Raymond Ackerman shares his knowledge on raising capital

have made the point already, but it is worth restating here: do not go to the expense of opening your own business before you have spent a number of years learning at someone else’s.

Most successful entrepreneurs are people who launch businesses in the fields in which they were previously employed.

Without question, the 12 years I spent working for the Greatermans Group gave me not only the tools I needed to build Pick ‘n Pay, but also the clout to persuade others to back me.

Again, there are exceptions to every rule, and this is not meant to deflate the young entrepreneur with a brilliant plan and a headstrong attitude, but personal experience in a related field will stand you in good stead, not least when it comes to persuading someone to give you their money.

It is pretty self-evident that someone with experience in a relevant field, armed with a clear objective – one that embraces the principle of service, backed with passionate interest and sound research – stands a very high chance of success. Why, then, do so many people stay on the treadmill, caged in jobs they hate, complaining about how little money they make?

What stops them from getting off and carving their own path?

I have heard a lot of people say they cannot afford to take the chance, but is it really about a lack of money, or just fear of failure?

Not that fear of failure is in itself a bad thing. I have already admitted that my fear of failure verges on the pathological. I worry about everything.

But instead of allowing fear to paralyse you, or to cloud your thinking, befriend it.

Fear simply means you have the good sense to identify the potential pitfalls that lie ahead. By working with it – using the Problem–Cause–Solution and “7 Tried & True” analysis – you will be better prepared for any eventuality. But analysing consequences and calculating risk will only get you so far.

At some stage, you have to take the leap and follow your gut instinct. Just do it, even if it seems impossible. It will produce a kind of adrenaline rush that cannot be quantified. You may even find it addictive.

Note that fear is not the same as negative thinking, which you must guard against vigilantly. Do not heed doomsayers, such as the friend who cautioned me against starting my own business. “Now is not the time,” he said.

According to him, the “best times” were over, that “there was so much more opportunity during your father’s era”.

Unlike fear, you can do nothing constructive with negative attitudes, so brush them off.

Of course, finding the right business and premises – one that sparks that intangible ‘this is it’ excitement – helps to ward off negative thoughts.

The minute I walked into the four little stores that the owner Jack Goldin had called Pick ‘n Pay, I felt this terrific surge of confidence. The only problem was the asking price – at R620 000, the stores were way beyond my means.

Jack Goldin had made it very clear that his asking price was not negotiable, so I accepted it almost immediately (along with a kick on the shins from my brother-in-law, who knew the price was way beyond what I could afford), and we shook hands.

I had three days to raise the money, and absolutely no idea how I was going to do it.

I have been told that it was easy for me because I had a proven track record. It is true that I had spent the previous decade launching Checkers stores for the Greatermans Group, but not all of them had been a success. I had enjoyed the cushioning of a retail giant that had interests beyond food.

More importantly, I had just been fired – and rather publicly so. Speculation was rife in all the business newspapers as to the reasons, which even I did not know or understand. So my reputation was, at the time, somewhat tarnished. But I believed passionately in what I wanted to do.

Having drawn up a balance sheet with every asset I could muster, I needed more money than any bank would be prepared to loan me. Then, as now, my first instinct was to reduce to an absolute minimum any reliance on a bank.

A business loaded with debt, particularly to banks, is very, very vulnerable. Bankers can let you down. Interest alone can cripple you.

Even if you have an excellent business plan and passionate self-belief, today’s centralised process of approval means you have little personal contact with the person who will decide your fate. There is a good chance that he or she will say “no” – certainly not the kind of demoralising assistance you should be courting at this early stage.

A “capital plan” is needed.

Today, there are a number of funding options available to the entrepreneur. There are organisations devoted to finding and assisting fledgling enterprises with equity funding, either by becoming an investor or finding one to buy into your company. This is usually for a limited period, after which you have to purchase their interest in your company at the market rate.

All banks are also now obliged by the Financial Sector Charter to aid and invest a percentage of their income in small enterprises.

So, despite claims about an economic downturn and the like, there is always cash available to those with a simple, thought-through business plan, relevant experience and projected figures that are market related and sustainable.

These private-sector sources are discussed in the Appendix to this book [A Sprat to Catch a Mackerel], as are the kinds of government grants, subsidies and other incentives that currently exist in an attempt to kindle entrepreneurial growth.

In 1967, my options were comparatively limited. I could have looked for a partner. This is a logical solution to limited funds, assuming you find someone who perfectly complements your skills, and is able to share the risks and capital outlay.

Banks looking ‘empirically’ at a loan request will also favour partnerships between complementary persons ‘of good repute’. However, I personally think taking on a partner is potentially even more dangerous than taking on a huge loan.

You have to be very careful about the kind of person with whom you commit to co-own a business, as this is a legally binding relationship, with all the messy consequences of a divorce should it not work out. If you do fall out, the legal claims can absolutely ruin a business.

That is not to say having a partner is definitely a bad idea – there are myriad examples of successful partnerships.

If you trust the person implicitly, go ahead. Just be aware of the consequences should things go wrong, and have a tight contract to cover both of your interests.

The other option was to look for investors or shareholders, rather than a partner or partners.

For me, there was no contest. Investors are (ideally!) people who provide you with capital and expect you to grow their money, but do not tell you how to do it (what is also referred to as a “silent partner”).

I knew exactly what I had to do; all I needed was the money to make a start, so this was the solution for me. Most people think they do not know any investors, but you would be surprised what you can uncover if you apply yourself.

Aside from the private-sector opportunities referred to in the Appendix, please do consider presenting your business plan to a selection of family and friends. You have nothing to lose, and the best thing about these kinds of investors is that, given the element of trust that already exists, you can work to create structured loans that are not too onerous to pay back, thereby freeing you to really make all your money grow.

I could not have started Pick ‘n Pay without the assistance of 50 individual investors whom my brother-in-law, my accountant, a good friend and I managed to gather together in the three days I had to raise Goldin’s money. Their start-up investment capital helped persuade the bank to provide the rest.

The structure of the loan and investment were also integral to the long-term success of Pick ‘n Pay, which shows the importance of hiring the services of an astute lawyer and accountant at an early stage.

In my case, the proposal was structured so that half the investment was to be an interest-free loan for a fixed period of two years, meaning that each investor would be paid back 50% of the initial investment, with no additional money, after two years (remarkably generous terms, and to this day I thank my original investors for their confidence and vision).

The remaining 50% was purely a capital investment, but we persuaded the investors to agree on a two-year ‘window’ in which I could build the business by ploughing profits back into the stores rather than paying out dividends.

This meant that I gave away a very big portion of the business up front in exchange for the capital to purchase it, but retained – very importantly – the controlling interest, and without being crippled by interest or dividend repayments.

What the investors gained were shares that rendered little in the very short term (two years is a blip!), but in the long term became very, very valuable. They gave me the space to build the business into a powerhouse in a relatively short space of time, and to rebuff a sustained and vicious price war with the Greatermans Group.

Why did they trust me with these incredibly favourable loan conditions? It is true that a few of the investors were friends or old school acquaintances, but most of them were relative strangers, connected via various friends of friends.

We simply cast our net as wide as possible, calling on everyone to find anyone who was interested in backing my new business proposition.

None of them was a fool, nor were they necessarily of charitable disposition. They were not doing me a favour by giving me their money. They invested in my proposal because they believed it would deliver a profit.

I am not sure if any of them foresaw quite how rich it would make them, but the risk was calculated.

The point is that I was convinced, and my conviction was contagious – the outcome could only ever equal profit.

Essentially, regardless of how you raise the money – partner, banker, investor, equity manager, friend, family member – what you will have to do, is impress them. Once you have won the commitment of a few, confidence tends to snowball, as nothing impresses one person more than evidence of cash investment from others.

Everyone is swayed by other people’s opinions, and whether it is a banker or “angel investor” (as an affluent investor who provides capital for a business start-up is sometimes called), the principle is the same: If someone believes in you, others are likely to follow suit.

But first, you have to believe in you. This is the fuel that will fire your courage.

Raymond Ackerman

An extract from his new book, “A Sprat to Catch a Mackerel” (Penguin Books)