Small to mid-sized businesses are missing golden opportunities to attract capital because they are ignoring the six key signs of what investors are looking for.
Uppermost in the mind of the potential investor is; why is the business seeking capital? Thereafter the investor’s concerns will be; is the business seeking money on the table or are they looking for skills? Is there a seat on the board? What capacity of input is there? What is the exit strategy?
For example we have several clients at the moment all seeking investors but each has a different rational. One is a clean skin start-up with a great idea and strong metrics; another wants to get out of the day-to-day business and put in a CEO and a third has decided it’s time to take some cash out of the business for lifestyle purposes.
On the other side of the table, we have had two investors walk away from deals as they saw too much potential conflict with the owners. During the negotiations one owner demonstrated a very difficult personality, too much history in the business and had a strong sense of identity woven into the business. The second was a maverick, used to making quick decisions and was not going to be told what to do.
More positively, a successful transaction was completed recently where the CEO, realising she wasn’t the best person to be the CEO, stepped into the operational side. This was clear from the outset and she was very open during the negotiations.
Also to consider is the significant money coming from Asia, where investors are looking to buy themselves a job. Often internationals don’t fit the standard criteria for employment and if there is an opportunity to incorporate relatives into the business the proposition becomes very attractive.
THE SIX CS TO ATTRACT INVESTORS:
Clear strategy: Businesses that specify exactly what the investment dollars will be used for always have a head start. The more concrete the information the better. For example, funds will be used to employ a business development manager at $200,000 who will generate $1 million in sales. How they will source this person, how long and it will take to recruit, the associated recruitment costs and evidence that the $200,000 will generate $1 million. Active rather than passive frameworks will sway an investor every time.
Cash flow metrics: Performance metrics are more important than a business plan. A third-party prepared plan won’t cut it unless the accountant is firmly entrenched in the business. The metrics demonstrate the owner’s level of understanding and commitment. Historical data is valid in showing the attitude of the business owner. Investors want to know that the owner lives and breathes the critical numbers that drive the business.
Culture: Easily the most important and often the most overlooked. The business has to be investor-ready and aware that things will change when there is someone sitting in providing input, comments and criticisms. Holidays on a whim, underperforming friends, an early mark on Fridays and a few extra days of at school holiday time may be over.
Clean accounts: Investors don’t want to see a company interwoven with the owner’s lifestyle. Potential tax issues, unpaid GST or superannuation for example, all pose threats that could wipe out the benefit of any investment. There is no point in investing $ 1 million if those dollars are going to pay unmet or unknown obligations. Private companies have a history of absorbing private collateral into the company and the family car, holidays, lifestyle and travel expenses are the first to come under scrutiny.
Compatibility: Start-ups are often more investor-compatible in terms of the six Cs. Start-ups have clean accounts and there is usually no great sense of embedded ownership. Investors like enthusiasm and eagerness. Bad habits haven’t developed yet and they will embrace a new owner with capital and skills. An investor will weigh up the pros and cons of working with an eager start-up over an existing business with fixed ideas of what their business is worth.
Control: Evidence of checks and balances with independent oversight of the business will give the investor comfort that the owner doesn’t have their fingers in too many pies. Reporting and regulatory compliance should be up-to-date and controlled by someone other than the owner.
As a mid-tier accountancy firm, we are constantly reviewing opportunities for investors with tens of millions of capital available and while this sounds attractive, always keep in mind, an investor can take their money off the table at any moment. The deal is never done until the cheque is cleared.