What Price Advice?
Entrepreneur Gerard Powell attributes his success to a simple strategy: Take a product or service that is sold only to the wealthy and make it affordable to the masses.
Following this formula in the early '90s, Powell parlayed a modest investment into a small fortune with his Y-Rent program, which allowed consumers to buy homes for no money down, with monthly payments not much higher than their rental payments.
So in late 1994 when Powell learned that cosmetic surgery was something only very wealthy consumers underwent, a light bulb went off in his head. He joined with partners Charlie Lynn and Vincent Trapasso in their fledgling venture, Cooperative Images Inc., which markets elective surgeries on behalf of physicians.
"The key to the market was making the procedures affordable," says Powell. Through elaborate financing mechanisms and tight credit controls, Powell reduced the price of some surgeries to just $38 a week.
But to put the business over the top, Cooperative Images wanted an infusion of capital to ramp up marketing efforts and increase the number of physicians under contract. While Powell was certain of his ability to create a sales and marketing dynamo, he was less certain in the arena of high finance. "I began to question exactly what I needed," says Powell. "Was it just capital, or was it something more?"
What Powell had hit upon was the great divide in early-stage financing. Did he need a passive investor who would simply deliver a check at the closing table? Or did he need a more active investor--sometimes referred to as a value-added investor--who would help guide the company to the next growth plateau?
The distinction is vital to consider. After all, some entrepreneurs don't appreciate advice at every turn from what appears to be a meddling investor. At the same time, a business owner who wants help from a new shareholder and doesn't get it might flounder his or her way into bankruptcy.
For Powell and Cooperative Images, these considerations were more than academic. Offers of capital came from two investors occupying opposite ends of the spectrum in terms of their involvement in the company--and left Powell searching for the answer to his happy dilemma.
One of the potential investors was Richard Gwinn. Gwinn's company, Radnor, Pennsylvania-based The Abbotts Organization, has been buying, selling and investing in companies for more than 20 years. Gwinn's approach to early-stage investing is hands-on; he not only invests in companies but also offers strategic management services.
The other potential investor was a much larger competitor from Powell's home-building days. This investor had enjoyed substantial success but, in Powell's opinion, didn't have as much knowledge of or connections with the capital markets Powell felt would be critical to Cooperative Images' long-term success.
While Gwinn concedes that value-added investors are not right for every entrepreneur, in most cases, he says, they can play an important role in shaping a company's destiny. "The reason an early-stage company should seek a value-adding investor rather than simply a source of funds," says Gwinn, "is that management, financing, cash management and marketing hazards are absolutely critical to overcome, and an experienced value-adding investor, if he or she is the right one, will spot costly problems early on."
In the case of Cooperative Images, Gwinn brought big guns to the offering table in the form of other experts and professionals who would invest along with him. These included a former partner from a Big Six accounting firm, a corporate attorney, and a successful entrepreneur who had done well in the telemarketing industry.
The expertise in telemarketing was more than a little relevant since a good part of Cooperative Images' success relied on effective telemarketing operations. In Powell's mind, these investors possessed not only a deep well of related experience but also the contacts in investment banking that would help him attain his ultimate goal of setting up an initial public offering or selling the company.
While Gwinn espouses a hands-on approach to investing, he knows it doesn't work in every situation. "If you're autocratic or egocentric in nature," he says, "you don't want the kind of investor who is going to challenge your thinking on sensitive and critical areas."
In addition, Gwinn says that entrepreneurs who can afford the price of outside assistance can also forego seeking out value-added investors. "You can get all the expertise, guidance and counsel you need from accountants, attorneys, marketing and financing consultants," says Gwinn.
There's an important distinction between advice from shareholders and consultants, however. "The consultant is often passive, providing advice, which if followed, should generate a successful result. The value-added investor, on the other hand, will provide advice but has a vested interest in its successful implementation."
If all this sounds a little too touchy-feely, there is a more concrete reason for considering what type of financial partner you really want. In general, hands-on, value-added investors require more equity in a company than strictly passive investors. Why? The value-added investor is taking the same financial risk as the passive investor but with the additional investment of his or her time. This added investment generally translates into owning a bigger piece of the company.
This was true in Powell's situation. Gwinn and his co-investors offered a package that would give them about 18 percent of the company. The passive investor's deal would cost Powell just 12 percent of his equity. Powell feels that 6 percent difference may someday soon be worth $6 million. Knowing this, he is reluctant to give it up unless absolutely necessary.
What's swaying Powell in the value-added direction, however, is the other great elixir of wealth: time. "I can grow the business," he says. "But if at the end of three years we want to sell it, the company will not get the highest possible price unless it's packaged properly right from the beginning, which is what I hope a value-added investor would help us do." In other words, getting the highest possible price on the back end might be worth some sacrifice on the front end.
Though at press time Powell was undecided about which offer he would take, he believes going with hands-on investors might pay big dividends down the road. "All schooling requires tuition," he says. "Mine might be 6 percent. But with the knowledge I acquire, I'll make it up 10 times over my lifetime."
The Abbotts Organization, fax: (610) 964-3630;