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Key Idea: Attract Money With A Great Idea

Fess Parker says that he learned from Walt Disney about the power of ideas.  

Key Question:

A: 

Have such a good idea that friends, family  and even investors can't resist helping you.

Q: What makes a good idea?

A: Eventually the market proves out any idea but to raise money for something that is only in your head means you have to win trust.

Disney was able to attract money for his animated film projects when people didn't even know what he was really talking about because he had proven, with Mickey Mouse, that he could create animation the world would love. Also, when Disney got his idea for a theme park that would be a safe place for children, his film backers became his partner in the new venture.

Fess Parker says that entreprenuers don't worry about the money because if the idea is good, the money will be available. It would be nice not to worry about money but that is exactly what Fess is telling us. Keep in mind that Fess came to Hollywood with nothing and left Hollywood with very little cash. What he did establish was an image. This is of course a huge advantage that we can't underestimate.

However, you can build an image from any starting point. Step by step you do what you promise, you create and deliver quality and operate every aspect of your business with honesty and integrity. You will probably never become a household name, but, you will have enough credibility to be trusted by customers, employees, bankers and investors. Therefore, when you need money, it will flow to you.

When your business becomes profitable and is growing, you may find that your cash flow is tighter than ever! You have profits, net income, but no cash. This is because you are increasing your investment in inventory or receivables. One way to ease this situation is to leave the profits of the business in the business to provide the working capital the business needs. Another way is to borrow money from a financial institution.

Q: What kind of bank financing is available to a small business owner?

A: The most expensive money to borrow is the money you get for factoring your receivables. Almost all factoring arrangements are "with recourse" which means you have to pay if the customer doesn't. Basically, you sell your receivables, at a deep discount, to the bank. The bank or factoring company advances you the discounted amount and you advise your customer to pay the factorer directly. In addition to the discount fee, the factorer withholds an amount as a reserve against uncollectible accounts receivable. If not utilized, reserves are distributed back to you. Although factored funds are expensive, the lending institution rarely has credit or reporting requirements so factoring can be a solution in small businesses with high gross margins that can absorb the cost of factoring.

Less expensive is conventional bank debt. There are basically two kinds of bank borrowings: lines of credit and term financing. Lines of credit are available up to a maximum negotiated amount, through a period of time, at a certain rate, generally collateralized by inventory and/or receivables. The amount that can be borrowed at any one time is based on the borrowing base, a certain percentage of assets.

For example, a borrowing base might be 35% of inventory and 80% of accounts receivable less than 90 days. The percentages are negotiated at the time the loan is applied for. Frequently, lines of credit are renewed as they mature, but the terms may change as the economy changes and as your business changes. These lines require interest only payments although the bank likes to see principal payments and additional withdrawals, the line going up and down, based on the seasonality and growth of the business.

Mature businesses with constant line of credit amounts make bankers nervous; the bank generally considers the note "evergreen" and, when it comes up for renewal, they'll want to convert part or all of it to term. If you obtain a line of credit, don't leave cash in your checking account, pay down on the line and borrow it back. This minimizes your interest expense and convinces your bank that you really are using the line as a line.

Term financing is just like your home mortgage or car payment. Each month you pay a fixed amount of principal and interest. If your business owns land, buildings, or equipment (capital assets) these can be used as collateral for term financing. If you own such assets personally, you can contribute them to your business as equity and then use them as collateral for a cash infusion in the business from a term financing.

Q: How does a small business apply for bank financing?

A: Bankers are vendors; they sell the use of their money. They do this for a relatively modest return and they take modest risks. Shop for a banker the same way you would shop for anything else you buy, look for the most value at the lowest cost. Interview lots of bankers, preferably before you need one, and keep them informed of how your business is growing. Before you submit a loan application, make sure you are aware of the following: Who will prepare the loan package and what will it contain?

The loan package should not be confused with the loan application. The loan application can be as little as a one page administrative document. The loan package could be 3 feet high! It contains all the documents that you provide and other documents that the banker obtains to present to the bank's Loan Committee.

For example, the Dun & Bradstreet report is almost always considered as part of the loan package and the credit decision.

Who's on the bank's Loan Committee? What is their lending limit? If they recommend the loan be approved, is that the final word or does the loan package go on to an even higher authority? You'll probably be dealing with one banker; he or she will present your case to the Loan Committee. Your banker will be motivated, because one's compensation and career depend on making money for the bank which is only accomplished by booking loans. But nobody can tell your story as well as you can. Find out who is on your Loan Committee and invite them out to see your business and meet with you.

We learned Jonus and Anne Beiler that they financed the start-up Auntie Anne's Pretzels out of their own pockets.

However, growth takes cash. Anne's vision got bigger than her cash flow so she hit the payment for a bank loan. Banks turned her down because she was giving too much money away. Rather than give up giving, Anne gave up on the banks. She refused to stop contributing to the counseling center as this was the original purpose of the company. A friend told her about a wealthy chicken farmer who enjoyed eating Auntie Anne's Pretzels so Anne went to visit him. She told the farmer that she needed a loan to grow and he was happy to accommodate.

The lesson here is that wealthy people want to invest in ideas they love and they want to earn money on their money. By creating a business-to-banker type of relationship, Anne was able to get the cash without giving up any ownership. The angel investors we read about in the Wall Street Journal are the ones who want to buy in, not make a loan. These angels are interested in putting cash in to grow a business and for that cash, the founder has to give the angel part ownership. Anne is teaching us here that all angels don't demand ownership.

Q: What kind of equity financing is available to a small business owner?

A:Equity financing means you are actually selling a portion of your business for a price based on what the value of the business will be after you use the proceeds from the sale of your stock to achieve your business plan.

As with bank financing, there are a variety of different sources of equity financing. Venture capitalists, angel investors, qualified investors, and the general public all invest in small businesses. To seek equity capital, you'll have to prepare some sort of offering memorandum. You are offering to sell your stock at a certain price. The offering memorandum will include your business plan, financial information, anticipated use of proceeds, and the risk factors to the investors. Both the form and content of offering documents are regulated by Federal and State securities laws.

Q: How does a small business obtain equity financing?

A: You will have to prepare a written document that tells your story effectively and in great detail. If you are successful, much of what you write may well be incorporated in an offering document.

Get working on that document, and begin weighing the "costs" of each type of equity partner. All but the SEC's SCOR, a private placement memorandum, requires what are known as qualified investors. The most expensive is the initial public offering on a securities exchange like the NYSE (Wall Street) or the NASDAQ.

It all depends on how much money you need and how the stock in your company will be marketed. Whether or not you will be successful is dependent on the soundness of your business idea, the strength of your management team, the size of the target market and your ability to capture that market, the all important numbers and potential return on investment, and, of course, the risk factors. If you believe you can excel in each of these areas and you pound on enough doors and make enough telephone calls, you will find the OPM you need.

Think about it

Do you need to borrow money to grow your business? How much? Do you have the collateral and the capacity to repay the debt? Do you have big plans that require big bucks to turn your dream into a reality? Could you give up part of your business to make that happen?
  

Clip from: Fess Parker Winery and Vineyard: Brand Matters

Los Olivos, California: Way back in the 1950s a young Texan by the name of Fess Parker took a job with Walt Disney. He became an actor and the incarnation of two American heroes, Davy Crockett and Daniel Boone. With so much exposure on television, this man truly became an American icon in our time.

We caught up with Fess in beautiful Santa Barbara wine country to continue our studies of the first principles of branding and storytelling.  Fess left Hollywood and bought land then built a hotel.  Here you'll also discover that he believes in real estate and in helping his customers create memorable experiences.

The Fess Parker Winery and Vineyard is located 32 miles north of Santa Barbara on the Foxen Canyon Wine Trail. 

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Fess Parker Winery

Fess Parker, founder

6200 Foxen Canyon Road
Los Olivos, CA 93441
805-688-1545

Visit our web site: http://fessparker.com

Office: 805-688-1545

Business Classification:
Advertising

Year Founded:

Attract Money With A Great Idea

HATTIE: I want you to talk to me about great people that you've been close to and what you learned from them.

FESS: Walt Disney would certainly be at the top of my list as a human being and as a creator. And he was interesting. Looking back on this event of 40 years ago, when I was under a personal contract to him, his dedication to the quality of whatever he was trying to do I think sort of became something that I have appropriated for myself and hopefully for the family. And that was that he always wanted to do it as well as he could. And he was open. I remember when we were filming the "Davy Crockett" episodes. They were not terribly important to him because they were fulfilling a financial obligation to a business partner. ABC was the third network, and they were not doing well. And they came to Walt Disney, who needed money to open Disneyland; said, `If you will do a television program for us, we'll loan you the money and become a partner and you can take us out later.'

HATTIE: And he needed the money, didn't he?

FESS: He needed the money.

HATTIE: Because he was always spending more than he had.

FESS: Absolutely.

HATTIE: You don't do that, though?

FESS: Absolutely, I do.

HATTIE: You do? OK.

FESS: I figure if you're going to be, you know, an entrepreneur, you can't worry about the money. I mean, this man was thinking openly. So that was a great lesson for me. And he was that way in person. As an employee, I could go up and ask his secretary if I could speak to him. Usually, I went in and if he had people there, he'd say, `Have a seat and I'll talk with you in a little bit.' And so I'd sit and listen to business that I didn't understand, but...

HATTIE: It was rubbing off.

FESS: Yeah. I really believe the way life is is that we're only guaranteed today, and yesterday we can't do anything about. And I feel like that the 40 years that I've been trying to do business has been a learning experience. I'm anxious to apply it somewhere else. I'm anxious to see another project change from less than successful to successful. It's fun.

HATTIE: But work is a good thing to you?

FESS: Absolutely. It was not my goal to work. You know, driving up here from Santa Barbara to the winery this morning, I guess I was in my thoughts and my wife said, `Well, why don't you lighten up'? I said, `Well, I'm doing what I like to do. I'm thinking about things that I want to do.'I'm not working. I'm just having a good time.

HATTIE: Do you think that's what keeps you younger, happier, more fulfilled, having something to go do?

FESS: Yes, absolutely. And, you know, it's the quality of the people. You know, I work with a lot of young people. Now I find that fun, you know. And I can see kind of where they are at their time of life and can go back and kind of relate a little bit to that. But at the same time, I think most of the time, I forget that I may be two or three times older than they are because we're both working on a project together.

HATTIE: So you feel as young as they are?

FESS: I do.

HATTIE: Don't forget Fess Parker's advice: Every great business has a great story. Find your story and tell it. We'll be back next week.

 
 

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