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Structure the deal to create value Featured

9:35am EDT July 22, 2002

There are so many good and right things about bootstrapping, or growing a business by reinvesting its profits, that I won't even begin to list them.

Take it on faith that growing a company through internal means is a time-tested, solid method.

Over the past few months, we've addressed the alternative way of growing your company and financing that growth by using other people's money, or OPM. OPM allows faster access to the funds necessary to finance your growth. In exchange for the use of OPM, you forego sole ownership and sole control of your company.

Angel investors, venture capitalists and the entrepreneur need one another. It is more than a symbiotic relationship; it is an absolute need. A successful or potentially successful company is the vehicle by which capital makes money.

This complete dependency on each other might make you think a deal would only be natural, that it would come together by some act of nature, or at least by some Adam Smith free market imperative. This can be the case if the value of your enterprise is so obvious that the capital source wants to have the exit door barred to keep you from offering your deal to anyone else. If the value isn't quite that obvious, it is up to you to create real value in the deal.

Value is created by identifying the right markets. Being able to save $25 on the cost of producing a car's automatic transmission will have significantly more value to Ford or GM than it would to Boeing. And the value would be immediately understood by an auto manufacturer, while a venture source might not have the industry knowledge to appreciate the savings.

By broadening your universe of capital sources to include the industry that you will serve, you have created additional value.

Consider structuring a contract, designing a licensing agreement or setting up a franchise arrangement so that people other than yourself get significant benefit, and therefore have a vested interest in getting the deal done. Find out what is important to the other party and structure your deal to reflect that.

Creating value by creative structuring does not mean using smoke and mirrors. It means taking your terrific idea and making it very valuable to someone else. That someone can be a strategic (someone already in the industry) or a financial player.

One deal I was involved with was made extremely attractive by giving the other party a way not to have to book a long-term purchase agreement as a long-term liability. We gave them the ability to cancel the agreement on short notice, but on terms that would make us more than whole.

By eliminating the long-term liability, the deal increased in value to the other party even though the product, pricing and other terms remained the same. We created increased value and both shared in that value.

Don't let your creativity stop with your product or service. Your goal is to get funding and grow your company, so be creative in your approach to your markets and to potential capital sources in structuring your deal to maximize value. Erwin Bruder (ebruder@gordian.org) is president of The Gordian Organization, which provides business planning and structuring services to start-up and growing companies. Bruder can be reached at (216) 292-2271.