billybob99 Member since: Apr 23, 2013
    #3
  4. Mr D

    Mr D UKBF Legend Free Member

    11,277 1,188
    So 3 months after sales started it has run out of £70k money.
    How long will it be able to run on your investment? If its making a loss of £1k a month now does it need this size investment? Or would you be better off doling it out a few thousand at a time? Then pulling the plug if the business isn't making money.

    I'd be wanting firm commitment as to when I'd expect my money back plus extra. Lend £25k, get £40k plus back?

    You can of course buy a share of the business. And if in 6 months the business goes under your share of the business will be worth - zero.
     
    Posted: Jan 14, 2019 at 12:04 AM By: Mr D Member since: Feb 12, 2017
    #4
  5. The Byre

    The Byre UKBF Ace Free Member

    7,807 3,034
    May I humbly suggest that
    is the accurate answer!

    Turnover £3k p.m.
    Gross mark-up £2k p.m.
    Costs £4k p.m.
    Losses £2k p,m. or £24k p.a.

    Just to break even on day-to-day costs, that business would have to DOUBLE its turnover.

    In order to start paying you that £25k back, the 'business' would have to increase turnover by a massive (and unobtainable) amount.
    I strongly suggest you keep it that way and re-trouser the £25k where it is safe from your hapless cousin.

    You have a business when the customers are banging on your door, begging for your goods or services. Your cousin just does not have a business. There is no need for you to share in his pain!
     
    Posted: Jan 14, 2019 at 2:07 AM By: The Byre Member since: Aug 13, 2013
    #5
  6. Paul Norman

    Paul Norman UKBF Ace Free Member

    2,349 713
    Investing in relatives business is one of the most sure fire ways of loosing money, and falling out with a relative.

    But....if you want to do this, get proper legal advice, and proper, legal shareholders agreements drawn up.

    As to what share - unless you want to have no safeguards over your £25k, you need to have a controlling share, which your cousin is unlikely to be happy about.

    Be aware the business you refer to is not worth £25k right now, so even if you are offered 100% of the shares you are, in reality, just putting cash into a leaky bucket with no expertise of your own to make the business work better.

    The tough love is this. Your cousin's business appears to have failed. You can probably prop it up for another few months unless there is a rock solid surge in sales just about to happen. Actually, ignore my last sentence, as it was just optimism rather than sound business advice.
     
    Posted: Jan 14, 2019 at 11:36 AM By: Paul Norman Member since: Apr 8, 2010
    #6
  7. Clinton

    Clinton UKBF Big Shot Full Member

    3,624 1,199
    Several posters have mentioned that the business is not viable.

    Without knowledge of the IP here, the product and competition, and a million other factors I feel that a judgement call on viability is premature; this is, after all, a startup and startups take a while to hit b/e.

    Though I'd be happy to call the entrepreneur a fool, or at least a bad planner, for getting to the point where he's run out of funds!

    The OP needs to take all the data he has to a professional to get the matter properly analysed and evaluated.
     
    Posted: Jan 14, 2019 at 11:56 AM By: Clinton Member since: Jan 17, 2010
    #7
  8. Mark T Jones

    Mark T Jones UKBF Enthusiast Free Member

    2,410 651
    In addition to solid advice from @Paul Norman and @Clinton, do remember that good investors seldom just drop cash into the business account, they make it available on a controlled basis and subject to pre-agreed conditions.

    Surprisingly often, they will structure it as a loan!
     
    Posted: Jan 14, 2019 at 1:09 PM By: Mark T Jones Member since: Nov 4, 2015
    #8
  9. Financial-Modeller

    Financial-Modeller UKBF Regular Full Member

    148 42
    A couple of thoughts...

    GBP3k per month sales at 200% margin is GBP1k cost. What has the cousin spent GBP69k of cash on? If it cannot be explained (manufacturing equipment, website, etc) there may be further problems to investigate.

    As already mentioned by @The Byre , sales need to double for the company to break-even (assuming no increase in operating costs at double the turnover). Is this realistic and over what timeframe?

    By whom? By you, or by your cousin?

    Two extreme possibilities based on limited info available:
    1. The business may be insolvent today and so has no real value, so arguably any investment would be for 100% of a worthless company.
    2. There is a reliable and robust business model underpinning a strong business plan, with early milestones already met, and you are confident that it will move into profitability at an agreed point in the future.
    @Ritchie121 if you have doubts, treat any cash injection as a charitable contribution to your cousin rather than an investment in the conventional sense.
     
    Posted: Jan 14, 2019 at 2:21 PM By: Financial-Modeller Member since: Jul 3, 2012
    #9
  10. STDFR33

    STDFR33 UKBF Big Shot Free Member

    3,615 878
    If he sells you a share of the business, the business doesn't get a cash injection of £25k. The person selling those shares gets £25k.
    It might be that in turn, they inject the £25k into the business as a loan. But they probably won't, particularly if their home is on the line.

    Moving on to the business itself...

    Loan repayments are not an expense. The interest element is. What the loan repayments may mean is that the business has a cashflow issue (ouch!).

    The operational costs can't possibly include a reasonable salary for a working director, never mind two of them. So how would you and your cousin look to increase sales profit to sustain your livelihoods and / or see a return on your initial investments?
     
    Posted: Jan 14, 2019 at 2:56 PM By: STDFR33 Member since: Aug 7, 2016
    #10
  11. Richie121

    Richie121 UKBF Newcomer Free Member

    2 0
    1) 5 types of products worth 40k(Cost Price) are available which are to be marketed
    2) A new product has been modeled based on the feedback over last products and ordered to manufacture (10k Advance to new product paid - this is were investment is required around 15k to get the product out + another 10k for running costs for next fews months)
    3) Rest of them were spent for Rent and Wages for existing employee
     
    Posted: Jan 14, 2019 at 11:21 PM By: Richie121 Member since: Jan 13, 2019
    #11
  12. Mr D

    Mr D UKBF Legend Free Member

    11,277 1,188
    Ok 10k running costs for next few months - then what?
    Same situation again having spent a further 25k?

    Step back from the business. Forget who has a lot of money on the line.
    Look at it as if some stranger was showing you the product and the figures.

    Is the business viable?
    At what point is the business going to reach break even point?

    Is demand seasonable / affected by factors that change over time?

    Is the business capable with its facilities and staff of coping with increasing sales to break even point and beyond?



    And what happens when the money runs out again if break even point still not reached?

    It sounds to me like a bad investment - spending 15k of money that could extend time the business has left to run in order to get new item. The item is in so much demand and has sufficient pre orders to risk that?
    New items designed and produced based on feedback can be good - what is the budget to market it? Spending 25k on any product is a risk. Doing it when you have a hundred k sitting in the bank may be worthwhile, doing it so the business has a few months money left ...
    Will it be shut in 6 months?

    Oh and by the way - how much is budgeted to market the existing 4 products out of that remaining money?
     
    Posted: Jan 15, 2019 at 2:47 AM By: Mr D Member since: Feb 12, 2017
    #12
  13. NickGrogan

    NickGrogan UKBF Ace Free Member

    1,618 335
    1) £40k of products should sell for £120k, giving £80k of profit. - So this is enough to make the business solvent again.
    2) Your current product is selling at 200% margin, so the new product isn't really a priority, put it on hold for now.
    3) The business turnover £3k per month at present, what does the employee do that your cousin couldn't? Let them go and cut costs, making the business viable again.

    Looks like the business likes spending money, and isn't so focused on making money.
     
    Posted: Jan 15, 2019 at 10:24 AM By: NickGrogan Member since: Nov 15, 2012
    #13
  14. Financial-Modeller

    Financial-Modeller UKBF Regular Full Member

    148 42
    IF you are saying there is GBP40k worth of inventory, which can be sold at a 200% mark-up, selling it is your cousin's top priority.
     
    Posted: Jan 15, 2019 at 6:15 PM By: Financial-Modeller Member since: Jul 3, 2012
    #14
  15. Abhinandan Jain

    Abhinandan Jain UKBF Newcomer Free Member

    6 0
    Check how good they are in their plan.
    check are they really working on 3 basic needs of a startup?
    1) Competitor's analysis
    2) Plan of actions
    3) Growth path ( check are they clear with what they are going to achieve yearly. And ask them what was their target last year and has they achieved it till today??)
    If they have a clear picture of all these things.
    you are with the right team you can invest their.
     
    Posted: Jan 18, 2019 at 4:35 AM By: Abhinandan Jain Member since: Jan 8, 2019
    #15