How Entrepreneurs Attract More Investors and Managing Profits in their BusinessJune 28, 2021
Small businesses are a major factor in American economic growth. Small businesses include a multitude of ideas ready to take off, but they need lots of financial love and support. Many investors who are looking to support small businesses are looking to make a profit while supporting a value or cause they are passionate about. However, this may not always be the case.
The majority of investors looking into small businesses are looking to diversify their portfolio and invest in new business growth opportunities. In order to attract more investors, it is important to first invest in yourself and the company. Acknowledge what you are willing to put in to reel in others to grow your business, and ultimately sell it or take it into the public market.
How to Pay Yourself and Your Business
One form of small business investment is the salary you pay yourself as a founder. This type of investment, in the form of payroll, happens when a salary is taken out of the company to work on the payroll. Although this may not be considered an investment, it does create a job for the founders. This distribution of company salaries into payroll can limit the total capital of the company, which leads to other drawbacks including expansions in both locations and sales.
In order for many small businesses to become successful, they may consider starting as part-time ventures. Starting out as a part-time venture allows founders to continue making money in their current jobs until there is enough capital to support the small business salaries full-time.
How to Manage Personal Profits
When your small business takes off, there will be some profit you can play with. This profit is important for the growth and expansion of the business. You should either
- choose to reinvest these profits into the business
- or declare them as a dividend to the shareholders.
A sole proprietorship small business has more personal freedom with this money, in contrast to limited liability companies or limited partnerships.
Overall, there is no right or wrong answer to what to do with these profits. It all depends on your desire for current or future wealth and net worth. According to The Balance, “when you move beyond having a job, dividends from profits are the second most common source of wealth for small business investors.”
Valuing Your Business in Order to Sell It
When your small business has developed and you have enough initial capital, it will become attractive to outside investors. These investors will want to own the company and offer to buy it from you. Valuation of the company is based on the earnings power from generating good returns on capital. Some of the most important factors that investors consider are:
- Company standing, and
- The economics of the industry.
When an investor is looking to buy, they may consider applying a valuation multiple, which is equal to your price-to-earnings ratio. The valuation price is also known as the “capitalized” earnings value of the company.
Transferring Ownership to Venture Capitalists
If you are looking to grow your small business only to sell it, there is a specific change in ownership. A “liquidity event” is the financial term for when someone buys your company and transfers ownership. These types of investors, known as “venture capitalists,” back these enterprises in order to eventually take them public. Once the IPO is public, the venture capitalists will sell the company to an experienced market player.
In conclusion, be sure to assess all your options as you keep a keen eye on the flow of funds in your business. In Global Leaders Organization, GLO, we are dedicated to ensuring we provide pertinent and relevant content to entrepreneurs intent on growing their business. We also encourage out members to learn from each other in a peer-to-peer network. Fellow entrepreneurs in a forum or informal communication connection will be a wonderful source of what works and what challenges your peers may have experienced already.
Consider and keep in play all your options: Pay yourself and your business, manage your profits, value your business with the possibility to sell your business, and, when appropriate, position your business for the acquisition of venture capitalists.
Madeline Pernecky is a Dallas based writer for Global Leaders Organization. She is also an undergraduate student at Southern Methodist University, working towards a bachelor's degree in Business Marketing as well as minors in Advertising and Spanish.