Build Your Business and Your Cash Flow Through Equity Investments - ResidentialSystems.com

Build Your Business and Your Cash Flow Through Equity Investments

We all need complementary services to our core AV business: networking, electrical, design, programming, etc. There are several ways this can be accomplished.
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We all need complementary services to our core AV business: networking, electrical, design, programming, etc.

There are several ways this can be accomplished:

•Hiring people in-house: Gives you complete control, but is expensive and leads to high overhead
•Outsourcing: Less overall control, high cost per job, but can turn it on and off as needed
•Partnering: Little control and lower profitability as you are more or less referring someone, but like outsourcing you can turn it on and off as necessary
•Equity partners: more control than outsourcing and partnering, better profits and provides regular cash flow

I’ve had particular success with making equity investments in networking, electrical contracting, and infrastructure companies—basically buying a piece of the business. I own between 20 and 50 percent of these companies, which gives me enough of a stake that I have a say in how the business is run, I get a sizeable quarterly dividend or payout of profits, and I have a resource I can turn to when needed for my clients. It is the best solution I have found.

Here are some key points to keep in mind as you explore these opportunities:

•Find the right companies in which to invest. This is the toughest part. You need to find people you trust and want to work with, but who also need money for investment (be it in people, new office space, inventory, or another business need). Stay with industries that you know or impact your business. Don’t go investing in a fire prevention company, unless you are either doing a lot of commercial work and integrate with them, or you are making the investment to grow your personal portfolio, not as a business strategy.

•Do your due diligence. Make sure they will use the money you invest to grow the business; be comfortable with the current management/ownership. You’re going to be partners for a while, so review their financials to make sure they have a viable and stable business.

•Be a good board member. By owning a stake in the company, you are essentially now a board member with a significant voice. You need to be involved in the company and help direct them in growing the business, finding clients, making strategic decisions about market segments and product lines. Don’t be a micro manager; be an advisor.

•Formalize the agreement in writing. How much of the company do you own, how it is valued (so that when or if you sell or the company is sold, there is a way to value your investment to buy you out, how often payments will be made and what will those payments consist of (ie, will depreciation and amortization be included or excluded when calculating the payout pool?), what will your responsibilities be?

•Work together. Not just by being a good board member or advisor, but most importantly you both now have “skin in the game” to refer business to each other and grow both businesses.

It can be a lot of work to make these equity investments because you are now part owner of the other business. But it can pay off handsomely. If you are a good board member and help grow the business, the value of your investment will grow, as will your quarterly (or monthly, depending on how you structure the deal) payments. You will now have a supplemental income and a trusted partner for your client’s needs.

I am about to divest one of these investments because we are ready to amicably go our separate ways. It has been a great relationship, and I’m sure we will continue to work together. In the meantime, I’ve been getting quarterly payments and have quadrupled the business and therefore my investment so will be getting a nice buyback payout.

This may not be for everyone. You have to have the ability to mentor others, give advice, and spend the time. But if this is right for you, it’s a great experience and business strategy.

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