It is never too early to prepare your business for investment.
In fact, a business should always be in a state that is attractive to potential investors, according to accounting and business advisory firm Asia Pacific CEO David Henderson.
“If you run your business on that basis, it’s always going to run better,” he advises, saying the starting point should be to define exactly what you want from an investor.
“For example, are you after $500,000 or someone who will eventually buy you out? The answer to this will drive everything that you do subsequently.”
Being investor-ready is about putting the right structures and processes in place to present a complete package of attractive qualities, according to advisory company BDO private clients partner Dylan Byrne. At the same time, this approach addresses concerns that typically keep investors at bay.
“Most important is your business’s risk profile, including its ability to withstand the loss of clients or employees, among other things,” says Byrne.
He offers a few core qualities that investors look for when assessing a business, referred to by BDO as GREATS…
Growth opportunities: demonstrate future growth possibilities.
Resources: do you have the resources to achieve growth?
Endorsements: do you have satisfied customers?
Advantages: do you have something your competitors lack?
Team: do you have the right people to grow the business?
System: do you have internal processes and robust governance structures?
“Regardless of which stage a business is at, these attributes should be kept front of mind and play a role in all major decisions,” says Byrne.
Similarly, and from a professional investor’s point of view, venture capital firm Right Click Capital partner Benjamin Chong says professional investors would look at your business plan, the quality of your management team in terms of skills and experience, and the business’s growth potential.
“When professional investors put money into a business, they want to get a significant multiple of return on their investment,” he says. “We want to see that you are chasing a large market.
“If it’s a new business, we look for early signs of traction or success, such as your level of sales, customer experiences and whether customers return. Customer contracts reduce the risk we take. We also want to see a level of corporate governance commensurate with the size of the company.”
Think like an investor
Byrne advises trying to think like an investor when planning for growth and bringing changes into your business. “For example, what fundamental things are they looking for when allocating their investments? What type of management style or oversight do they want to protect their investment? What type of accounting systems and reporting will they want to monitor their investments?”
He says small companies should incorporate some of the discipline used by corporates. “You should implement sound financial reporting systems, have an informal advisory board or board of directors, and ensure you hold monthly meetings with managers and key staff members. This greater transparency and control can make investors more comfortable in making a decision.”
Henderson recommends that businesses be clean or easily cleanable. “For example, are you paying super for other family members? Are your salaries arm’s length? Are your tax affairs up to date? Are there other items in the business that muddy the waters? Investors will not be interested in a business where they have a potential exposure.”
Choosing an investor
So who are the right investors for your business?
Henderson says it all depends on your needs and your continuing role. “For example, if you have someone coming in, are they taking an active role or just investing money? Do they gel with the management? If not, it’s likely to lead to issues.”
Byrne says investor selection will largely revolve around your business’s goals, such as whether the aim is to grow locally, target international markets or diversify. The choice would also depend on where the business is in its life cycle. “For example, a private equity firm will be seeking to invest in a business with a view to helping maximise its value, then on-sell it within the medium term, while business angels will see their role as helping to commercialise the business model and build revenue streams.”
On attracting potential investors, he says such factors as relationships play a critical role. “It may well be that potential investors or connections to investors exist in current business networks… Often, investment will come from a bank, and the relationship with a bank manager is among the most important for growth.
“In the case of venture capital, it might be that an investor is familiar with the company and has been following its development from afar, perhaps through industry connections or even media coverage.”
Chong believes the best way to approach a potential investor is through a referral, or at an event. “Meeting up with folks in a casual setting gives you the opportunity to explain your idea, get some advice and assess whether you hit it off,” he says.
“Angel groups are also wonderful because they allow you to see a range of investors at one time. Because of this, it is likely you will meet investors with skills, experience, contacts and time to help you, as well as providing money.”
He says the biggest mistake when pitching to professional investors is to think that superlatives will win them over. “Don’t be overly complicated in your explanations. Explain your innovation or product simply. That will get the attention of a professional investor and allow them to rule you in or out very quickly. That saves everyone time.
“Also, work out very carefully and be quite clear on how the investors will get their money back from their investment.”
Henderson agrees. “Like all first impressions, you have only one chance. Always practise your pitch from the investor’s point of view,” he says.
“That also means you should find out as much as you can about the investor in advance.”
His tips for those hoping to attract investment into their businesses include:
- Be realistic. Work out what you are willing to give for what, and know the reasons why.
- Engage and interact with advisors and lawyers when it comes to the agreements. An agreement with everything in it upfront is far better than trying to argue or discuss points later.
- Do not spend all your focus and energy on obtaining the investment. Ensure you are running and controlling your business at the same time.
- Have a fall-back position. What is your plan if things do not come to fruition? Remember that deals often take longer than expected.
- If someone shows interest, do not stop talking to other people. Do not count on an investment being in place until you have the money in the bank.
- Even if you have a great relationship with your investor, ensure all the legal issues are ironed out before finalising the deal, including how you unwind the investment.
This article first appeared in the last issue of Inside FMCG. Subscribe here.