10 ways to attract investors
There are a number of hurdles to clear before a business is ready to take the step
Recent financial data shows professional investors are once again putting money to work in private companies. The information service Pitchbook reports that private investors closed nearly 500 transactions in the third quarter of 2013, a level that hadn’t been seen in the last 12 months.
Business owners interested in tapping this vein still must clear a number of hurdles to attract investors. The same goes for retiring baby boomers that decide the time is right to sell with middle-market valuations on the rise.
So to help business owners understand what it takes, here are 10 ways to add value and stand out from the crowd.
1. Audit your financials. Sloppy numbers sap value like a poorly tuned engine saps horsepower. You may find investors who will overlook holes in your financial reporting, but you won’t get top dollar. An audit shows a prospective buyer that you are serious about doing the little things right – which can be a powerful signal to send when you are in a negotiating process.
2. Fill gaps in your team. If you can’t be away for a week without checking in on routine problems, you need a stronger team. This is especially true if the investors or buyers for your business include private equity groups who almost always are looking for a deep bench when they are recapitalizing a company.
3. Diversify your customer base. Many business owners are surprised to learn that customer concentration is a major knockout for sophisticated investors. When businesses derive 40 percent or 50 percent of their revenues from one or two customers, a red flag goes up for potential buyers who don’t want the risk of losing a major customer. A good rule of thumb: No one customer should represent more than 10 percent to 15 percent of your revenue.
4. Create an exit plan. Sitting down with an investment banker and your other advisers to plan your exit will eliminate confusion during the business sale process. Fred Wainwright, a certified exit planner at Ledyard Bank in New Hampshire, urges business owners not to wait for a life-changing event to force the planning process. “We like to see owners start meeting with their advisers two to three years before a planned transition. That way the owner can act to fill the gaps so his business can become an A or even an A+ company.”
5. Solidify your contracts. Buyers will pay a premium for a business with customers under contract and/or recurring subscription-type revenues. This is one of the reasons companies with service contracts are so popular with investors today.
6. Build the product pipeline. Consider launching new products or entering new markets to show growth potential. The research you do as part of this effort will also help answer two of the big investor questions: (1) “How big is the market?” and (2) “How can you get more share?” Confident answers make it hard for buyers to walk away.
7. Get a realistic valuation. Your company will not trade at the same multiple as IBM, but it may be worth more (or less) than you think. Buyers will be armed with this information -- to negotiate properly you should be too. Your investment banker can provide you with a general range of value by providing recent transaction information. But to truly get a handle based on your actual performance, you should consider a market assessment by a skilled professional or, in certain cases, a formal valuation by a certified appraiser.
8. Make an acquisition. Buying another company is a big undertaking, but often is the fastest way to growth and leads to a more attractive exit upon successful integration. “There is certainly no playbook,” says Glenn Fishler, who embarked on an acquisition strategy after 23 years of building his environmental services company one customer at a time. “If you’ve never made an acquisition before, and you don’t have people inside the company to guide you, you’ve got to find all the help you can get.”
9. Put your records in order. The better organized you are, the easier it will be to attract investors or sell your company and the less disruptive you will find the due-diligence process. Time will start to speed up the day you accept a letter of intent from a prospective buyer. You will be asked for information about your company, your corporate structure, your stockholders, your employees, your customers and your legal affairs. Organizing these records beforehand will help keep the deal on track and, perhaps more important, reaffirm for the investor that he is making the right deal.
10. Protect your IP. In our knowledge-based economy, intellectual property is more valuable today than ever. To support your business model, catalog your training processes, document your software, trademark your products, copyright your website and keep close tabs on your customer list. These are valuable assets and you want to make sure you get fairly paid for them.
Craig O. Allsopp, an investment banker with mergers and acquisitions firm Corporate Finance Associates, can be reached at 603-676-6005 or firstname.lastname@example.org.