A friend wants to invest

frenchplonka · 12 July 2018 at 8:07PM

Hey guys so I have a question I recently started a business in the eCommerce space aimed at men's grooming its very new and so far I have self funded it from funds and I am adding to it as and when is needed whilst still finding my way in the world.

I have a clear vision of where and how I wish to grow the business and have been trading a short time with great reviews on my products and healthy margins.

So today a friend expresses an interest in becoming a silent partner for a 20-25% stake in the new start up and asked me to come up with a figure I would find acceptable etc here lies my issue how does one value a new start up with little to know data to go on in terms of figures other than projected ones?

I played around with some online tools that gave me various amounts based on projected turnover in my first your I have a business plan based on 3 outcome worst/best/amazing sales at the worst its not really worth me taking on a investment as I can fund it myself and grow slowly.

At best my turnover goes to around 50k with a net of 19k these are based on launching the new products to upsell and a few other things but require a sale of each product per day ( I have 5 products ) and currently I sell one per day ( 2 existing products ) so I think this is the most attainable outcome of the 3 I wont list the 3rd as its pie in the sky for now.

So going on the middle assumption the INTERNET values my business at around 50-70k personally I think this is nuts but again im no expert.

Would love some peoples advice on what price I can pitch to my friend

frenchplonka · 12 July 2018 at 9:16PM

00ec25 wrote: »

a "stake" in % terms should be valued at whatever your profit is x however many years of profits you want to include in the calculation

So its turning a profit right now but not enough data to base a investment on I am around 1 month old in terms of time running the business

It allows me to bring other products to market about a year to year and half faster which adds a upside to sales in terms up add ones and will bring up the AOV. I can run it myself and make a nice little income a for a couple of years and it will provide a much larger income in a few years BUT the cash now would push forward the growth

hope that helps a little more

Aquamania · 13 July 2018 at 8:15AM

frenchplonka wrote: »

Hey guys so I have a question I recently started a business in the eCommerce space aimed at men's grooming its very new and so far I have self funded it from funds and I am adding to it as and when is needed whilst still finding my way in the world.

I have a clear vision of where and how I wish to grow the business and have been trading a short time with great reviews on my products and healthy margins.

So today a friend expresses an interest in becoming a silent partner for a 20-25% stake in the new start up and asked me to come up with a figure I would find acceptable etc here lies my issue how does one value a new start up with little to know data to go on in terms of figures other than projected ones?

I played around with some online tools that gave me various amounts based on projected turnover in my first your I have a business plan based on 3 outcome worst/best/amazing sales at the worst its not really worth me taking on a investment as I can fund it myself and grow slowly.

At best my turnover goes to around 50k with a net of 19k these are based on launching the new products to upsell and a few other things but require a sale of each product per day ( I have 5 products ) and currently I sell one per day ( 2 existing products ) so I think this is the most attainable outcome of the 3 I wont list the 3rd as its pie in the sky for now.

So going on the middle assumption the INTERNET values my business at around 50-70k personally I think this is nuts but again im no expert.

Would love some peoples advice on what price I can pitch to my friend

Are you seeking investment?
If so, how much and for what purpose? How will that affect the figures you have calculated?

If you do not need investment, why are you considering giving away up to 25% of your business (and hence your profit)?

How much has the potential investor indicated they are willing to pay for their share?

Paul_DNAP · 13 July 2018 at 9:45AM

A share in a business is only worth what someone is prepared to pay for it, so in that case you can name a number and you both agree then that is what your business is worth to the pair of you on that day.
It is probably more sensible to think about what size of wad of cash would persuade you to give away 25% of your hard earned profit to a silent partner who is contributing nothing to earn it. This is why investments usually come with a reason, such as if he puts £x into the business I can put in this equipment/design this new product/buy this new stock/go to these trade fairs etc. and expand the business so that the 75% I keep is earning me more than the 100% I have now.

scaredofdebt · 13 July 2018 at 10:09AM

Why not get a business loan instead? That would probably work out a lot cheaper in the long run, assuming the banks will lend.

tacpot12 · 13 July 2018 at 10:17AM

Alternatively, you could offer your prospective partner the option of lending you the money.

Ozzuk · 15 July 2018 at 7:13PM

I would exhaust every other avenue of raising cash before giving away 25% of my company for a one-off fee and no assistance. If you are valuing your company at 70k, 25% is only 17.5k. Not that difficult an amount to raise - you could even raise it as private finance, and 'invest' in yourself (though I don't know the most efficient way to do that, possibly you could even offset the interest against profit).

Even if you have to grow more slowly, isn't owning 100% a much better deal for you? Silent partners rarely stay silent, friendships fail, and even if it goes swimmingly its a big chunk to give away - your friend will after all benefit from 25% of any improvements it brings in!

trailingspouse · 28 July 2018 at 10:53AM

I would turn this around the other way. If you were needing investment into your business (and your early posts suggest that you're managing just fine without), is this the route you would take?

Or think of it another way - your mate gives you x amount of money (which may seem a lot at the time, and is needed), but in return you have to give him 25% of your income every year. Forever. Regardless of how much you're earning (ie even if the 25% is more than he originally gave you, or even if it means you can't make ends meet). I wouldn't do it.

You don't have to accept it, just because he's offering it. Stick to the plan.

Percy1983 · 28 July 2018 at 11:09AM

In short why sell 25% of your business for money you don'y need to give away 25% of all future profits.

Of course if they can add value to the business and increase profits by more than 25%.

My brother in law helped fund my recent business expansion but in short we agreed a loan to be paid back with a percentage of profits for for a few years, I couldn't justify him taking a percentage of profits forever as after the initial loan he isn't adding anything to the business.

I would take it as a sign you are onto something good as they want in.

A friend wants to invest

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