Wednesday, October 22, 2008

I Need Your Opinion

So for those of you that don't know, a friend and I have been looking into starting a business for about seven months now. We have looked at about 7-10 franchised businesses and selected one in a huge market that is getting ready to explode. The industry isn't sexy like high tech, but it will provide serious long term growth for our business for many years.

No, I am not mentioning what company/industry it is until we move forward.

Anyway, we have completed our due dilligence and are looking to raise money from friends, family and close business associates. We have come up with two different ways to pay back the investor.

I will present the two ways and then please comment on which one you would go with if you were an investor. Also assume that the P&L projections can be reasonably achieved. For ease of comparison I will use the same investment figures.

1. Fixed Infinite Cashflow
In year 0 you loan me $100,000. I promise to repay you 30% of your contributed capital ($30,000) annually for as long as I own the business.

In this scenario it will take you a little over 5 years to recoup your
initial investment, but after that it is just cash in the bank from there on

2. Double Your Money in 4-5 Years

This scenario is exactly what it sounds like. You give me $100,000 and I hand you back $200K in 4 or 5 years.

Obviously in this scenario, you get your initial capital as well as your return much sooner, but you miss out on the recurring cashflows.

Side By Side Comparison

So here it is with the associated IRRs. Based purely on IRR, the "rational investor" would choose scenario 2, but I am trying to determine if scenario 1 is compelling as well since in absolute terms I would pay you back almost $400K in the first scenario.

What do you think?