Learn best practices for starting and running a float center:
  • This field is for validation purposes and should be left unchanged.

Unsurprisingly, we’re seeing more and more float centers using investors to finance their operations as the float industry matures.

Every center’s earning potential varies greatly — but a well-run center with no surprise buildout costs (or re-buildout costs) can do very well for itself.

As a result, people with means (or general interest) are increasingly likely to consider having a financial stake in the float industry without the glorious headache of actually running a shop.

While partnering with an investor (or investors) may mean less short-term hoops to jump through (and no, or a smaller, bank loan to repay), this decision can reshape the ownership picture. Every investor will be different, expecting a range of financial, organizational, and managerial involvement in your float center.

A quick note before we get too far into the (shark)tank: although we’ve worked with a lot of centers that have had investors, we haven’t gone down that route for any of our own companies.

 

Investors vs. Bank Loans

The majority of people opening a float center, or any business for that matter, will probably cobble together financing from a variety of places. You can generally expect that float centers with investors also have other methods of funding — most likely a combination of personal capital and bank loans. In fact, most investors won’t jump on board unless there’s some sort of funding already lined up.

Whereas the ultimate goal from a bank’s perspective is to make their money back with predictable interest, some investors are more willing to hedge greater risk against the potential of greater returns. This also means that, while your relationship with the bank will most likely end once you pay off all principal and interest, investors can have a longer-term stake in your company.

 

Crowdfund Investing Overview

While a lot of people who consider themselves “investors” usually deal in large sums of money, that doesn’t always have to be the case. In fact, there has been a surge in crowdfunding and crowdfund investment that allows individuals to fork over smaller sums of money to business they want to support. The distinction between the two is important: whereas crowdfunding campaigns (Kickstarter, IndieGoGo, GoFundMe, etc.) usually give products, prizes, or services in exchange for monetary donations, crowdfund investing goes a step further and allows people to purchase small equity stakes in a company.

Crowdfund investing could be an attractive option for someone who is looking to build community involvement and buy-in while raising money for their center. It’s an interesting route, with an equally interesting history, if you feel like doing some research into what is a relatively young method of investment. You can do crowdfunding at the national level, and in some states, at the intrastate level. While this second method limits the total pool of people who can invest through a platform, it does allow you to focus more on the community and regions who are most likely to come to your center.

Keep in mind that each crowdfund investing site and method has it’s own rules and terms. If you’re considering going this route, be sure to research carefully.

 

Friends & Family

By far the most common form of investors for single float centers is a group known in the biz as friends & family. It’s important to note here that “Friends & Family” are not necessarily your actual friends or family (although in many cases, investors at this level do fall into one of those two categories). They are generally considered “non-accredited/sophisticated” investors (more on this later) and there are strict regulations governing this type of financing, including a cap of 35 total investors, guidelines on what information you need to provide, etc.

On the other side of the fence, over there in the high-falutin’ world of investment, there can be a lot of risk. Wealthier investors will hedge their risk by spreading investments across a range of startups and other companies with the hope that the success of one or a few of these will cover the expected failure of the rest. It’s a vicious world over there.

When you’re bringing friends and family into the mix, however, you can probably assume that they’re not investing in a broad portfolio of businesses — they just want to be a part of your success. This means that, just like you, they are invested in the success of your specific center, rather than being invested in the overall performance of larger group of enterprises. The difference can often manifest in decisions towards slower and stable growth (in the case of friends and family) versus decisions towards high growth opportunities that often come with higher risks of failure (in the case of venture capital).

Taking your friends and family’s money, however, means that their only security against losing their cash is you being successful, and this is potentially a lot of pressure to put on your relationships. Even if you are confident that your float center is going to thrive, seriously consider the ramifications of entering into a business relationship with friends & family. As always, make sure to consult an attorney, and draw up clear, written agreements. Believe it or not, these formalities often become more important when mixing relationships with business. Take the time to fully lay out your expectations on paper, and this will both decrease confusion going forward and provide a safety net for if there’s ever contention about the terms of their investment. A good example is whether or not they get all, part, or none of their investment back if you’re forced or decide to close down your float center.

 

Sophisticated vs Accredited Investors 

Accredited investors are individuals (or organizations) that either make more than $200K/year or have a net worth upwards of $1 million. Sophisticated investors, on the other hand, are individuals deemed to have a certain level of financial expertise (accountants, CPAs, and small business owners, for example). According to the SEC, your friends & family need be able to be considered “sophisticated” in some way or another. Keep in mind that these regulations are in place in order to protect people who don’t have as much knowledge. Oftentimes, the SEC will consider investors “sophisticated” as long as  they are provided with sufficient information regarding their investment options.

 

Angel Investors vs Venture Capitalists

At this point, we’ve covered the most likely options for using investors to fund your float center dreams. However, there are some higher realms of investing that are interesting and potentially relevant depending your specific plans. At the very least, fully researching the ways to start and fund a business will help you hone your vision and clarify your needs.

You’ve probably heard the terms “angel investor” and “venture capitalist” out there.

An angel investor is usually an individual willing to put up personal financing for equity in a company. Specifically, they’re a “high net worth individual,” who either has a net worth of $1 million or higher (excluding their home) or who earns $200k or more a year. An angel investor will often be the first round of financing for a startup, and usually will be a smaller amount of money for high equity. Wings are optional, but highly encouraged.

A venture capitalist most often represents a firm that invests other people’s money in potentially lucrative holdings. Venture capital firms usually don’t invest in very early stage companies, and often they don’t invest in companies at all unless they have the potential to net them 20-50x their investment. Their money often includes a seat on the board (if you’ve watched “Silicon Valley,” you know how that can work out). This route in unlikely unless you’re planning on franchising or manufacturing or going some other route that has serious scalability possibilities.

Exit Strategies

This bring us to one of the most important topics when talking about investing — exit strategies. For individuals looking to open and run a float center for its own sake (often called a lifestyle business), the term “exit strategy” may seem completely foreign. Their exit strategy is, well, to stay within the company.

However, if you’ve brought on investors with the promise of return, there needs to be a way to realize that promise, and most often that involves your investors cashing out at some point. Here are some exit strategies related to investors:

An investor sells their portion to new investors.

You sell the whole business, both your shares and investors’ shares, to another company.

You or your business buys out the investors.

Your float business goes public (extremely unlikely, unless you’re a huge company).

You sell to an ESOP (an Employee Stock Ownership Plan — also not likely unless you’re very large).

 

What you promise to investors should ideally be based on the exit strategy or long-term goals you have for your center. There are essentially limitless ways to structure your investment agreements. Through common stock, preferred stock, management agreements, voting privileges, vesting, dilution, and whole slew of other details, you can really dig in to make sure that there are good protections and compromises in place for both sides.

You don’t want to get a year into business only to find that your overbearing Uncle Jasper suddenly has a lot of (now legally valid) opinions about what type of rifles are appropriate to retail in a float center. That said, in many cases, investors can also be mentors and business partners, providing value far beyond their monetary involvement.

 

Why Would I Want to Use Investors Instead of a Bank Loan?

Obviously, answering this question depends on many circumstances that will be unique to your plans, available finances, and overall vision for the future of your business.

Perhaps there’s a limit to your personal capital or ability to secure a loan, and reaching out to small investors is the only way to make up the gap. Maybe your ultimate goal is to grow and sell your company, and angel investors end up being the fastest way to accomplish that vision. Maybe you have a robust community of friends and family who are eager to be part of your journey, or a larger investor who is particularly interested in partnering and mentorship.

Because businesses are inherently risky, and because bank loans often require personal collateral (especially for new ventures), investment money has the obvious benefit of not being a burden should your center crash and burn (or crash and flood, as the case may be). Investors are taking a risk right along with you, and if your business goes away, their money goes too.

It may be obvious be now, but we are not lawyers. Whatever the scenario, be sure to consult your attorney and accountant when seeking financing in any capacity.

Especially when it comes to investing, things can get incredibly deep and confusing. You want to be sure to know, as best as you can, why investing is right for you and how to do it correctly and cleanly. There are very specific federal and state laws governing what defines a legal investment, and it’s important that you’re comfortable with them before taking on any form of investment.

 

What to Send to Investors

When looking to connect with investors, you will probably be asked to provide your executive summary and an overview of your financial summary. They’ll size this up first to see if your business basics seem solid and interesting.

Even if you’ve thought everything through, you shouldn’t dump all of your planning documents on them at the beginning. The days of 30-page, stuffy business plans are still going strong in the world of bank loans, but not so much for investors. If they want to know more, they will ask for your full financials next, and probably a meeting after that.

 

So…

We hope that we’ve imparted some of the basics about the investment options that are at your disposal.

Using friends and family is the most likely candidate for float centers starting out, but it’s worth looking into crowdfund investing. And, if your plans are more grandiose, perhaps larger investment partners will match up perfectly with your business. Whatever you do, we hope this blog gives you a rough framework so you can do your own, deeper research with a little more ease.

Stay buoyant, my friends.

 

 

Float Tank Conference