QUESTIONS: A friend asked me to buy 20% of his small business for $100,000. I’m sure that 20% of the company is worth that much today. Still, I’m worried. Are there things I should think about when it comes to making an investment like this one?
ANSWER: You are right to be concerned. Making a minority investment in a privately held company is risky, but we’ve done it successfully. We’ll share what we’ve learned about how to mitigate the risk. You’ve said that based on the company’s current value, it’s a sound financial investment. That’s a good first step. Still, the pitfalls are numerous. Before investing, follow these four tips:
Ask Doug & Polly: Short-term lenders for small businesses
1. Ensure the business has a sound strategy: If you read this column, you’re familiar with the three questions that every successful business must answer: Why should a prospective customer buy my product or service rather than a competitor’s? Is there a segment of the market that values the thing that makes my offering different from the competition and is it big enough to support my business? How will I cost effectively reach this segment of the market with my message?
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2. Know why the owner needs the money: If the owner needs money to make payroll, we would suggest caution. On the other hand, if the owner needs money for capital improvements to expand or to fund working capital for a rapidly growing enterprise, that’s a better situation.
3. Verify that the majority owner is a good business person: Remember, when you buy a minority interest in a small business that the majority shareholder runs, you are making a bet on that person.
4. Make sure you will be compensated – without constraints: A minority interest in a privately held business is worth only what the majority shareholder says it is worth. Consider this, you write a $100,000 check. The majority shareholder then proceeds to manage the company successfully, generating a lot of cash. However, the majority owner just sucks the cash out of the business by increasing his/her own compensation and never declares a dividend. Further, he/she never sells the business, but passes control to the next generation. You will never see a nickel from your investment.
When making minority investments in privately owned companies, we insist on constraints:
The majority shareholder’s compensation must be formulaic. If the business is successful, the majority owner can’t just increase his/her compensation at will. He/she has to declare a dividend to get cash out of the business. Obviously, when dividends are declared, we get paid.
Earnings may be retained in the business for only a limited time. If the business generates cash, dividends must be declared, unless we approve otherwise.
We control myriad other ways that the majority shareholder could get cash out of the business (for example, paying a spouse $500,000 per year for being a receptionist or paying above market rates for services to other companies he/she owns).
Polly and Doug White
SHELBY LUM/TIMES-DISPATCH Polly and DougWhite////
The majority shareholder must devote his/her full effort to the enterprise. We don’t want to make an investment in a business and then have the majority partner take a full-time job at another company.
We protect ourselves against dilution or sale. If the majority owner is going to sell shares, we have a right of first refusal. This prevents him/her from issuing new shares and diluting our interest or from selling to a new owner with whom we do not wish to work.
Finally, we insist that our prospective on the business be considered. Admittedly, this is a “gentlemen’s agreement.” We can’t force the majority shareholder to listen to our point of view. However, we do make it clear upfront what we want to be heard.
Making minority investments in privately held companies is a risky business. The tips above are a good start, but this is a complex topic. If you aren’t experienced, reach out to experts before investing.
Richmond-area business expansions, openings and closings
Ironclad Coffee
Ironclad Coffee opened three locations at Richmond International Airport, including this pre-security café in the atrium.
Matthew Brazier
Anthony’s on the Hill
Anthony’s on the Hill in Church Hill announced that it is permanently closing.
Joe Mahoney, Times-Dispatch
Grit Coffee
Grit Coffee Roasting Co. will open its second Richmond location in Scott’s Addition on April 17.
Grit Coffee
Rockler Woodworking and Hardware
Storefront for a Rockler Woodworking and Hardware location. The brand is opening a new store in Short Pump by the end of March 2023.
Lauren Sauer
Boiling Crab Richmond
The Boiling Crab Richmond was scheduled to open at 2053 W. Broad St., Richmond, in March 2023. The Orange County, California-based chain has 25 locations in the US, as well as Australia, China, and Saudi Arabia. The Richmond location was previously Cornerstone Cigar Bar.
Diablo Donuts RVA
Diablo Donuts RVA, located at 1090 Virginia Center Parkway, Suite 105, in Glen Allen, hosted its grand opening Feb. 11.
Eva Russo, Times-Dispatch
Blue Cow Ice Cream Co.
Blue Cow Ice Cream Co. is opening its second Richmond-area location in Short Pump in the Greengate Shopping Center, 12171-C W. Broad St.
AARON SPICER
Suzy Sno
Suzy Sno’s new location in Carytown at 3423 W. Cary St. is now open.
Colleen Curran, RTD
The Brass Tap
The Brass Tap Libbie Mill in Richmond, VA on February 21, 2023. The restaurant with 60 beers on tap is now open. EVA RUSSO/TIMES-DISPATCH
Eva Russo
Graybo’s Sports Cards
Graybo’s Sports Cards has opened at 214 E. Grace St. in Richmond. The business sells baseball, football and basketball cards.
Blue Ridge Cyclery
Full-service bike store Blue Ridge Cyclery to open at Libbie Mill-Midtown
Blue Ridge Cyclery
BigWife’s
BigWife’s Mac n’ Cheese brick-and-mortar shop is now open at 1017A N. Arthur Ashe Boulevard in Scott’s Addition.
BigWife’s
Jeni’s Splendid Ice Creams
Jeni’s Ice Cream is seen on Wednesdays in Carytown at 3500 W. Cary St. in Richmond.
SHABAN ATHUMAN, TIMES-DISPATCH
CarLotz
The CarLotz brand is exiting the Richmond area. The remaining CarLotz locations will be rebranded as Shift.
PROVIDED BY CARLOTZ
Acacia Midtown
Acacia Midtown, from restaurateurs Dale and Aline Reitzer, is now open and serving a limited menu at Libbie Mill Midtown.
Daniel Sangjib Min, TIMES-DISPATCH
Zoom Room Richmond
Zoom Room has opened its first Richmond area franchise 3450 B Lauderdale Drive in Short Pump.
Zoom Room
Torchy’s Tacos
Torchy’s Tacos has opened two fast-casual restaurants in the Richmond area: one in Short Pump and the second in Carytown. A third is on the way for Chesterfield.
times-dispatch
Planet Fitness
A Planet Fitness location is expected to open this winter at Stony Point Village shopping center in Richmond.
Raising Cane’s Chicken Fingers
The fast-food restaurant chain Raising Cane’s Chicken Fingers is planning to open two Richmond-area locations in fall 2022.
Locations are planned at 12721 Jefferson Davis Highway in Chester and 1321 Huguenot Road in Midlothian. The company currently has a location at 805 W. Grace St. in Richmond.
The Baton Rouge, Louisiana-based company has nearly 700 locations in 35 states and Guam. The chain was founded in 1996.
— Sept. 1, 2022
Three Notch’d Brewing
Three Notch’d Brewing has expanded its Scott’s Addition location at 2930 W. Broad St. The group acquired a former wine shop on Broad Street and a pizza kitchen next door, which will be combined. Muralist Nico Cathcart was hired to design and paint two new pieces inside the space.
Three Notch’d, founded in 2013, operates five venues throughout Virginia.
— August 2022
Daniel Sangjib Min/TIMES-DISPATCH
Retail or Resell
Footwear business Retail or Resell has signed a lease in Short Pump’s Towne Center West Shopping Center.
— Aug. 9, 2022
Marshalls
A Marshalls location is planned in Staples Mill Square at 9041 Staples Mill Road in Henrico.
The chain dates to 1956 and includes more than 1,000 stores. — July 21, 2022
Charles Krupa, Associated Press
Raising Cane’s
Raising Cane’s is planning a location in the 6900 block of Lake Harbor Drive in Chesterfield County, Cushman & Wakefield | Thalhimer announced.
The office represented the company in the sale.
Founded by Todd Graves in 1996, Raising Cane’s Chicken Fingers has more than 530 restaurants in 28 states and other countries.
The 1.9-acre Chesterfield plot sold for $2.5 million. A 2023 opening is planned.
—June 22, 2022
ASSOCIATED PRESS
My Favorite Muffins
My Favorite Muffin has opened at 10174 W. Broad St. in Glen Allen. The local owners/operators are Sam and Suzanne Makarem. —June 7, 2022
Mattress King
After more than 40 years of carrying the moniker of Mattress King, business owner Anil “Neil” Gulati, 72, said he’s ready to retire this year. Read more here.
2012, ALEXA WELCH EDLUND/Times-Dispatch
The Mill on MacArthur
The Mill on MacArthur is closing. Its last day of service will be Sunday, Feb. 26.
Doug and Polly White have a large ownership stake in Gather, a company that designs, builds and operates collaborative workspaces. Polly’s focus is on human resources, people management and human systems. Doug’s areas of expertise are business strategy, operations and finance.