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Laundry Financing Can Be Had for Good Investment

Howard Scott |

PEMBROKE, Mass. — Laundromateurs tell me if they only could get their hands on $100,000, they could build a great business. And I occasionally meet individuals who say, “I would love to open a Laundromat, but I just don’t have the money.” Both types are missing the boat.

As a starting point, I’m not sure existing operators would use that $100,000 effectively. That is, after using the money, their business might be more or less in the same position as before the money was spent.

Second, and this is the point of this column, I disagree with the notion that obtaining money is hard these days. Yes, even in these cautious, recessionary times, money can always be had for a good investment.

Let me tell you a story. In 1968, I was a callow young man, fresh out of college and a year in the working world, wanting to start a business. I computed that I would need $25,000. Since I only had $2,000 to my name, how was I going to raise the rest?

First, I did my research. I obtained a warehouse job at a company in the field I wanted to enter. Down in the basement, I learned about product, processing, delivery, and staffer work patterns. I learned about the guts of the business. I would submit to you that my two months of being a warehouse worker was far better experience than being an executive.

Secondly, I went to several business owners and interviewed them. I told them that I was doing a graduate thesis about the industry. These businessmen opened up, providing in some cases more than I wanted to know. I took copious notes. In the process, I learned some strategies about winning and maintaining customers. For example, I learned one businessman’s theory about giving price breaks.

Thirdly, I spoke to customers and asked what they liked about their service and what they didn’t like.

Using that research, I wrote up a seven-page business plan. Nothing fancy, but it basically explained what I needed in capital and how I was going to use it to get my business started. Then I sent my business plan out to 10 individuals. These people included successful business owners from the town where I grew up, moderately rich relatives, and one college buddy who had money. I also sent the business plan to my local banker, who I had dealt with when I was a young boy minding my miniscule savings account.

Basically, I asked for a debt and equity investment of equal increments. In other words, whether they invested $1,000 or $5,000, it had to be 50% debt and 50% equity. The equity was the individual’s ownership stake. If the business prospered, the investor’s value would be increased by the success of the business. The debt portion was a three-year loan, which would be paid back at 4% interest each year, until the balance was paid off in full.

Why this necessity of equal debt and equity? Because I would contribute my $2,000 (my life savings), and if every investor contributed equal debt and equity, then I would, by arithmetic, own more than 51% of the business and therefore have effective control. I could do what I wanted and wouldn’t have to answer to anybody.

To illustrate, say there were five investors, and each contribution went like this:

  • Ricky — Total contribution of $1,000: $500 in debt, $500 in equity
  • John — Total contribution of $3,000: $1,500 in debt, $1,500 in equity
  • Susan — Total contribution of $4,000: $2,000 in debt, $2,000 in equity
  • Mike — Total contribution of $5,000: $2,500 in debt, $2,500 in equity
  • Jose — Total contribution of $10,000: $5,000 in debt, $5,000 in equity

So, their total contribution was $23,000: $11,500 in debt and $11,500 in equity.

I add my $2,000—all equity—to reach the $25,000 required capital investment. So, my ownership stake is the $11,500 debt and the $2,000 personal contribution, for a total equity stake of $13,500. That’s 54% ownership ($13,500/$25,000).

For many years, the Ford family owned exactly 51% of Ford Motor Co., so therefore it had full control. Sure, the Fords had to share profits with the minority 49% stakeholders, but they could manage the business any way they wanted. That’s the importance of obtaining equal debt-equity contributions.

One by one, I visited these potential investors, presented my case, answered questions, and showed them how serious and determined I was. Several days went by, and nobody budged. Then one prospect called, saying he would put in $2,000 according to my stipulations. I called two others, and both agreed to put in money. In one week, I had the necessary commitments.

Altogether, nine prospects agreed to invest in my business. Even the bank came through, which I had to refuse because its interest requirements were higher than my debtors’ arrangements. In short order, I gathered my $25,000, and started to set up my business. I was 24 years old.

The point of this story is not to boast. Rather, it’s to show that there are unlimited ways to obtain funds. In my state, Massachusetts, 6% of families have more than a million dollars in capital. Many of these individuals are earning precious little on their money. A number of them could be persuaded to invest in a business enterprise.

Consider the following options:

  • Attend a Rotary meeting and present your business investment idea. Describe how investors can make money from your proposition.
  • Approach members of your family, asking them to invest a sum of money, which will be rewarded with 10% interest a year. If you believe you can take that money and put it to good use, you can certainly pay high interest. I know a woman who built a giant bus company by giving investors 20% annual interest for their $10,000 investment.
  • Visit your two wealthy retired relatives with your idea and pitch them on the debt equity deal that will make them part-owners again. Play one against the other to encourage them to invest. Or do the same with neighbors, friends, or members of the same organization you belong to.
  • Post an ad on Craigslist for a partner. Set up some sort of partnership role, without you giving up control. Who knows, perhaps some wealthy individual will become intrigued by your proposal.

If you need money to take your business to the next stage, it’s out there. Saying “I can’t find investors” is no longer acceptable.

About the author

Howard Scott

H&R Block

Industry Writer, Drycleaning Consultant, and H&R Block Tax Preparer

Howard Scott is a longtime industry writer and drycleaning consultant, and an H&R Block tax preparer specializing in small businesses. He welcomes questions and comments, and can be reached by writing Howard Scott, Dancing Hill, Pembroke, MA 02359.

Comments

Great article!   I may try

Great article!   I may try this myself soon.    I'm curious - you said "If the business prospered, the investor’s value would be increased by the success of the business".   What were the details of that?  What was actual amount their investment value would increase tied to the success of the business and how was it determined?   Also - what was the time period?  Were they to be paid back their equity at some point?  thanks!

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