Investing in Your Own Business

Outside Investors Fund Business Growth in Partnership with Owners

Jun 9, 2008 Ruth King

Business owners feel entitled to take huge salaries and profits out of their businesses. However, outside investors won't fund growth unless owners make cash investments.

A lavish personal lifestyle could jeopardize future outside investments in an entrepreneur's business. Some of the cash needed to grow a business must come from retained profits. If an outside investor sees all profits taken from the business and no retained earnings, he is likely to stereotype a business owner as having the "Mercedes Benz Syndrome".

The “Mercedes Benz syndrome” occurs when the business pays for unnecessary personal assets, i.e. the owner’s “Mercedes Benz”. Money that is supposed to go towards the business’ needs goes towards the owner’s personal needs. This is typical with entrepreneurs who start generating business profits without understanding what profit really is. Since the company is profitable, the owner believes he is entitled to take money out of the business. Not necessarily.

If an investor discovers that a business owner is funding exotic cars, boats, expensive vacations, has a non-working spouse on the payroll, or other personal luxuries at the expense of the business, the owner is not likely to get additional funding. The investor will believe that the business owner is more interested in having the business pay for his personal lifestyle than business growth and longevity. Outside investors feel that their cash infusions are supposed to help grow the business; not the owner’s personal finer things in life. This can endanger the survival and growth of the business.

Entrepreneurs must understand that profits do not mean cash and that having cash does not mean that they have to spend it. There is absolutely nothing wrong with enjoying the fruits of an entrepreneur's labor. However, don't do it at the expense of the business. Entrepreneurs must save cash for the times when a receivable doesn't come in on time and payroll is due, when sales slow down or economic downturns occur, before spending it on personal pleasures.

How to Avoid the Mercedes Benz Syndrome

  1. Make sure that pricing is accurate to ensure the generation of reasonable profits.
  2. Watch collections. If an invoice is one day past due, make a friendly phone call.
  3. Painlessly save some of the money generated from collections. Save 1% of every check that comes in the door. If deposits for the week total $1,000, write a check into a savings account for $10. The business will never miss the $10. And, that $10 will start earning interest.
  4. Don't take money out of the business until there is enough saved to handle cash shortages.

How Much Should be Saved?

  1. Establish a line of credit to cover at least two months' payroll costs.
  2. Have at least two to three months' overhead expenses saved.

Don't be trapped by the “Mercedes Benz syndrome”. Good profits and savings will prevent financial hardships in years to come.

The copyright of the article Investing in Your Own Business in Entrepreneurs is owned by Ruth King. Permission to republish Investing in Your Own Business in print or online must be granted by the author in writing.
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