Of all the challenges that an entrepreneur faces in attempting to bring their dream to life, raising the capital necessary to make it happen can be the most daunting and frustrating.
Many entrepreneurs, especially trainers and instructors seeking to open and operate their first studio, fail to realize the challenges inherent in raising the funds to bring their vision to life.
How Much Capital Will Your Vision Need?
Before beginning the process of acquiring funding for your vision, you need to prepare a budget that details the financial requirements for fulfilling your vision. The budget must address the capital required to start the business as well as the capital needed to support operations while you are building a revenue stream.
The start-up budget should address the hard and soft costs associated with opening your studio.
- Hard costs. The hard costs for opening a studio include the costs to retain an architect (most commercial space requires an architect to be involved), construction costs (also referenced as tenant finish-out costs) and equipment costs (fitness equipment, sound systems, computers, furniture, etc.). Hard costs can vary significantly depending upon the size of the studio, the level of finish desired, the amount of equipment needed, and finally, potential landlord contributions to the finish-out of the leased space.
- Soft costs. The soft costs relate to the operating and development costs necessary to open the studio. These costs can include, but are not limited to, items such as: the cost to develop your brand materials, the cost to develop your web site, fees associated with marketing your studio during pre-opening, costs for pre-opening staff or contractors, costs for basic operating materials, the cost to activate your utility, phone and internet service, and so forth.
Most entrepreneurs believe that they will immediately start generating the revenues necessary to cover their expenses, but reality says it will take months to get to the point where you are generating sufficient revenues to cover your operating expenses, let alone generate a profit.
Finding the Money
Once you have a reliable estimate of your financial requirements it’s time to raise the money. In a recent AFS research report, it was found that most current studio/gym owners used their own money.
So, what route is best for you? Where do you find the money to capitalize your vision? Here are several choices to get the funding you need.
- Personal equity. Personal equity is the cash you personally contribute to the venture. In most instances, entrepreneurs have minimal equity to put into a deal. Typically, entrepreneurs - in this case future studio owners - may have a small stash of cash that they have saved over the years that can be applied to the venture. It is important for entrepreneurs to contribute equity to their venture, even if it’s not very much. Investors always want to know you have “skin in the game,” meaning you have capital at risk if the venture does not succeed.
- Friends and family. The term friends and family refers to family members, friends, business associates, existing clients and acquaintances. Friends and family are those most likely to place trust in your vision and have an intimate knowledge of your expertise. Depending on the amount of capital being sought (usually smaller capital requirements), friends and family can often provide the balance of funding an entrepreneur requires. Raising capital from family and friends brings with it certain risks, particularly if the venture does not succeed. When raising capital from your family and friends it is best to have an attorney first draw up a term sheet and later an operating agreement that spells out what the investor will get in return for their contribution of capital.
- Angel Investors. The term angel investor (also called angel) defines investors who are not typically part of your inner circle and are successful business people who provide financial backing (start-up or growth capital) for entrepreneurs and small start-ups.
- Venture Capital. Venture capital represents money provided by institutional investors who seek to invest in start-ups with long term growth potential and have the ability to generate high returns. Venture capital firms refer to this as ‘seed capital.’ Venture capital firms are not individuals or a network of angel investors; instead they are professionally managed firms that oversee investments for large investors (individuals, pension funds, businesses, etc.).
- Bank Debt. Bank debt, otherwise known as a bank loan is probably the most prevalent form of funding for entrepreneurs other than personal equity and possibly investments from friends and family. The most popular form of lending pursued by entrepreneurs, and definitely the approach of choice for studio operators, is a small business loan from a local bank that is guaranteed by the U.S. Small Business Administration (SBA). The terms of an SBA loan are typically negotiated between the entrepreneur and the lender, and therefore the specific terms of a loan will depend on negotiations between the lender and the borrower.
While these are just some of the ways you can raise money for your dream, other opportunities exist such as crowdfunding. However, it’s important to note, no matter what road you travel, make sure you have an attorney review all legal documentation prior to taking the important next step.
Without sufficient funding your studio will be doomed to fail. Not only is it important to get funding, but it is essential to raise sufficient capital to sustain your studio through its first year of operations.
You don’t want to go back to the well more than once if you can help it, therefore it’s essential you understand the financial demands that your studio will require. Just remember, to build a credible five-year financial cash flow, have an exit strategy, save up enough cash to invest something in the business and be persistent.
Raising capital can take time and is often dependent on the amount you are seeking to raise. When first you don’t succeed, try again.