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Is Crowd Funding A Viable Way To Raise Money To Buy A Small Business?



Posted By: Peter Siegel MBA: Business Purchase Financing Advisor.   We're hearing more and more about "crowd funding" through sites like gofundme and kickstarter as a possible way to raise the cash needed to buy a small business. This method of collecting funds has proven successful in other kinds of situations. Could this strategy work when buying a small business?

We're hearing more and more about "crowd funding" through sites like gofundme and kickstarter as a possible way to raise the cash needed to buy a small business. This method of collecting funds has proven successful in other kinds of situations. Examples are people who are needy, seeking financial help from strangers on the internet in order to pay for life saving medical procedures or to cover rent payments and avoid becoming homeless. And there are entrepreneurs launching new businesses or perfecting new products who appeal to people who might like their ideas and be willing to provide some of the cash needed to convert a good plan into an operating business.

And, of course, we receive online solicitations every day from people running for public office-some not even those who will represent us in local, state or national government. And a number of causes have taken to the internet to get financial help saving the endangered watermoose mouse, the Burmese rose-and-carnation hybrid (the "rosenation"), and to save our planet from errant meteorites.

But what about raising money to buy a liquor store, accounting practice, machine shop or other kind of enterprise already operating? I've been watching this area of financing closely because of my special interest in this topic. I've had the opportunity to arrange business purchase financing for buyers for more than 15 years. I'm as curious as many people are, about whether some form of crowd funding can become a viable means of business purchase financing?

In my opinion, the crowd funding strategy for small business purchase money is the hardest "sell" of the many causes for which "donees" have their hands out through their computers.

Most of the fund raising pleas come with some compelling reason that might evoke an emotional reaction from prospective donors. Helping to "save" someone or something, or being partially responsible for creation of an exciting new business or product, are requests that might touch our hearts, or our sense of adventure.

By comparison, there is little emotional gratification helping someone you don't know who wants to acquire a business.

I've heard about crowd funding requests, for this purpose, that offer an incentive related to an interest in the company to be purchased. I don't think that has worked very well. Even people who know each other and want to acquire a business together, can have difficulty determining each participant's share of ownership. Imagine the challenge of convincing strangers to put their money into something they haven't seen or studied, from a person they don't know, with the reward of a financial interest, based on a calculation using figures that can't readily be verified.

And a business lawyer tells me that if an entrepreneur is raising money from strangers to buy a business in exchange for an interest in that business, the activity might be interpreted as a public sale of stock. And that requires the person seeking the money to do so in strict adherence to complex requirements found in Federal Securities Law.

An interesting variation on this approach is for the fund raiser to offer non-financial benefits to cash contributors. So, for example, a restaurant purchaser might ask for money from people in the community with the understanding that donors will be assigned the "best seats in the house" when they come for dinner. Or the buyer of a retail store might recognize donor customers with considerable discounts at the cash register.

I've heard this idea discussed but have not seen it happening in practice. If any of my colleagues in the industry are aware of a successful fund raising effort along these lines, please let readers know about it in the comments section below.

But so far, I think the response to the question about whether crowd funding by a small business purchaser is proving to be viable as a way to get cash to complete a deal is: not yet. But with new social networking technologies and more clever incentives ideas, we may see examples of crowd funding used successfully to raise business purchase funds in the future.

With regards to a liquor license a "crowd funding" technique may cause problems because an ABC investigator wants to know exactly where all the money came from and who gave it to person who is being investigated. An ABC investigator wants to verify that no money to the buy the business comes from illegal activity, etc. I've heard of business in communities participating in "loyalty cards" where they reward customers who frequent their business often. It's been my experience that crowd funding works best with a cool invention or an inventor trying to get something into a prototype mold.

With regards to a liquor license a "crowd funding" technique may cause problems because an ABC investigator wants to know exactly where all the money came from and who gave it to person who is being investigated. An ABC investigator wants to verify that no money to the buy the business comes from illegal activity, etc. I've heard of business in communities participating in "loyalty cards" where they reward customers who frequent their business often. It's been my experience that crowd funding works best with a cool invention or an inventor trying to get something into a prototype mold.

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