Is My Business Ready For Investment? 3 Tips To Make Yourself Ready

Two types of financing are available for your business – debt and equity.  Once you understand that, read on for our 3 top tips for working with an investor.  

Debt financing this is what you borrow and can be expected to be repay over the lending period.  Your bank or lender will want information on your profitability (see our blog on Ratios) so that they can assess the risk and reward related to likely future profitability.  If you have to provide security for your loan, your personal financial and credit history will be assessed.  Unlike equity financing, debt financing does not transfer ownership of your business – you retain control.

Equity financing can be public or private.  Public equity comes from floating on the Stock Market andoffering shares in exchange for capital.  Once your company goes ‘public’, investors buy shares of your company and become shareholders. They are repaid through profit sharing mechanisms such as dividends or when the stock is sold.  Private equity comes in many forms (see our previous blog here) such as friends and family, angel investors and venture capital.   Angel investors provide capital to start-up companies in exchange for partial ownership and control of the business.  Most new businesses obtain their first round of financing from angels, who make up 5-10 times the numbers of institutional venture capital organisations.  Venture capital businesses (VCs) have large amounts of capital and seek out companies in which they can invest in exchange for a share of the ownership in the company and some control of the business.   Venture capitalists typically invest in amounts greater than Angels.

 

A major difference between equity and debt capital is that equity investors expect a far higher return because of the greater risk involved, remember that they have no claims against the assets of you or the business so are not guaranteed repayment.  This means that equity investors investing in your business are likely to expect 20% to 50% returns.  Think of the negotiations that you regularly see on Dragons Den.

To make your business attractive you need to enhance the following aspects:

  • Industry experience and success
  • Potential growth
  • Proprietary technology, patents or other barriers to entry
  • An exit strategy within a reasonable time frame
  • Your knowledge of your numbers

Three Steps To Take To Make It Happen

 

First Step – Develop a business plan: see our blog on this subject and this helps you build a valuation on your business

 

Then – Networking: the best way to expose yourself to potential investors is to be out there doing business and putting yourself in environments where there are likely to be higher levels of people or businesses to invest – such as Seminars.  Your Solicitor and Accountant are great places to start to make important first contacts, rather than a straight cold call.

 

Finally – Key Questions for A Potential Investor:

  • Do they have knowledge as well as capital from which the business can benefit?
  • How does the control and decision making become affected by shared ownership?
  • Can they provide additional capital if necessary?
  • Do they have a good reputation?
  • Will they stay the course of business fluctuations or bail in the bad times?

Remember that all enquiries of this nature are going to end up as a negotiation before you can come to final decisions on either side.  Finding the right investor may mean that compromise is made on both sides, but that is a good indication of a strong and balanced working relationship.

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~ by crispinread on April 1, 2011.

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