Capital Structure

by seanlow on October 20, 2017

Talking about taking other people’s money (OPM) is not often addressed when it comes to most creative businesses.  Of course, most creative business are considered micro businesses and are also incredibly personal to the artist/owner.  That said, taking OPM is in the air and understanding what it looks like is really useful BEFORE you decide to leap.  So here goes.

There are so many things when it comes to considering taking on debt and/or an investor.  Sometimes just the thought of having someone else being able to poke their nose into your creative business is enough to send you screaming for the hills.  If this is the case for you, then no need to read further.  OPM is not for you and set yourself free for the notion (delusion) that it ever could be.  If you are open to, well, being open, then keep reading.

Given the choice between taking on an investor or debt, my deep preference is to take on debt.  Most creative businesses only need cash to support seasonality and/or growth in human capital.  Meaning you are not going to be raising money to go into a massive expansion or have a business plan that is going to demonstrate enormous scale anytime soon.  Investors invest because they see tremendous upside in giving your creative business money without any guarantee that it will be paid back.  For most of us, we just cannot make that promise.

Debt has its own issues though, the biggest of which is that it is a pain-in-the-you-know-what to get.  Most of you have awesome cash flow running through your accounts, particularly if you are managing purchases for and/or retailing to your clients.  And likely is that you are stable in that you do it every year and you have been doing it for a while.  This makes you a perfect candidate for a Line Of Credit.  A general rule is that your LOC should be for at least six or so months of operating expenses.  Now, meaning high season, is the best time to apply for the LOC because the tide is in and cash flow is good.  Which leads to a general rule — if OPM is something you are considering, then go get it when you do not need it, because, when you do, it will be much much harder to get.  Yes, I know I am adding to your already long to-do list at the moment, but that is why you should get help.

To get a LOC, you are going to need your accountant to support you — to provide all of the financial information the bank is going to need.  Most likely you will be asked to personally guarantee the loan.  Sometimes this is ok, but sometimes it is a deal breaker.  I would stress to you that it should be less of a deal breaker than you think.  You are all in anyway and providing yourself financial flexibility is almost always worth the risk. If you can avoid the personal guarantee, so much the better.  Do note though that many LOC’s are connected to SBA programs that almost always require a personal guarantee.

For those of you who have capital assets (i.e., inventory, buildings, etc.) to finance longer term, so much the better.  Just know that the banking axiom to match length of debt to purpose is there for a reason.  Financing inventory with your credit card is never a good idea.

Back to equity.  The issue with taking on investors is that you are all private micro companies offering a minority stake.  What this means is that the investor does not control their fate and really have no way out to get out of their investment save an ongoing return from your business (a business they have no say in by the way).  The translation is that if you are looking for third party investment, it is going to be really, really expensive and the investor will absolutely look for some sort of say that is going to be much bigger than their investment.  For this very reason, equity investment would be a last resort for me.

The only exception to equity investment/partnership would be if the investor/partner brings something to the table other than money — whether it is operational expertise, a new sales channel or other type of exposure.  Think Shark Tank.  Still though, just like Shark Tank, those with money and expertise tend to overvalue both.  Which means, of course, that it will be really expensive.  The other downside to equity is that once it is gone, it is gone.  Unfortunately, I have seen many equity situations where you, the artist and creative visionary, wind up effectively working for your investor.  Not exactly what you signed up for when you decided to launch your creative business.

For specific advice: do the work now to get yourself a LOC for at least six months of operating expenses.  Think of the cost of your LOC even if you do not use it as an insurance policy for when you do.  Leave equity investment alone unless you can see how you can cash out your investor in some way in the next three to five years.  Since most of you are not going public anytime soon, this means a sale of your business.  If that is not something you would ever consider, taking on an investor will not be for you.  This will be true even if the investor is strategic.  The strategic investor will be adding their expertise/value so that they can realize a big return — this means build it to sell it too.

The last option and my very least favorite is friends and family (FFM).  Unless you are starting a new venture that you can see your way to success with, taking personal money is almost always a bad idea.  FFM is not OPM for a reason.  FFM is because they love and believe in you beyond all else.  For business, creative business in particular, this is an awful idea.  Creativity demands irrationality, a blind faith in what is to come.  You can be very wrong and you will likely be wrong more than you are right.  Having to explain necessary missteps to FFM is almost impossible and pretty much never has a good outcome for you or your creative business.

A practical post to be sure, but hopefully helpful as you think about what to do when things slow down and/or for your grand future plans

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At The Margin

by seanlow on October 17, 2017

How you see your world matters.  Do you see things in context of the immediate?  Like a puppy or a toddler who will have five different focuses/thoughts in a minute.  Distractible by the latest beep on your phone?  Or do you see the world as somewhat fixed?  This is just the way it is done.  Plod along and we will keep on using our paper planners and Excel spreadsheets because, hey, they work.

Here’s the thing:  you have to put aside your bias about how you see the world and get down to fundamentals. The concept of margin is all that matters.  Margin is the incremental value (cost/revenue) of the next project and/or opportunity.  In economics speak, if marginal revenue is greater than marginal cost you should do the project.  If not, you should not.  This works for all businesses.  Our world of creative business, however, has a special twist.  Margin has to include brand equity and opportunity cost.  The twist exists because most projects last a long time and have implications beyond the project both during and after the project.

Let’s boil it down.  If you have booked several projects for 2018 already but feel like you are shifting or that you would like to shift, then taking the next project as you have the ones before means that you have ignored opportunity costs and/or real costs associated with doing business you no longer want to do.  Likewise, the revenue you are going to receive for the next project you book in the context of margin is not enough relative to the revenue/workload you already have.

I know I know, but what if business does not materialize, if the great client never calls, a bird in the hand is a bird in the hand.  Worldview, not margin.  Math does not care about your fear.  Margin lets you evaluate where you are today in the context of what has come before and what you would like tomorrow to look like.  It also makes you think beyond the fact that you have a client willing to say yes to you and your creative business.  Yes can only work if it is on your terms.  Margin defines the terms.

Does this mean there can be dry spell?  Watching real money, real projects leave?  Of course.  Who said margin was easy?  I only said it did not have emotion.  Reality always does.  Then again, reality is based on your worldview, margin is not.  Having the discipline to look at what each project will mean to you and your creative business keeps you on the straight and narrow.  Why? A series of effective micro decisions  almost always adds up to a powerful macro impact.

Here’s what I would love to have see happen: Appreciate and understand how margin works when you are looking at the next opportunity in front of you.  Will this project fit into where your creative business is just now?  Where you want to take it?  Will your client get your best?

The moment matters and the best way to appreciate the moment is to evaluate it as it is, with its own value and expense.  Each moment is different and means something different.  This is the concept of margin.  And the more you learn to love it, the more it will love you back.

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The 21 Day Challenge

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Owning Who You Are Today Is Everything

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Foundational Pillars Under All Creative Businesses

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Incremental Change Is An Oxymoron

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Presentation

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As a rule, I am underwhelmed by the presentation process most creative businesses undertake. The willingness to ask a client to invest sometimes hundreds of thousands of dollars on a Pinterest-type mood board and simple samples astounds me. Shame on any creative business for letting clients believe that this is, in any way, acceptable. We all need […]

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