Here are Five Points to Consider when selling a business, from an experienced business broker:
If you are considering selling your business then it might come as a bit of a shock that the majority of the businesses listed for sale, never sell!
There are a lot of factors that come into play in a business acquisition and you need to expose your business to the right potential buyers and have all of your business information available including details on risk management, your business plan and your business financials.
Business brokers are experts in marketing businesses for sale and can assist you in making sure your business is investor ready.
Every business could do with more funds it seems. The typical life of a business owner is one of juggling funds and prioritising who to pay.
This is true for business at almost any stage from startup to mature, and the issue tends to exist in times of growth as well as slumps.
It is often this need for cash that causes a business owner to see an investor as the answer to all their problems. However, cash may or may not be the answer. To be precise, additional cash will be the answer only when (lack of cash) is the cause of the problem, rather than a symptom.
In many cases, there are other underlying problems such as:
wrong product
wrong market
wrong marketing
wrong margins
poor accounting and financial management
What will happen if you introduce cash into a company that has these problems is that the cash will simply accelerate whatever is happening. If the business is making money it will make more money. If the business is losing money, it will lose even more money. Cash simply becomes fuel on the fire. It can create fast growth, or it can create fast failure.
It is quite likely that if you seek capital, you will learn several things:
The process of preparing your business for raising capital will highlight its flaws, and prompt you to fix them. For example if you lack KPIs in regards to your marketing you will be unlikely to present your offering succesfully to an investor.
If you are unsuccessful in gaining capital, the reasons why not (if you are lucky enough to learn them) will help you improve your business as well as your next pitch.
If you successfully secure capital, you can be sure that an investor will demand systems to allow them to see how things are running at any given time. Very few investors (other than family, friends, and fools) are likely to simply run things however you like.
So, don’t assume that capital will fix all your business problems (or take advantage of opportunities). If it is in trouble, decide if your business is worth fixing (not all are) and then decide if and how it is attractive to an outside investor.
Bootstrapping is the process of growing by reinvesting profits back into the business. A business may start with something from the owners, but often not much. In 2003 61 % of the Inc 500 companies had started with $50,000 or less – this normally comes from personal saving rather than outside investors. (This is not to say they all continued this way… ). Costs are kept low, budgets highly monitored, and profits are used to grow. This has advantages and disadvantages. The advantage is that it appeals to many people’s ideas of a good strong work ethic, it keeps companies debt free, and often forces people to find creative ways to get results (ie focusing on selling, rather than investing tens of thousands in a web site). It proves a model will work, rather than just relying on dollars to make it work. The disadvantage is that growth is limited to the amount of profits. A business may just survive, when it had the potential to thrive.
Bootstrapping is a mentality. The problem is, it might be a mentality that stops someone from creating a fortune. By getting by on incremental change, and not leveraging an opportunity, the danger is that the business stays small.
Investors will want to see a balance of the good aspects of bootstrapping (keeping costs low, getting by with what you need instead of buying $1000 chairs and a new Porsche) and the slight disposition to risk that shows a business owner can create something bigger.
Often a good fundable business is one which has proven itself through organic growth – building on existing customers and sales activities, and proven that the products and systems work – but that needs capital in order to leverage these assets. A dream investment opportunity is one which is proven, yet constrained by lack of capital.
Some businesses just don’t work with limited resources, so would not be possible to run as a bootstrapped operation. Examples include anything with high fixed costs, longer sales cycles, high R & D, and when the only strategy is to enter a market quickly (some innovative products need to start strong in order to gain first entrant advantage).
As a business owner seeking capital, part of your “packaging” to an investor needs to be a clear demonstration of those things which you have achieved on your own, so that you are seen as capable and resourceful. Companies that seek to raise capital with just an idea, and no results yet, are unlikely to win funding… even if the “results” are not profitable. A company that shows it can win customers, but is losing money (due to its size for example) may still be an attractive investment.
A brilliant example of bootstrapping is Ovid Technologies started by Mark Nelson in the late 80s. He ran the business from an apartment, and as he grew, he rented more apartments in the building… running cables in and out of windows. It grew to 150 employees and in 1994 listed, raising $10m. In 1999 he sold for $200m. This is a great story because it shows both the creativity and persistence that was required to grow the company, together with the final payoff that this gave the owner in being able raise funds, then cash out.
Business owners looking to raise venture capital for business, that DON’T live and die by numbers – and it is more often than you would think – will be marginalised by investors.
No matter how powerful your vision, or appealing your product, if you are unable to present accurately and effectively the current position of your company, you can say goodbye to the funds from investors.
Here are a few tips that you should consider about your business financials when looking at raising capital:
1) If you, the business owner, are not comfortable with the numbers, then you need to recruit someone who is.
2) Even with a good numbers guy, the numbers need to be presented effectively, clearly, concisely, and without “noise” (=too much detail) ie summarise, as well as have the detail handy just in case required.
3) It goes without saying, your proposition must make lots of money for yourself and the potential venture capitalist. For example – venture capitalists require at least a compound 30% return but depending on the risk may go up to 100% or more.
4) Have an effective framework in place to regularly and accurately demonstrate to your stakeholders (your investors, board, employees, banks etc) that you are on top of your numbers.
Remember trying to attract venture capital investors is all about providing an expectation of a return for a given set of risks. If you can’t demonstrate how you are going to manage the return (that includes producing it) then you simply wont attract an investor.
