If your exit strategy includes plans for selling your business, you may want to reach this goal sooner rather than later. This often requires funding from outside sources to quickly maximize the potential for your business.
One way of accessing additional funds is to attract investors. These are people who invest money in other people’s ideas. There are very specific formats which are considered acceptable to most investors. Approaching investors properly means being prepared. You cannot just arrange a meeting, show up with some promotional materials for your business in hand and expect to come away with enough money for your purposes. Investors look for opportunities which have the best potential for success. They primarily look for the following criteria:
• A great management team
• A great business concept
• A dynamic growing industry
Only having one or two of these elements will seriously handicap you when seeking financial backing. Of these essentials, the most important is being in the right industry. If your industry is going places and you have the other two elements in place, you will have people falling over themselves to be an investor. Even if you have a top notch management team and a solid business idea, if you are in an undesirable industry, you may have to struggle to find backers.
Before they put money on the table, the investment world will ask some specific questions. They will want to know:
• Your objective for your business?
• Is it obvious what you have to do to achieve your objective?
• Where is the real value in the business?
In answer to the value question, you will need to show the areas of your business which indicate what the investor is “buying.” You will need to identify beforehand which elements of your business hold the most value. Is the value for your business:
• In the process?
• In the intellectual capital?
• In the customer base?
Once you determine where you value is located, you need to address some additional questions:
• Where is the leverage to capture that value?
• What can you do to multiply that value quickly? (For instance, if the leverage is in the customer side, can you market more effectively to amplify your customer base and use it as leverage for investment?)
• How was the leverage built?
• How are you going to use leverage and is it something that you know how to do?
• What does the business ultimately own?
• What does the business really earn?
• Does the business have the mechanisms to create value or not?
• Is everything done in-house or is some work out-sourced.
• Are the processes and ideas behind the business able to be franchised? (If not franchised, is the company ultimately scalable?)
It is not necessarily just bricks and mortar and a sound business idea that accounts for the value of a company. Different prospective buyers have various reasons for assessing a certain value to a business. For instance, a great strategy for a small business is to target a market dominated by a big company, and deliver something much better than the big company. If they can capture a significant percentage of the market and annoy the big company enough, the larger company will want to buy them out. For example, this scenario happens a lot in the cosmetic industry. A new product from a small company grabs a slice of the market and the big company has no option but to purchase the smaller company. In such cases, an investor’s assessment of the smaller company’s value may be much higher than it would be under different circumstances.
One final question from the investment-banking world is:
• Can the value that is found in your company easily be converted to cash?
Investors want to know just how they are going to profit from their investment, and so you as the business owner need to be able to figure out how to get to the wallet of your customer. This again requires your unique in-depth knowledge of your business and of your customers’ needs and how to best meet them.
About the Author
“Murray Priestley has 25 years of commercial and asset management experience having served in board, CEO and senior executive positions with a number of global public and private companies.”