You’ve got past the “Should I do it?” stage. Your business is an ideal candidate to secure financing. But before you talk to an investor there are a number of things to check you have ready.
Management equity
Have you implemented a management equity policy? In other words, have you some evidence of sharing ownership, by allowing key managers to take (as a minimum) some profit share, or some company shares that are ideally tied to performance.
Keep managers engaged by offering them a profit split or phantom shares in your company. Investors like to think that managers are working for more than a salary, as it increases the chance that they will stay.
Ensure that the company structure, and the way the shares are divided are not too complicated. If you do have a complicated structure then make sure it’s clearly explained. Also, if you do decide to offer management some shares, make sure you get some legal advice first.
Document and reduce existing loans
A small amount of existing debt is fine, especially if it’s just part of normal working capital. Be careful though. You don’t want an investor to think you’re just after cash to pay off your debts.
If you’ve accepted loans from family and friends who expect to be paid out, investors may want them to take a shareholding in the new company based on their investment, like everyone else.
Capital invested is usually spent on growing your business, not paying you or anyone else. Investors may want to come in on the same terms as the family and friends did. You are therefore better to pay off any outstanding loans. Even if this means taking a lower salary, or putting money back into your company to make the balance sheet look healthier before you approach investors.
Prepare realistic financials
People investing in your business will be getting the best financial advice they can. Therefore your cash flows, or financial projections must be detailed and realistic. And you must be able to show how you achieved them, using historical data merged with common sense projections.
Financials must be as open as possible. Aim to project at least three to five years out when you present the finances. This may be a huge time frame for most businesses, but it demonstrates you are thinking ahead, which investors like to see.
Remember that most investors will want to exit after five years and will want to determine what their investment might be worth (their return on investment). This is vital, as most investors look at industry-specific businesses that can return them at least a certain percentage return per annum.
The shorter the payback period, the better chance you have. Therefore money should be spent on developing the product or the market, not salaries and conferences. You may even have to take a pay cut to demonstrate your commitment. If you need to have short-term incentives for staff, then put them on a profit incentive so the investor can see that if salaries go up, the increases will be funded out of cashflow and not the investment capital.
Have an excellent team in place
Investors want to see a tight team that is committed and enjoys what they do. If you don’t have the right person for a key role, then explain you will get them once you have the money.
The second rule is to understand that managing a business with a $2 million turnover is different from managing a business with a $50 million turnover. This is an important issue. You need to add detail to your plans about the need for an evolving management. This might include you passing the reins over to a more experienced general manager or CEO.
“What!” you may be saying to yourself, “Give up control?". If you have this attitude then raising capital is probably not for you. At all stages the management of the business should be what is best for the business. Once you accept growth then the business really starts to assume a life of its own. It’s rare to find a person who can start up a business on their own, and then transfer their skills to a larger company.
Larger companies have lots of meetings. This will drive you crazy if you’re a go-getter and not a ‘dot the i’s and cross the t’s’ sort of person.
In your proposal, cover the restructuring of management to cope with growth and show how you will deal with this challenge and with your own evolving role in the company. Depending on the controlling shareholders, you may probably still be on the board, and could be the chairperson if this is your wish. This will be dictated by the shareholders’ agreement.
Don’t forget about your ‘board’ or set of people you receive advice from. They do not at first have to be paid board members. Choose people relevant to your industry or opportunity with a range of experience.
