Advice

How to Deflect Requests for Money


How to Deflect Requests for Money

Photograph by Classicstock/Corbis

Experienced entrepreneurs know running a business means hard work, difficult decisions, and stress. But many are surprised by how often they get hit up for money, says Jeff Leventhal, managing director and partner at HighTower, a national financial services firm that caters to wealthy individuals. Based in Bethesda, Md., Leventhal estimates he has counseled more than 200 entrepreneurs during his 17-year career. I spoke with him recently about how he advises them to vet the requests, including funding startups, investing in real estate, and making loans to relatives. Edited excerpts of our conversation follow.

Why do entrepreneurs become targets for people looking for money?

It’s goes along with being successful—so many people come out of the woodwork begging for money. You start investing, and the danger is you get half a dozen projects and your money’s gone. That’s why so many professional athletes go bankrupt.

What do you recommend to avoid that?

In the case of business opportunities, we’ve got a simple process with red flags that go up around some issues that help us know to throw those in the trash. If these opportunities get through the process with no red flags, we start looking at them in a thoughtful fashion and matching them against what [the entrepreneur] already has in their portfolio.

One major thing I want my clients to think about from an investment standpoint is asset allocation. Their business is their biggest asset, but they want to build some assets outside of their business, too. So what percentage of their portfolio do we want in highly speculative, illiquid alternative investments? We might come up with a number around 2 percent or 3 percent—or 5 percent if they’re really aggressive. It has to be something that we think is surefire to go above that.

What are the red flags?

First, does the company have a business plan? If they send you a one-page executive summary but it’s clear they haven’t done due diligence or planning, that’s red flag No. 1.

If they forward a business plan, you take a look at how much money they are raising and how much of it is coming from the person asking for the money. If the founders are not putting any of their own capital at risk, that’s red flag No. 2.

What do you do if the plan passes those first two tests?

Then you look at the underlying business and determine whether or not it has viability. For instance, does the business plan recognize who the industry leaders are now and have a path to overcome the barriers to entry? Has adequate research been done?

I had a client call me two months ago who was approached by a group, including a friend, that was raising money for a device that goes on the back of a helmet and flashes when the person wearing it has a concussion. If you had a device like that, and it worked, it would be unbelievable. But there had been no viable medical studies that proved their device worked. You’ve got to go through R&D to show something actually works before you get funding.

What do you do with real estate investment opportunities?

Those have a much easier evaluation process, particularly if they are commercial real estate deals. We can take a look at things like lease terms and whether the property is above or below market. Real estate is a good component for a client to have in their portfolio, especially direct investments in commercial real estate, so I tend to favor those more than business opportunities, but they come up less frequently.

And what do you do when clients ask you about making loans?

My clients usually know very clearly right away whether or not there’s any chance of getting the money back. I had a client call me last spring because his brother-in-law needed some money and he and his wife wanted to help. They thought he needed $400,000, but I talked to his accountant, and it turned out he only needed $150,000. So I was able to reduce the amount they loaned. I advised them they should go into it knowing if the money never came back to them, they weren’t going to lose any sleep.

Are there any exceptions?

It does depend on what people are asking for. If I have an entrepreneur with a net worth of $10 million, and some friends from high school are asking for $25,000, whether or not we feel 100 percent convinced that their business idea has merit, it might be O.K. to help your friends.

For the most part, 90 percent of the time, the answer to these requests is probably going to be no. The good part is, 90 percent of the time they don’t get beyond red flags Nos. 1 and 2 anyway.

Typically, don’t these requests come from family and friends? How awkward is it to turn them down?

It’s about 75 percent family and friends; maybe 25 percent comes from someone you don’t know personally.

What I try to get my clients to say is that they’ve developed a process with their investment adviser and ask [the person making the request] to send all the information to me. That way I can reach out with questions, and the client can make me out as the bad guy. I’m able to take a very nonemotional approach to looking at the investment opportunity and determining whether it has merit.

Thankfully, I can’t tell you how many grateful calls I get three or four years down the road. Last summer I got a call from a client who remembered a golf course investment we turned down. “Did you see they filed for Chapter 11?” he asked. Oh yes, I sure did.

Has it ever gone the other way—where you turned down an investment that became successful?

No, not yet. But we do find some that occasionally work. In that case, I often ask to show it to other clients because I get tremendous deal flow. But the good ones are few and far between.

Karen_klein
Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues.

Your Small Business Questions, Answered

Send us your questions on challenges you face in your business. Journalist Karen E. Klein will interview experts and distill their insights into answers.

(500 characters max)

Toyota's Hydrogen Man
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus