Monday, December 29, 2014

Should you put your money into your entrepreneurial dream?

Deep in the heart of most of us beats a tiny imitation Donald Trump.We would love to see our name in neon on the side of a hotel or office tower that we own.

We would love to command attention and respect for our business acumen, to raise enough money to gild our world with gold, and to “dabble” in the business world even as we retire. We tell ourselves it would be something we could just keep our hand in enough to keep the revenue rolling in our direction.

The question comes down at some point to how much of our own money are we willing to invest in fulfilling our entrepreneurial dreams.

How do we decide how much of our retirement savings are worth risking on a business? What kind of return would be worthwhile?
There is an old saying that just like gambling on horses or real estate, you should never risk more money than you are prepared to lose.

But you can be a lot more scientific about it than that.

In investment terms, pretty much everything in life can be calculated on the basis of a mathematical formula to determine a fair return on your investment.

Even if you are taking some of your savings to invest in learning to play golf, and adding to that by paying for club fees, you calculate to a certain extent whether the lessons you receive are working for you and whether the enjoyment you get from playing on the club’s greens and frequenting its facilities are returning sufficient enjoyment to you to be worthy of the cost.

In more philosophical terms, we go through life to some extent calculating returns on relationships. If we have lovers or friends who bring us joy and fulfillment and happy times, we are prepared to invest serious time and money in those people because we have determined they are of value in our life.

Having established that there is a return on investment (ROI) for even the most basic exchanges in life, let us now look at the concept of whether we should invest in a business as part of our retirement package.

If you are looking at purchasing an existing business, besides an accurate value of any real estate and stock included, one of the most important calculations to determine is what would be a reasonable return on investment.
Only then can you determine if it is worth investing your money, your talent and your personal energy.

Only then can you prepare a solid business plan and have a reasonable chance of being considered for additional investment by any lending institution, individual, or organization that might support your venture.

Simply put, the ROI is the guiding light that should lead you into the business or cause you to steer around it.

The “return” in ROI means the actual profit you are going to put in your pocket when your business year is completed. The return on investment means this figure, this final profit, divided by the money you secure to put into the company. This money includes the funds from your own savings or investments, and from any other financial sources that you secure funds.

You need to calculate your anticipated ROI at the start of your business, and then keep your eye firmly fixed on it every quarter of a year as your business continues.
If the business is already up and running, you need to go over the books and carry out these simple steps before you put your own money into it. If you have already invested your own money into it, you need to do it as well.

Start by surveying your accounts ledger. Figure out precisely how much money you have at the end of each quarter. Call this money you have on hand A for use in your ROI mathematical formula.

Next tally up the money you and other lenders put into the business to get it started or to purchase it in the first place. Call this amount of money B.
Subtract B from A and then divide by B. Then multiply that number by 100 so you can describe your return on investment as a percentage.

How much of your savings you are willing to invest will always come down to your risk profile, but in practical terms, seriously calculate if what you are willing to invest has the likely potential to be returned to you with reasonable interest. If you can make no more from the business than you would buying bonds or making different wise investments, even if your company is successful, you should likely walk away from it now.

Also consider, if you are using your retirement funds, how long it will take for the money to return to you. If you want to leave work in two years, but it will be at least three before the business will start to make any real profit, then maybe this isn’t for you.

Keep in mind under any circumstances that the longer your money is needed to shore up the company without any money coming back to you, the higher the rate of return on your money should be in the long run.

If you can see that happening, you are better off to leave your money in more traditional investments.

Sunday, November 30, 2014

Should you invest in somebody else’s business?

A newly ignited economy is a great environment in which to consider business expansion or creating a new business. So if you have any money at all, inevitably your child, your niece or nephew, or your friend or colleague will hit you up for equity financing to start up their new company.

What they offer you is a small share of their company in return for your money up front.

Should you go along with the request? Is it a good investment strategy?

No matter how much you care for the person asking you, you must remember from the start that this is a business decision, not an emotional one.

That means there are business matters to consider.

The first is why are they coming to you? Is it because they want your support and your expertise along with your money, or is it because they know they don’t stand a chance of getting a loan from the still-skittish banks? Refusal from traditional funding sources doesn’t mean they don’t deserve capital, but it does raise a caution flag.

Secondly, do you honestly think the business is valid and that the person starting the business has the skills and business acumen to make it work? Are they going to be open to your advice and take advantage of your expertise?

If all the boxes are checked okay, providing equity funding could be a wise decision. If the business succeeds magnificently, you will end up getting much more return on your money than if you had put your cash into a more traditional investment. If the company turns out to be the next Google or Apple, you may never have to work again.
But the risk is that you can lose every penny and there is no recourse for getting any of it back. And if the business you invested in is operated by someone you had emotional ties to, your relationship can suffer immeasurably.

Consider the case of those who provided equity financing for Apple when the late Steve Jobs and Stephen Wozniak co-founded it. There were so many shareholders who put financing into the business that when it hit troubled waters, they all got together and voted Jobs out.

Would you have the strength to do that if you had to? And while you are thinking about that, ask the start-up entrepreneurs how many other equity financiers he or she is looking to bring into the company. Are they people you can work with and make tough decisions if you feel you have to?

There is one more thing to consider before making your decision. Work out the company’s debt ratio by dividing the value of their assets into the amount of their debt.
The higher the percentage of debt, the riskier the venture, as a general rule. To be totally fair, compare its debt ratio to that of similar industries.

What is the bottom line? Providing equity financing isn’t a bad thing on the surface. In fact, many notable millionaires made it a regular part of their investment portfolio.
But is it right for you especially if your assets are limited? Do your homework and if you believe there is a reasonable chance for the new business to succeed, consider it. But don’t invest more than you are prepared to loose. 


Saturday, October 11, 2014

Should you invest in crowdfunding real estate?

If you have a few thousand dollars you’d like to invest for a reasonable return, should you be lured by the growing popularity of crowdfunding real estate?

Because of portals like Realty Mogul, Fundrise and RealtyShares, among others, the big real estate market that was previously out of reach of small investors now offers an open door invitation.

Crowdfunding, as defined by Merriam-Webster, “is the practice of soliciting financial contributions from a large number of people especially from the online community.”

To get into crowdfunding, you the investor (or the crowd) invest your money through an Internet platform (called a portal).

When you invest your money through one of the entry portals, what you are doing is securing part ownership of a real estate project either through unlisted shares of the company or returns on the company’s assets or financial performance.

The projects you invest in are either still in the planning stages, or they are newly completed. Some are to provide money to help the developer to secure leases while others are for house-flipping firms.

If you are wondering why you there is such a buzz about this investment opportunity now, it is because it is relatively new in the United States. It has only been since a law changed in September, 2012, that real estate developers are allowed to market their projects directly to the public through these web portals.

There’s no denying that crowdfunding is attractive to many small investors and it is easy to see why. You are buying something substantial like a strip mall, a senior’s residence or a golf community, rather than crowdfunding in the traditional way of supporting a starving artist to make a new CD.
But like all investing, there is also a possibility of fraud or failure.

There are ways you can protect yourself to a certain extent.

Before you invest a penny, make sure that the real estate portal you are considering is compliant with the Securities and Exchange Commission or its equivalent if you are looking outside the United States.

Read the fine print and be sure you are fully aware of all fees involved and what kind of return you can reasonably expect. Are you being promised that all your investment will be returned and then some, or just a small proportion? And when can you reasonably expect some return. In a few months or will it be years?
Research the project as thoroughly as you can. Study the company’s successes and failures, check out the legitimacy of the advisory board members and look into the current management as much as you can.

If the portal will not provide any information about the company or its management they invite you to invest in, interpret that as a warning sign.