Preparing your business for investors

Business owners often view investors as an alternative to bank finance. In most cases entrepreneurs would seek to raise external equity because they are running out of cash and were turned down by a bank. The only message that investors would receive is that the entrepreneur lost control of their business regardless of how you dress the situation up. If you were an investor, would you want to put your hard-earned cash and invest significant amount of time in such a venture?

So, when is the right time to start raising external equity? And what can one do to ensure that the business is ready to attract and secure investors?

When considering raising capital, timing is everything. Understanding the business's needs and early planning is key. The best approach is to prepare and seek funding well in advance, before it becomes critical. No potential investor will be impressed if they waste their time on a venture with no clear plans in place. So, the first things that an entrepreneur ought to consider are:

1. Purpose: what is the money for? And when will it be needed?
2. Reason: why external equity and not bank finance? Why would an investor want to invest in your business? What's in it for you and them?
3. Sources: who would be a good investor for you? And why?

Once you have answered these questions and decided that external equity is the right route for your business, have a clear understanding of what will be involved. Investors are there to make a profit, so do not underestimate the impact they will have on your business. They will have the right to influence how your business operates, how much money you are allowed to earn and how your valuable resources are allocated. On the other hand, the right investor can accelerate growth of your business through guiding and mentoring you and your team as well as provide access to their contacts, to name a few.

To attract potential investors, a business needs to satisfy their criteria for investment. Here are a few points to keep in mind:

• Sector: consider whether the sector you are in is a high, medium or low risk. The higher the risk - the more equity investors will demand.
• Competition and Market: how does your business compare to your competitors and what are the market entry barriers, i.e. how easy would it be for others to penetrate and saturate your market?
• Profitability: most investors will want to invest in a profitable business. However, most importantly, they will want you to demonstrate that the business will continue to make a profit in years to come. Therefore forecasting and financial modelling as well as understanding your figures is paramount when talking to potential investors.
• Valuation and Pricing: undervaluing a business is just as dangerous as overvaluing. Make sure that you have a sensible and realistic valuation for your business. Entrepreneurs often lose investors quickly because their valuations are excessive or insupportable.
• Management: can your business clearly demonstrate that your management is capable and competent? Do you have the right skills, expertise and experience to run the business and maximise its potential? After all it is the management and not the investor that will continue running the business and as such, they will want assurances that you have quality management in place to ensure the business's continuity and profitability.
• Exit: as I mentioned earlier, investors are there to make a profit. Therefore have a clear understanding of how and when an investor will get their money and exit your business.

There is a host of other important areas for entrepreneur to think about, including shareholding structure, directorship, your earnings, the amount of equity to give to investors, where to find the right investors and how to present to them, investor relations and how to keep them in the loop, etc. Therefore, it will take time to ensure that you have everything in place and can clearly demonstrate to your potential investors that your business is ready to engage with them.