What Price Advice? When looking for financing, consider the expertise a value-added investor can offer.

Entrepreneur Gerard Powell attributes his success to a simplestrategy: Take a product or service that is sold only to thewealthy and make it affordable to the masses.

Following this formula in the early '90s, Powell parlayed amodest investment into a small fortune with his Y-Rent program,which allowed consumers to buy homes for no money down, withmonthly payments not much higher than their rental payments.

So in late 1994 when Powell learned that cosmetic surgery wassomething only very wealthy consumers underwent, a light bulb wentoff in his head. He joined with partners Charlie Lynn and VincentTrapasso in their fledgling venture, Cooperative Images Inc., whichmarkets elective surgeries on behalf of physicians.

"The key to the market was making the proceduresaffordable," says Powell. Through elaborate financingmechanisms and tight credit controls, Powell reduced the price ofsome surgeries to just $38 a week.

But to put the business over the top, Cooperative Images wantedan infusion of capital to ramp up marketing efforts and increasethe number of physicians under contract. While Powell was certainof his ability to create a sales and marketing dynamo, he was lesscertain in the arena of high finance. "I began to questionexactly what I needed," says Powell. "Was it justcapital, or was it something more?"

What Powell had hit upon was the great divide in early-stagefinancing. Did he need a passive investor who would simply delivera check at the closing table? Or did he need a more activeinvestor--sometimes referred to as a value-added investor--whowould help guide the company to the next growth plateau?

The distinction is vital to consider. After all, someentrepreneurs don't appreciate advice at every turn from whatappears to be a meddling investor. At the same time, a businessowner who wants help from a new shareholder and doesn't get itmight flounder his or her way into bankruptcy.

For Powell and Cooperative Images, these considerations weremore than academic. Offers of capital came from two investorsoccupying opposite ends of the spectrum in terms of theirinvolvement in the company--and left Powell searching for theanswer to his happy dilemma.

Attracting Opposites

One of the potential investors was Richard Gwinn. Gwinn'scompany, Radnor, Pennsylvania-based The Abbotts Organization, hasbeen buying, selling and investing in companies for more than 20years. Gwinn's approach to early-stage investing is hands-on;he not only invests in companies but also offers strategicmanagement services.

The other potential investor was a much larger competitor fromPowell's home-building days. This investor had enjoyedsubstantial success but, in Powell's opinion, didn't haveas much knowledge of or connections with the capital markets Powellfelt would be critical to Cooperative Images' long-termsuccess.

While Gwinn concedes that value-added investors are not rightfor every entrepreneur, in most cases, he says, they can play animportant role in shaping a company's destiny. "The reasonan early-stage company should seek a value-adding investor ratherthan simply a source of funds," says Gwinn, "is thatmanagement, financing, cash management and marketing hazards areabsolutely critical to overcome, and an experienced value-addinginvestor, if he or she is the right one, will spot costly problemsearly on."

In the case of Cooperative Images, Gwinn brought big guns to theoffering table in the form of other experts and professionals whowould invest along with him. These included a former partner from aBig Six accounting firm, a corporate attorney, and a successfulentrepreneur who had done well in the telemarketing industry.

The expertise in telemarketing was more than a little relevantsince a good part of Cooperative Images' success relied oneffective telemarketing operations. In Powell's mind, theseinvestors possessed not only a deep well of related experience butalso the contacts in investment banking that would help him attainhis ultimate goal of setting up an initial public offering orselling the company.

Hands Off

While Gwinn espouses a hands-on approach to investing, he knowsit doesn't work in every situation. "If you'reautocratic or egocentric in nature," he says, "youdon't want the kind of investor who is going to challenge yourthinking on sensitive and critical areas."

In addition, Gwinn says that entrepreneurs who can afford theprice of outside assistance can also forego seeking out value-addedinvestors. "You can get all the expertise, guidance andcounsel you need from accountants, attorneys, marketing andfinancing consultants," says Gwinn.

There's an important distinction between advice fromshareholders and consultants, however. "The consultant isoften passive, providing advice, which if followed, should generatea successful result. The value-added investor, on the other hand,will provide advice but has a vested interest in its successfulimplementation."

If all this sounds a little too touchy-feely, there is a moreconcrete reason for considering what type of financial partner youreally want. In general, hands-on, value-added investors requiremore equity in a company than strictly passive investors. Why? Thevalue-added investor is taking the same financial risk as thepassive investor but with the additional investment of his or hertime. This added investment generally translates into owning abigger piece of the company.

This was true in Powell's situation. Gwinn and hisco-investors offered a package that would give them about 18percent of the company. The passive investor's deal would costPowell just 12 percent of his equity. Powell feels that 6 percentdifference may someday soon be worth $6 million. Knowing this, heis 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 thebusiness," he says. "But if at the end of three years wewant to sell it, the company will not get the highest possibleprice 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 endmight be worth some sacrifice on the front end.

Though at press time Powell was undecided about which offer hewould take, he believes going with hands-on investors might pay bigdividends down the road. "All schooling requirestuition," he says. "Mine might be 6 percent. But with theknowledge I acquire, I'll make it up 10 times over mylifetime."

Contact Sources

The Abbotts Organization, fax: (610) 964-3630;