The agony and ecstasy of limited partnerships

Tom Boyd wouldn't think of himself as a financier. A 50-year-old tooling engineer who spent 17 years working for Chrysler Corp. in Indiana, Boyd's the kind of guy who thought about money only when he really had to. As for finance, well, he probably never even uttered the word until a few years ago. Yet when a one-shot money-making idea began to mushroom into a fledgling business with a big appetite for cash, Boyd did what any self-respecting craftsman would do. He rolled up his sleeves and raised the money himself.

His was a real do-it-yourself job. It didn't involve bankers. "They practically run from you when you start talking bucks," Boyd says with a laugh. It didn't involve venture capitalists, rich uncles, or the stock market. What Boyd designed was a limited partnership. The first one raised $13,000. By the time he was done, some 32 partnerships later, Boyd and his wife, Patti, had raised $1.3 million.

That's enough to make anyone a big fan of limited partnerships. And Boyd certainly was one -- for a while. Then he tried to borrow from a bank, and the limited partnerships' shortcomings began to reveal themselves. Now, he sometimes wishes he had never heard of them. On the other hand, Boyd admits, he might not even have a business if he hadn't used limited partnerships.

The Boyds' story will be particularly heartwarming to anyone who has ever been confounded by a financier's inability to see how utterly fantastic their product is. Because, in fact, it was the surprising appeal of Boyd's product, with perhaps just a smidgen of Boyd's aw-shucks charm, that allowed him to scare up so much cash. Not that his product is glitzy. Boyd doesn't make Hollywood movies or own a professional sports team -- two activities that have made limited partnerships sell like hotcakes in the past.

No, Boyd makes candy boxes.

How does a clear plastic box filled with hard candy win the hearts and pocketbooks of investors? The answer to that goes back a few years to when the Boyds moved to Oxnard, Calif., in search of a simpler way of life. "We got our kids raised, moved to a house near the beach," Boyd remembers. "And then I got an idea for a candy box."

A friend had mentioned that Texas soon would be celebrating the 150th anniversary of the Battle of the Alamo. Boyd began to envision a candy box in the shape of Texas, decorated with a map of the Lone Star State's landmarks. In short order, Boyd devised a prototype, found a sales representative, and began selling his boxes in airport gift shops.

The Texas box turned into a nice little money-maker. It didn't take long for Boyd to figure out that there were 49 other states with airport gift shops and tourist spots that could be memorialized with one of his candy boxes. California, his adopted state, home of Disneyland and destination of countless tourists, seemed a sure bet. Money was a worry, though. "It's expensive to make these molds," Boyd explains. "If you have a flop, then you've got the cost of a pretty nice automobile sitting there on the shop floor."

That's when the candy box itself came to the rescue. A welder who taught at a local community college, where Boyd polished the Texas mold, was so attracted to the venture that he volunteered to invest in it.

Boyd, of course, was happy to oblige. He had seen limited partnerships used in real estate, and he asked a lawyer friend to draft a straightforward agreement: the welder put up $13,000 and in exchange was entitled to 45% of the net earnings of the California box for as long as the box was sold. The Boyds, as the general -- and only other -- partners, would receive the other 55%.

Boyd continued to use this formula, forming seven or eight more partnerships by the fall of 1987. His casual little business might have continued in this pleasant way if Boyd hadn't been such a dreamer -- literally. One of his sales representatives was going to pay a visit to Walt Disney World to try to get it to sell the Florida candy box. As soon as Boyd heard that, "I started having the same dream about Mickey Mouse's head on a candy box every night," he says.

The problem: he didn't want to spend $1,500 on a prototype to show the folks at Disney. Finally, two days before the appointment he sketched Mickey's head on a piece of paper and handed it to the sales rep. Disney loved it. "Then things got crazy," Boyd recalls, "because they also wanted Daisy Duck, Bambi, Cinderella, Lady and the Tramp, and Roger Rabbit."

That, oddly enough, was when Boyd's real problems began. Oh, it wasn't any trouble to raise money. "It really turned investors on that they owned 45% of Snow White or Roger Rabbit," Boyd explains. There were spells in early 1988 when Tom and Patti were forming a new partnership nearly every week.

So the problem wasn't getting the money -- it was spending it. Boyd was spending on a scale that he'd never imagined. "When you first start, you think it's just a simple mold. Then you need four-color art on it. All of a sudden you've got printing costs and a $15,000 bill sitting there."

Then there was the cost of scaling up production so quickly. States Plastics Inc., as Boyd had named his business, started life in a 400-square-foot garage, moved to a 1,200-square-foot corner of a factory, then to a 3,000-square-foot space, and then, filled with Disney-inspired confidence, leaped into a 20,000-square-foot factory of its own.

Red ink quickly followed. Boyd's debts to suppliers began to mount. So Boyd took his problem to some banks. Sure, he had a cash shortfall. But he also knew that he had two aces that would surely be bankable: a track record of successful sales and a license to sell his Disney-character boxes both inside and outside of the two Disney theme parks.

Boyd was right about those two features but dead wrong about being bankable. Bank after bank turned his loan request down. Not because they didn't like his operation and not because they didn't have faith in the power of Mickey and his buddies to sell candy boxes. They didn't like Boyd's limited partnerships.

Morris E. Van Asperen, a senior vice-president at the National Bank of California, took the time to sit Boyd down and explain why his perfect money-raising technique was so unpalatable to bankers. Boyd had been conducting his business as a proprietorship. "The proprietorship had the right to use the licenses and sell the product and pay the money to the partnerships," Van Asperen says. "But the real capital for the business was in the partnerships. The business itself didn't really have a lot of capital."

From a banker's point of view, the proprietorship didn't have much equity to loan against. Worse, though, was that the partnerships owned the business's principal assets -- the molds for minting Mickey Mouse and other cartoon-character candy boxes. Boyd couldn't collateralize a loan by pledging the molds, because they belonged to the partnerships.

Boyd is now scrambling to find a way to roll all the investors into one corporation and eliminate the partnerships. This might not have been necessary, he suggests, if he'd only constructed his original partnerships a little differently. For one thing, he says, "I should have raised probably a third more money." It was the tooling costs that had seemed insurmountable at the beginning. But clearly they turned out to be only part of what the Boyds would need to take Mickey Mouse and crew to market.

Not only would Boyd have raised more money per partnership, he says he would have tried to construct a forecast of all these spiraling costs. "I can't stress it more. If we had something to do over again, I'd spend the money to put a financial model together. People put a business plan together, but the financials are not as simple as you might think."

Still, Boyd recognizes that the limited partnerships, as much of a headache as they've turned out to be, were what made his business grow to $1.5 million in sales this year. Indeed, as money raisers, they were the perfect technique to use with Boyd's quirky products, which are expanding beyond states and Disney characters. Investors liked betting on the success of a specific product rather than the whole company. As for Boyd, he tries not to play favorites, but he can't help sounding a little paternal. "I'm looking across the room at little Tweety bird. I know we're going to sell thousands of them because they're so darn cute."


What to watch for in do-it-yourself financing

It wasn't that Tom Boyd designed his limited partnerships wrong, many would argue -- it was that he used them at all. They can be expensive, unwieldy to administer, and can hinder further financing.

The alternatives, though, aren't always palatable. Boyd could have invited his investors to become co-owners in an S corporation, with similar tax and income benefits. But that would have diluted his equity. Or he could have borrowed from investors. But Boyd believes they were more interested in "owning" a cartoon character than in betting on his company.

The two great advantages of a limited partnership: you can keep control of the company, and you can raise money without much outside help. Which means you're more likely to make a mistake. A few pointers:

* Securities laws. If you are a start-up and you raise less than $500,000, you don't have to file any federal disclosure forms. You do have to comply with the state laws that govern private limited partnerships. In any case, you should disclose the critical features and risks of the partnership to your investors in writing so that no one can accuse you of fraud later.

* Assets. Don't tie up all your business's assets in the limited partnership; you may need them to borrow against in the future. That's why many experts believe limited partnerships work best with separate projects or product lines.

* Amount. Raise enough money to get into a self-financing mode. You've got to cover not just the basics, but the overhead and then some.

* Help. Get an accountant and lawyer experienced in limited partnerships to help make financial projections and draw up the partnership agreements. Have a banker review how bankable your company will be after the partnership is in effect.