Backers and risk

I recently watched for the umpteenth time one of my favorite movies:  Fargo.  There is a classic story line where Jerry Lundegaard has a business deal which he wants his wealthy father-in-law, Wade, to finance.  After reviewing the deal, Wade decides that the deal looks pretty sweet and is ready to pony up the cash.

Jerry is thrilled until Wade asks Jerry about his finder’s fee.  Devastated, Jerry walks away while Wade invests and stands to make a fortune.  Of course, Jerry just wanted Wade to lend the money for Jerry to invest so that he could reap the profits.

I see this scenario all the time.  Somebody finds a “great moneymaking idea” but does not have the resources to invest.  They look for deep pockets to supply the cash for a small piece of the action and the person finding the deal would get the lion’s share.

It’s funny, watching the Fargo story line unfold you feel for Jerry and think that Wade is taking advantage of him, but when you describe it as I just did, it sounds different.  That’s because finding a deal has no risk, and that’s what this is all about, risk.

In Fargo, Jerry’s idea was for Wade to shoulder the risk and for Jerry to enjoy the benefits.  Does that seem fair? Of course not.  That’s the way prudent investors and savvy business people work.  If somebody finds a great investment for you, they should get paid for it, and a reasonable finder’s fee is appropriate.  The fee will be smaller if it gets paid regardless of the success of the investment, larger if it is based upon a percentage of the return on investment.   That gives the finder additional benefit for taking higher risk, the risk being not getting paid at all if the deal tanks.

It may seem sad that Jerry can’t reap the big profits from the deal, but that’s the reality.  If you can’t afford it, you can’t buy it.  That is just as true for investment opportunities as it is for an expensive car or palatial house.  “It takes money to make money” the old saying goes.  If you don’t have the money, you can’t invest it.

You’ll notice that when people have a great deal that they want someone else to back, they don’t consider borrowing the money against their house or taking out a loan.  That would give them all the benefit, as well as the risk.  But they are not willing to take on the risk.

Think about that when you are looking for backers or investors for a business.  The one supplying the cash will be the one to reap the bulk of the benefits.