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financial snapshot

Ronny Elfassy and his sister Josie Elfassy-Isakow started their business after creating a personalized book for their far-off nephews.J.P. MOCZULSKI/The Globe and Mail

When their two young nephews moved overseas, siblings Josie Elfassy-Isakow and Ronny Elfassy wanted to make sure the boys would remember them.

The pair decided to make a personalized book to ship to the boys, one that would help them recognize not only names but also the faces of their far-off family members when they flipped through its pages at bedtime. So the brother and sister printed their pictures on magnets designed to be used as characters in a story they co-wrote; their prototype book featured magnetized pages with designated spaces.

"They loved it," Josie said of her nephews. "They read it every night."

Josie and Ronny had a hunch the book might get traction among other families spread across vast geographies. And the market for personalized children's books was starting to boom; their photo-magnet concept, which allowed buyers to personalize their magnets through a website, was novel. Formerly business partners in a photo-booth venture that produced magnets, the pair decided to go into business together once more.

They launched their Toronto-based venture, MagneTree Books, in the spring of 2015 with the help of a Kickstarter campaign for presales of their inaugural book.

Neither Josie, who was at the end of a maternity leave, nor Ronny, who worked for a humanitarian aid organization, had much savings to fund their startup or the first run of books, which together rang in at more than $65,000. A bank loan wasn't an option; neither entrepreneur was in a position to cover the debt if something went awry.

Their first year was rough: The Kickstarter campaign demanded more attention than either had planned, and creating a website and finding suppliers ate up time and cash.

The biggest speed bump came when their first shipment of books arrived: all 1,000 were defective (their spines split when opened). The supplier agreed to ship a new round.

Meanwhile, the pair began attending trade shows. While both ended up quitting their jobs to focus on MagneTree full time, both have since had to take new jobs to make ends meet, including driving for Uber.

Online sales have been slow – just 15 per cent of their books are sold on the web. But corporate gifting and wholesaling has proven fertile. Still, the company has yet to break even. Profit on a run of books rings up at about $7,000.

They are determined to build their business, but they are concerned about its viability and taking the right next steps. The partners have, for now, narrowed their focus to wholesale and retail sales (online advertising did not translate into sales gains).

Having had promising meetings with a large national bookseller, the pair is prepping to order a new run of books and launch a new story that will expand their offering. Their goal is to have a broad lineup of personalized, magnetized readers that will help build their company name.

But they have a big problem: no cash to fund the second book's production and marketing. Neither sibling is able to personally lend the company money, and they have begun crowdfunding once more.

We asked Andrew Zakharia, a chartered accountant and founder of Toronto-based AZ Accounting Firm, about MagneTree's path forward.

Expert advice

Mr. Zakharia notes that the amount of money the siblings need to fund their second book is relatively small at between $7,000 and $10,000. Still, their inability to make a personal loan or secure a bank loan will make them unattractive to traditional lenders. "Banks are going to be very conservative," Mr. Zakharia said.

One option the pair might consider is Lending Loop, a peer-to-peer lending marketplace that might be their fastest route to raising cash. "Because it's such a small amount, I think it would be pretty easy to raise," he said.

Even better, he said, would be to take on an investor. "They need someone to help them who has business knowledge, capital and can talk strategy with them, maybe make some introductions and help them move things along much quicker than them doing it themselves," Mr. Zakharia said.

Most small businesses he deals with are posting profits by their third year. "The same timeline applies to almost every business I work with. Within five years they are well off with well over $1-million in sales," he said. Three years in, Josie and Ronny "should be further ahead than they are."

Partnering with an investor would mean giving up ownership shares of the company. But "the investor is going to add advice, strategy and contacts. Sure, the investor is going to want something."

Say an investor asks for 20 per cent of the company. "It's better to own 80 per cent of a million-dollar pie than it is to own 100 per cent of the small pie they're working with right now."

To get the bigger pie, though, MagneTree has to pick up the pace, Mr. Zakharia said. Finding the right investor – one who will be content with smallish profits for now – would help solve their slow growth and fill gaps in the brother and sister's professional expertise.

Doing it could safeguard the future of their company, which is built on a product with lots of potential but is arriving in the market much too slowly. It is in danger of being cannibalized by a better-positioned competitor. "Someone else is going to come along and do the same thing, or something similar, and they'll move much quicker," Mr. Zakharia said. "Then they'll really have no opportunity."

In the meantime, MagneTree should incorporate, Mr. Zakharia said. The fee is relatively small ($200 in Ontario), and doing so will help the company start to build a public track record that will be not only useful but will also be necessary to secure future loans and credit.

Each founding partner, Mr. Zakharia said, should also think about putting aside six months' worth of personal savings to live on. In the event the duo does get the big order they're dreaming of from a large retailer, one or both partners may need to devote their full-time attention to filling it.

To succeed, Mr. Zakharia said, MagneTree will need to develop a multi-year growth plan.

"Every big business you see today was once at the point [MagneTree] is at currently," he said. "They've sold their first book, so it's not like they're starting from scratch. But they need to strategically plan what they want to do."

Cash shortage

The duo behind MagneTree need money to move their business forward and help them prepare for their next big order.

Cash -- $3,000
Equipment -- $2,000
Supplies -- $300
Inventory -- $23,308
Total assets -- $28,608

Loan from Futurpreneur Canada -- $12,165

Online book sales -- $342
Wholesale book sales -- $1,913
Total revenue -- $2,255

Parts and materials -- $322
Office supplies/postage/freight -- $330
Drawings -- $377
Computer/technology -- $58
Bank service charges -- $49
Dues, subscriptions, professional fees -- $133
Meals, entertainment, travel -- $297
Advertising and promotion -- $141
Miscellaneous -- $131
Total expenses -- $1,838