Dream Merchant 2309 Torrance Blvd. #104, Torrance, CA 90501 (310) 328-1925 email: Jkm316@aol.com

CONSIDER YOUR INVESTMENT

New Products Can be Risky Business. What Can You Do? Make Sure Your Initial Investment is as Low as Possible.

PART ONE

By James F. Riordan

I consider a product successful only when it ends up NETTING MORE money for the new product developer and investors than they would have made if they had left their money in a certificate of deposit (or similar investment) in the bank. Winning products are those that require very little capital to get to market, with a good chance of recapturing the investment quickly.

By "netting," I mean the amount of money in your hand after ALL the expenses of product development, manufacturing and marketing have been paid back in full, leaving a reasonable (or better) reward for efforts and risks undertaken.

Normally, such expenses include:

* Prototype development (labor and materials)

* Patents, trademarks, copyrights, licenses, incorporation fees

* Facility and storage rental, pilot plant costs

* Market research and regulatory research

* Testing and certifications

* Equipment and tooling

* Labor (direct and indirect), medical benefits, profit sharing plans, etc.

* Materials and packaging for production runs

* Expenses for setting up Reps and distribution channels, postage, telephone, etc.

* Advertising, promotion, "slotting allowances," sales literature, brochures, trade shows

* Displays or racks for point-of-purchase

* Interest paid to investors

* Insurance costs, liability, vehicle, workmen's comp, performance bonds

* Initial inventory and stock

* Freight and shipping costs

* Vehicle and fleet expenses

* Office supplies, invoices, labels, envelopes, business cards, etc.

* Accounting, bookkeeping, legal expenses

* Taxes

Since every new product is an "unknown" to some degree, the evaluator must estimate these costs in order to assess the potential profitability. Naturally, the investment size will vary greatly depending on whether a new company will be started to produce the product, whether the capacity of an existing facility will be utilized, or whether the new product developer will use contract manufacturers.

There are many creative ways to keep initial investment costs down, and the evaluator or new product developer should explore every angle. I have negotiated with suppliers to finance the entire first production run and tooling expenses in return for a sole-supplier agreement. I have negotiated a similar deal where I had several suppliers, but I gave them each long-term manufacturing contracts in return for fronting the tooling and first production runs.

In addition, I've had suppliers pay for all the tooling for a project in return for ten cents more per-part-ordered until the tooling cost was paid off WITH NO INTEREST. Suppliers have also made extra inventory for me, storing it at their facility and allowing me to pay for the additional inventory as I used it. That way I didn't have to come up with all of the cash at one time. Negotiations such as these are as valuable as getting cash in hand from an investor, and sometimes MORE valuable if you can cut a deal with NO interest.

By far the biggest pitfall is under-estimating the total capital requirements of the project. The wise evaluator checks ALL the figures presented by the new product developer to be sure that person is living in the "real world" instead of "fantasy land."

My advice is to add 20 percent to even the most conservative real world numbers to cover unexpected setbacks.

NEXT ISSUE: More on Investment Costs

The above article was taken from James F. Riordan's classic book, HOW TO EVALUATE THE POTENTIAL FOR SUCCESS OF A NEW PRODUCT OR TECHNOLOGY. Riordan's highly-acclaimed, 36-point system is a valuable tool for inventors, product evaluators or anyone interested in the invention process. Each section is followed by a comprehensive questionnaire that can be used to evaluate your product.

The highly-recommended book can be ordered through the Dream Merchant, 2309 Torrance Blvd., Suite 104, Torrance, CA 90501. The phone number is (310) 328-1925.