Fundraising: Numbers & Things We’ve Learned Along the Way
It’s been a whirlwind week for our team as we learn all kinds of financial and accounting principles neither of us have ever studied before.
The bright side is that we’re both completely capable of sounding really smart. The dark side is that it’s also completely possible we have no idea what we’re talking about at any given moment.
But that’s the fear, right? The reason people don’t pursue their dreams? It’s easy to have vision, it’s much harder to take action. And if you’re anything like us — the writer and the barista — then as soon as numbers start swirling around, you get a little dizzy.
Some exciting news though: we put in an offer on a cafe this week! (YAY!) The cafe is in our ideal location, it’d require some TLC for our brand, but it already has a rich history and amazing owners who poured so much of themselves into making it a fantastic place for its customers over the years.
I want to share some of the stuff I’ve learned throughout this process with you. (And please correct me if I’m wrong by DMing us @nirvanasoulsj or leaving a comment below. We’re open to all tips!)
There are three rules of thumb for valuing a cafe.
We’re being mentored and guided by some incredible coffee shop owners who have held our hands through much of this journey. The below rules are what they’ve discovered in their time about valuing an existing cafe:
Twice the annual profit
20x the weekly revenue
Annual profit/0.33
These numbers will still be approximate as it’s important to review comparable businesses and consider location. In our case, after these considerations, we came in much lower than what was asked. It was a risk, but fair. The owner got just a couple of days to accept, reject, or counter, and based on the decision to counter, which is likely, we can start negotiating.
Lenders require a lot of sheets and statements
We created a business plan with superficial numbers when we first started out. We knew we needed a business plan, but we weren’t sure how to make projections. One of the first moves we made was to contact the Small Business Association (SBA), which is how we got connected with the Small Business Development Center (SBDC). The SBDC asked us for a pro forma.
I had to look this up. According to Investopedia, “In the world of investing, pro forma refers to a method by which firms calculate financial results using certain projections or presumptions.”
Ok.
Fortunately, we know people who know finances. These people helped us come up with our Balance Sheet, including assets, liabilities, and stockholder equity, our Income Statement, our Cash Flow Statement, including cash from investments and financing, and our Cash Balance.
All of these sheets and statements, coupled with the cafe’s tax returns, profit and loss statements, and equipment list helped us form our pro forma.
Calculating return on investment isn’t black and white
We are so grateful that so many of our friends and family have approached us wanting to invest in our business. The primary question they ask, of course, is what would be their return on investment. This isn’t cut and dry.
Our best bet, according to our calculations (and just plain simplicity), would be to find a single investor. However, we understand that may be unlikely, which opens us up to multiple investors at various amounts. Based on the revenue model of our choosing, which for us has been an interest-based model, we are proposing an interest rate better than what someone would get at a bank.
Not very standardized, huh?
What’s important to us is that we’re not working indefinitely for our investors, so aggressive repayment, meaning a sacrifice of profit, is an agreement we’ve made together. The fun part is we get to make the rules. The smart part is these are informed rules based on the pro forma. Now, when we chat money with someone, we have a success path, which prospective investors seem to appreciate so far.
Investment proposals are really helpful
A great piece of advice we got from a family member is that when you should be clear about whether you’re asking for money as a gift or asking for money as an investment, especially as it pertains to family.
If you are asking for money as an investment, having some sort of proposal is a good idea. (We only had our pitch deck, which is definitely not the same thing.)
So again, I went to Google and found a few templates. I combined some things and here are the sections I ended up with:
Proposed Investment Project: All about your business
Company Organization: All about you and your experience
Planned Marketing & Sales Method: How you’ll drive traffic and make money
Business Management & Projected Financing: How much you’ll need and for what
Return on Investment & Project Timeline
Pro Forma Statements
Exit Plan: What happens if things go left. How will the investors get their money back?
Go step by step and use your resources.
This is a lot of information, and it’s been a crash course for us too. Here’s my advice as a newbie to this game: be confident!
On my day job, I’m often in the position to present numbers to really smart people and there’s nothing scarier than someone calling you out for numbers that don’t add up. This is kind’ve like that. How I’ve overcome is by receiving the feedback positively and gratefully, like, “Hey, thanks for pointing that out. I’ll go back and update.” That’s it. The sky doesn’t fall. People don’t laugh and point. There’s none of the public shaming we all anticipate.
If we can do this, and learn this, and talk about this, so can you. Be confident. Accept help. It’s hard, but it’s not impossible. Stay encouraged.
We’ll keep you posted on the offer. Wish us luck! We can’t wait to create something special for this community.