Strictly Business

Wednesday, Jan 16 2013 12:00 PM

RUSS ALLRED: Know the waters when swimming with business sharks

BY RUSS ALLRED Contributing columnist

As a teenager, I spent many happy hours body surfing at Hermosa Beach. Not even the movie "Jaws" could deter me from hitting the beach the very next day. The little skin diving I did revealed that sharks are pretty common in those waters, but most people swim without incident.

As an adult I tend to swim with business sharks. There is a TV program called "Shark Tank" where entrepreneurs can pitch their business concept to a group of five potential investors. Most leave the stage bloodied by the aggressive capitalists.

If you are going to swim with the sharks, here are five things you should do to prepare.

Before you ask for investment dollars, study where you are swimming. Know the investment parameters of your proposed partner. Most investors have industries in which they prefer to put their money. Their preference is usually based on their experience, in which case, they not only offer needed money but also needed contacts for suppliers, customers and distribution channels.

Watch for signals that may indicate danger or comfort. Lifeguards fly flags indicating swimming conditions: red for danger, yellow for caution and green for safety. Learn in advance if your industry is growing or declining. This knowledge, found in trade journals, will help you negotiate.

Sharks typically don't bother people. Most humans are attacked while surfing because from beneath, surfboarders look like seals. You need to make your business attractive to the shark. Sharks want meat. They want you to make money. They want a history of increasing sales and substantial gross margins. Your net income is less important than your growth and margins. If you can make your product inexpensively and sell at a good mark-up, they will take care of the quantity sold for high returns.

There are many breeds of shark and most are not predatory. Each breed contributes to the ecology in its own way. Business sharks expect you to contribute your share as well. They don't like paying you money for past expenses; they want to participate in your business growth. You should have a plan of how much money you need and how you will invest it to benefit the growth of your company, like advertising, discounted production, distribution channels, SKU (shelf keeping unit) fees or the price retailers charge to locate your new product on a shelf.

Unlike entrepreneurs, sharks do not dream. You must have realistic expectations of future sales. Your projected numbers must be supported with facts. You must be the expert and source of knowledge for your business in your industry. If the shark perceives that you have exaggerated your numbers, they will swim away. They don't like fishy stories.

The biggest mistake shark seekers make is the way they value their company to solicit investment. If you want to sell 30 percent of your business for $100,000, then your company must be worth $333,333. That means, depending on the industry, that you are currently earning $100,000 to $300,000 in discretionary earnings (the cash benefit the business offers the owner) or you have already invested 70 percent of that in cash.

With these tools in hand, you are ready to swim with the sharks and live to tell about it. I am always happy to share my fish stories.

-- Russ Allred, MBA, is a business consultant and author with Sunbelt Business Brokers & Advisors. These are his opinions, not necessarily those of The Californian.

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