Preserving Equity in Cash-Strained Businesses: Expert Tips to Protect Your Investment

by Cheryl Powers

Is your business in need of a financial lifeline? When your company is faced with a cash crunch, it's crucial to safeguard your equity and ensure your hard-earned ownership stake remains secure. In this article, we will explore effective strategies that can help you navigate the challenging waters of a cash-strapped business while protecting your equity from potential risks and pitfalls.

In a nutshell, the key to protecting your equity when your business is in dire need of cash is to strike a delicate balance between securing short-term funding and preserving long-term ownership.

Financing Your Business Growth

When it comes to financing the growth of your business, you may find yourself facing a difficult choice between the lesser of two evils.

Selling shares in your business can provide an immediate cash injection, but it means giving up some of your valuable equity stake. Borrowing money from a bank, on the other hand, can be costly to repay, can limit your growth, and often requires that you provide a personal guarantee.

However, there is a third option: customer financing. This approach involves convincing your customers to prepay for some or all of your product or service, providing you with the necessary working capital to drive growth. This method can be a great alternative to selling equity or taking on bank debt and gives you access to cash without having to sacrifice ownership or pay interest.

How Brad Lorge Got His Customers to Fund the Growth of His Business

In 2015 Brad Lorge founded Premonition, a technology company that provides logistics software to streamline delivery operations for large enterprise companies. While working with big businesses brought in good revenue, large enterprise customers were slow to make purchasing decisions, and when they did decide to buy, getting them up and running was slow and costly. If an implementation failed, Premonition risked losing months’ worth of work for nothing.

Rather than the traditional approach of financing a software start-up (rounds of dilutive funding), Lorge asked his customers to prepay. Having customers pay in advance allowed Premonition to utilize the cash from their customers to fund its growth.

By March 2022 Premonition had grown to $3 million in Annual Contract Value (ACV) when Shippit acquired it for $20.5 million—an implied valuation of just under seven times ACV. Better yet, because they used customer financing, Lorge and his partners still owned 80% of the equity in the company when they sold it.

Customer financing can be a powerful tool for business owners looking to raise money without giving up equity in their businesses. If you’re considering getting your customers to prepay, like Lorge, start by understanding your customer’s needs and motivations. Consider what’s in it for your customer to prepay. Could you guarantee delivery times in return for a project deposit? Could you offer incentives or discounts that make sense for your business and your customers?

Productize Your Service

If you offer a service, another strategy for getting customer prepayments is to consider productizing it. A productized service is a type of service offering that has been standardized and packaged as a product with a defined scope, price, and deliverables. It is essentially a predefined service that is delivered repeatedly to multiple clients in a similar fashion, with a fixed set of deliverables, processes, and pricing. Examples of productized services include website design packages, social media management plans, and content creation bundles.

The goal of productizing a service is to simplify the sales process, increase efficiency, and provide a predictable customer experience. By creating a standardized offering, service providers can reduce the amount of time and effort required to close a sale as well as minimize the need for customization, which can be time-consuming and expensive.

Best of all, when it comes to products, we are accustomed to paying in advance (e.g., you expect to pay for that box of cereal at the grocery store before going home to dig in). Therefore, if you package your service offering into a product, your customers will be more inclined to pay upfront for some or all of your offerings.

Productizing your services or asking customers to prepay can be effective ways to obtain the cash your business needs to grow while keeping a tight grip on your equity and avoiding the obligations of a hefty bank loan.

Protecting your equity during times of financial strain is a critical priority for any business owner. By evaluating your financial position, exploring alternative funding options, negotiating with creditors, reducing operating costs, and diversifying revenue streams, you can safeguard your equity while navigating challenging times. Remember to stay proactive, seek expert advice when needed, and prioritize long-term sustainability. With the right strategies in place, your business can weather the storm and emerge stronger than ever before.

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