how to fund the expansion of your business
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[00:00:00] Fiona Johnston
How do you do things like expand your business, buy another business, you know, use different strategies to do something really big in your business? So what we're talking about is taking on risk. Open your mind about how you can grow your business really significantly using funding either from the bank, an investor, a joint venture partner, or by pre-selling to your existing customers.
Money Secrets Intro
Are you a small business owner who'd love to be making more money while making positive change in the world? You're in the right place, friend. Hi, I'm Fi Johnston, a chartered accountant and money coach obsessed with small business. In The Money Secrets Podcast, I share strategies that you can use to make more money without working harder. You'll hear successful small business owners share what they've learned about money and business, and I'll help you to [00:01:00] think differently and shift your perspectives about money so you can grow your business and your impact. My mission is to get more money into the hands of good business owners like you.
Acknowledgement of Country
This podcast episode was recorded on the lands of the Wurundjeri people of the Kulin Nation, and I'd like to acknowledge them as the traditional owners and custodians of this land and water that I live, work, and play on. I'd like to pay respects to elders both past and present, and note that sovereignty has never been ceded.
This always was and always will be Aboriginal and Torres Strait Islander land.
Fi
Hey there, listener. It's Fi Johnston here, the host of the Money Secrets podcast, and today I wanna talk to you about how to find money to do the things that you wanna do in your business. Now, I'm not talking about little things like paying a bill or doing [00:02:00] something that's the normal stage of business.
I'm talking about how do you get funding? How do you do things like expand your business, buy another business, you know, use different strategies to do something really big in your business? So let's go. Let's jump into the episode now. So if you don't know me, I am a chartered accountant, and I have been working with small business for the last 25 years.
I'm a business and finance strategist, which means that my job is to understand what you want to do with your business, where you wanna go, and how we are going to get there. So I am the one who you come to to work out, "This is what I want to do. How the hell do I get there?" And we look at things like pricing, who your ideal client is, what your unique value proposition is.
We look at your offers, we look [00:03:00] at your marketing, we look at who is in your team. We look at how you spend money, how you manage your money, cashflow planning. Everything that comes in the back end of running your business is what I would work on with you. And I'm giving you that context because it will be helpful in trying to understand where the advice that I'm gonna share with you today comes from So let's talk about why I think this is really important.
So what we're talking about is taking on risk. Now, traditionally, um, this is a very gendered sentence, and it is based on my observation over the last 25 years with the small and medium business owners that I work with. And the observation I have is that men or male-led businesses tend to be more risk-tolerant than businesses run by female, women, and non-binary [00:04:00] founders.
Now, some of that, or a lot of that, is systemic, and we can touch on that a little bit today. But I wanna talk about what we can do about it. So what I find in my work is that I have a lot of clients who are, you know, businesses that are led by men who are really open to, and quite almost aggressive about, using debt to fund the expansion of their business.
So that would be doing things like purchasing equipment, like millions of dollars i- of equipment that is going to generate a new revenue stream for you, or equipment that is going to reduce the costs of your manufacturing or your process or your building, whatever it is that you do. Most service-based businesses don't need to invest significantly in equipment.
Their biggest investment is in their team. But there are [00:05:00] still ways to use funding of different sources to grow your business beyond just bringing in clients and doing the sort of normal thing. So when I see my women founders that I work with, we are so good at managing money. We are really good at making sure that there is enough money coming in to cover everything that's going out.
So a lot of my women clients will say to me, "Fi, please tell me what my breakeven number is. I wanna know what my breakeven number is so that I know that is the minimum that I need to bring in every month to make sure that my business is healthy and is able to continue on." And that is a great number to know, but it is definitely not the number that we focus on the most.
The one that we are focusing on is what is the revenue number that we want to achieve to get to this goal that we have set together. So women are really [00:06:00] great at that money management, caretaking, the sort of custodianship of the money in their business. We are so good at that. The evidence that I have gathered over the last 25 years tells me that emphatically But men do tend to take bigger risks.
Things like buying equipment, buying vehicles, you know, going after big opportunities. So maybe it might be investing in an international trip to go and meet with a potential customer. It's taking risk in all sorts of ways. Now, there's a big, um, conversation that's always going about how much more difficult it is for women founders to get startup capital or venture capital, and I don't disagree with that.
It is very difficult for women to access funding to grow their business through the traditional angel [00:07:00] investing, startup funding, capital, venture capital, imp- impact capital. There's all of these different types of funding that is essentially either equity or, you know, debt loans. It's much, much harder for women business owners to access that funding than it is for men And I am not excusing that for one second.
It absolutely freaking sucks. I do think the way that we are going to move through that is that as women become more wealthy, we will be the ones lending money to other women. And we all know that women make great investors. We're great at building businesses. But what I wanna talk more about today is how do we take risk to grow our business really significantly?
So let's run through a few examples and how you might go about getting the money to make it [00:08:00] happen. So let's say you run a marketing agency, and you do organic social media, and you really wanna expand into doing paid ads as well. And so you're exploring a couple of different options. One option might be bringing in some new team members, getting some training, building out a department of ads specialists, and then offering those services to your clients.
That would be a really safe, tried and true way of doing... You know, adding that revenue stream to your business. But another way to do it would be to look for a, an agency that specializes in meta ads and has a really strong team, a really strong process, and long-term clients that is for sale, and purchasing that business.
That would be a really ballsy, risky, but [00:09:00] high risk, high reward way of growing your business. So let's say you wanted to, you know, purchase this other business, and now we've gotta work out how that is going to be funded. Now, lots of small business owners don't even consider that buying a- another business is an option for them Now, one way of accessing the funding to do that might be through your own, you know, cash reserve.
So you might have enough money to purchase that business outright, and if so, go you. Awesome. You know, this is a very blanket statement, but most businesses are worth a multiple of their profit, and you can expect to pay anything from one to five times profit. Again, this is very loose. Um, any business valuation experts listening will know that I'm being very general here.
But essentially when you buy a business, it's [00:10:00] based on how many years of profit am I paying for. So if you're paying three times the annual profit for that business, what that means is you're saying, "I'm willing to take three years to pay off what I have invested in buying this business, and then everything from then on is pure profit."
If you're paying one times profit, you're saying, "Look, the risk is a little higher. I need to make that investment back within one year in order for it to be worth it for me."
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So given that the purchase of that business is going to be based on what their profits are and what you think they will be in the future, another way of funding that is through vendor finance.
So you can actually get the person selling the business to fund you purchasing the business from them. Now, I'm not saying this is easy or simple, and you will absolutely need support from your lawyer [00:12:00] and your accountant to do this, but it is an option. It is absolutely possible for you to negotiate with the person selling the business, the vendor, to lend you the money to purchase the business from them, and then you pay that off over the next two, three, five years, whatever it might be.
So that is one way of purchasing a business. Another way that you could go about finding the funding, which is a little bit more left of center, is to go to the clients that you currently serve and find out who wants to receive ads as an additional service, and you could pre-sell that service. So for example, you're gonna have to do it at a really good price that needs to be a lot better than what it would be under ordinary circumstances because you're asking them to pre-pay for that service.
So [00:13:00] if you could get enough of your clients interested in pre-paying for the first one or two years of ads services, you've funded the purchase of that business that has an existing client list, processes, procedures, and a team that, if you play your cards right, will keep working with you if you do it in the right way.
That's three different ways that you could purchase another business to merge with your own and grow your revenue dramatically overnight. Of course, there's nuance there. It's not as simple as just adding the two things together like they're two notebooks that just go together. There's a lot involved in bringing two businesses together, but there's three options there to purchase that.
There's using your own funding, there's using vendor funding, and there's getting your customers to fund the [00:14:00] purchase of this new business Let's go for another scenario. Maybe you are a massage therapist, and you've been running a massage clinic for the last 10 years from somebody else's location, and that has meant that you have to continually move, you know, move studios every two years.
And, you know, you've got this really loyal clientele, and you know that they would want more from you if you could offer it. But right now, all that you are able to provide is massage services in, you know, a rented space that somebody else controls. So let's say what you wanted to do was set up a wellness space.
So you wanted to go and find an amazing location that had, you know, spas and saunas and massage and other related services, maybe beauty, maybe hair, maybe, you know, mental health [00:15:00] services, maybe, you know, meditation, maybe yoga. Maybe you've got this vision for this incredible wellness center, and you've already got this incredible client list that you know is interested in all of these additional services if you could find them.
So let's say you go and you find the perfect space, and let's say it's going to cost you $500,000 to get this thing off the ground. Let's say 250,000 of that is the fit out for the, the space, and let's say the other 250,000 is to get the business going. So that's kind of working capital, getting people paid, all of the things that need to be paid in the business before the income starts coming in.
So what we have here is 250,000 that we need to fund something tangible, the fit out. Now, banks are much more open [00:16:00] to lending money when there is something tangible that they can tie that loan to. Now, a fit out isn't as mobile as a vehicle or a piece of equipment, but it is something that some banks will be more open to lending on because there's a physical thing that they can come and take away if the loan is, um, violated or you miss your repayments for long enough.
So we've got 250,000 for the fit out, which we might be able to borrow from a bank, and we've got 250,000 that we need to fund the working capital, sort of getting this business up off the ground. So that might be the first three months' expenses, the first six months' expenses, something like that. So some people would probably think, "Well, I don't have any way of getting 250 or $500,000 for this project, so I'm not even going to bother [00:17:00] considering it because it's just not available to me."
And that is what happens to a lot of people's ideas and dreams, is that they never go anywhere because they don't actually consider what options are on the table. So now it's time to think outside the box. How could we find $250,000 to fund the working capital of this business And there's a clue in one of the examples I gave for the last option, which was, let's go to our customers.
So not all funding needs to come from the bank, and not all funding needs to come from investors, right? So there's a couple of options here. You could try to find an investor and ask them to give you 250,000 or 500,000 to fund the startup of this business. But from that moment on, you now have somebody else that owns part of your business.
Now, that can be really [00:18:00] great when you have a great partner who is able to offer Advice, support, funding, capital, introductions, you know, expertise. That can be amazing, but it also means that you have diluted the amount of that business that you own forever from that moment on. So how do we get our customers to fund setting up a wellness space?
We pre-sell our services. So, for example, you might say, "Okay, I know that within my existing client list and within my existing network, I reckon that there are 25 people who would pay $10,000 to have lifetime access to my wellness space." Right? It needs to be a really good deal, and lifetime access to a wellness space, I really like that idea.
So what you might do is [00:19:00] you might go out and say, "We are looking for 25 members of the community who love the idea of having a wellness space in this area, and that they are so invested in this wellness idea that they would like to become a lifetime member." So in exchange for their $10,000, they will get to have X number of years of...
You know, maybe it's not actually lifetime, and if there's any lawyers listening to this, this is just a general idea. Of course, we would need to work out all of the details from a legal perspective. But essentially, it's the pre-selling of services. It's not equity in your business. It's a customer relationship that forms on an ongoing basis.
And it might be that those founding members get to have first dibs on when new services come out. They might be able to have first dibs on booking out the whole space for their 50th birthday. It might be that they get [00:20:00] to have weekly massages for the next three years in exchange for their $10,000 investment.
There's so many different ways that you could package up different founding memberships to get that wellness space funded. Of course, the alternative would be to go to an investor. What I think's worth noting is that the kind of legal framework and the complexity of finding an investor and finding an equity partner is arguably much more complex than pre-selling services to a customer.
Of course, pre-selling services will need really tight terms and conditions, and you will certainly need to use a lawyer to do that. But the amount of paperwork and complexity required to bring on an investor is more So in this example where we are wanting to fund the setting up [00:21:00] of a wellness space, we might go to the bank looking for that 250,000 for the fit out.
We might go to an investor or some future customers to find the other 250,000. We've now got our $500,000. But also, when we are going to the bank looking for their 250,000, if you can tell them that you've already pre-sold $250,000 worth of future revenue, I think they're going to be a lot more interested in lending you the money than without that future income there.
So you could borrow the money from the bank, you could find an investor, or you could pre-sell services to fund the setting up or the expansion of a wellness space. So these are just two completely random examples of how you could use debt and other funding to either purchase another business or start another business.[00:22:00]
I'm going to give one more example of how you could use different ideas to fund future growth in your business. So let's say there's a potential for you to add a second or third, or whatever it is, revenue stream to your business. But in order to build that revenue stream, you need to spend some money.
Let's say you are a homewares brand and you currently sell ... I'm just making this up on the fly. You're a homewares brand and you currently sell tea towels, and that is going really, really well. You've got repeat customers, you're profitable, things are going really well with your tea towels, but there's a really big opportunity to also go into towels, haberdashery, whatever towels are called.
So let's say that you know that if you are able to add towels to [00:23:00] your product range, you are almost certain that your customers will now wanna buy your tea towels and your bathroom towels. So how are we going to go about funding this? Because adding a new product line isn't just clicking your fingers and now we sell towels.
There's product development that needs to be done. There's supply chain, there's manufacturing, having them made, you know, working out what they're going to look like, what will the designs be, what's the quality control? You know, there's a whole range of things that goes into building out a new product range.
So how could we do that? So again, going back to our other example, we could get our customers to fund that. So what we could do is we could come up with a concept for a new towel range, and we could pre-sell those towels to our existing customers. So you're basically doing a [00:24:00] pre-order for an exclusive, you know, pre-order where you need to buy the whole set.
So you need to buy six towels at one time, and it's an exclusive range, and if you are able to pre-sell enough bundles of six towels, that is not only going to fund the first batch of towels to be... I should not have picked the word towels, by the way. It's quite hard to say and not feel like an Australian bogan.
Um, so if you can sell enough towels, that means that you are able to fund that first, you know, range that you're gonna do, and if you're smart, you will also have built profit margin in to be able to then self-fund the next batch of towels that you create. So that's one way of expanding your product range.
Another way of doing it would be collaborating with somebody. So let's say that there is somebody that you know of, somebody that you've worked with or you've had an [00:25:00] introduction to, and they are a towel expert. So rather than you doing all of that work, essentially you go into a joint vech- joint venture with that other person.
It could be that you're collaborating on the design. So it could be an artist who specializes in, you know, textile design or pattern design, surface design. So it might be that there's an artist that is willing to put their time into creating the design for these towels, manage the supply chain, and do all of the product range, all of that stuff that comes, and they're willing to do all of that in exchange for a percentage of the revenue that comes from the towels.
So that could be a way of doing a kind of joint venture or a collaboration to fund those towels. Another way of doing it, of course, would be taking on a line of credit. So taking on a line of credit with the bank and [00:26:00] having a look at- If we're able to pull this off, maybe doing it the other two ways that I've suggested is going to be too slow, and what you really need is $100,000 tomorrow so that you can use that to get a really amazing deal on towels from your current supplier that you can add to your range.
So you can look at those three options and say, "Okay, how do we fund this new range? Is it through pre-selling the towels to our existing audience? Is it about partnering somebody who already knows how to design and produce towels that would be willing to work with us in exchange for a percentage of the revenue once it arrives?"
And the third option could be, um, borrowing the money from the bank using a line of credit and really doing the sums to say, you know, "If we can sell all of these towels within, let's say, three months, [00:27:00] that's gonna be 200,000 in revenue. We can easily pay off the $100,000 line of credit and the 10 grand," or whatever the interest would be, "and we've then got enough money to fund the next batch of towels."
So these are just a couple of examples that I wanted to share with you that might just open your mind about how you can grow your business really significantly using funding either from the bank, an investor, a joint venture partner, or by pre-selling your services or your products to your existing customers.
I would love to know if this has sparked any ideas for you. So if you wanted to share anything with me about what you might do because of this episode, please jump into the show notes and you'll find a way of getting in touch with me. If you r- can remember things you [00:28:00] can send an email to hello@peachbm.com.au and let me know what risk you are going to take to grow your business and how you are going to do it.
And I'll see you in the next episode.
Money Secrets Outro
Thank you so much for listening right up to the end. I hope you enjoyed this episode of Money Secrets where we talk about the money secrets of successful small business owners. If you enjoyed the episode, I'd love it if you subscribe to the podcast, could leave us a review, or share this episode with one of your friends.
I hope you learned something. I hope you got a new perspective, and I really hope you enjoyed the listening experience.
