Being investment ready is critical if your high-growth small business is seeking investors to fund future growth. An earlier blog post explored investor attractiveness highlighting factors such as structure, competitive position and management capabilities necessary to successfully attract investors. So your high-growth small business is attractive to investors, but it is investment ready?
This blog post provides an overview of the journey you will embark upon to get your small business investment ready. Preparing to accept capital from investors will not only increase the attractiveness of your small business but expedite the overall process of raising cash necessary for growth and ensure your investors are happy.
1. The right management team helps your business get investment ready
Savvy investors will look closely at your management team. An ideal management team consist of hard-working, motivated professionals some of whom, especially the founder, have previous experience managing the growth of a successful business.
Many investors place greater value on the presence of a strong management team than on technical aspects of a business. If an investor has confidence in the management team they will support their ability to overcome technical challenges as they arise.
Your management team doesn’t need to be large or consist of full time managers. You can employ experienced consultants or freelancers on a part-time or as needed basis to fill experience or knowledge deficiencies. Such an approach helps you build a lean and agile management team with the complementary skills and knowledge necessary to execute the growth strategies planned for the funds raised.
2. Forming a board of directors or advisory board is part of getting investment ready
Forming a board of directors or an advisory board is an excellent way to focus the knowledge of experienced professionals on your business. You can use talented individuals with the right skills to fine tune growth strategies, mentor the founder or CEO and establish and monitor the governance framework appropriate for your business.
Investors will look very favourably at the presence of a board of directors or advisory board, particularly if it includes people who have had previous success or are leaders in your business’s industry or technical endeavour.
Ideally board members should be from diverse backgrounds that fill identified skill gaps. Remember to keep a seat free for your new investor.
3. Get investment ready by structuring your business as a company
Australian businesses can be structured as sole proprietorships, partnerships, companies or trusts. Each structure has various advantages and disadvantages. However to be investment ready it is necessary to structure your business as a company.
Investors prefer investing in companies as this structure provides a legal entity separate from its shareholders, offers limited liability, and ownership is easier to transfer.
4. Ensure your governance framework will withstand investor scrutiny
Corporate governance refers the rules, processes, and practices by which businesses are controlled and managed. Good governance balances the interests of all stakeholders, including shareholders, customers, creditors, the general public and regulators.
A business’s internal controls are a part of the overall governance framework. They include controls for providing assurance that your business operates effectively and efficiently, has an appropriate financial reporting system with due regard for applicable regulations. These controls help to ensure the business is well-managed, ethical, and operates with a high level of integrity.
Investors will take a close look at the governance and internal controls of your business before investing in it. Engaging a specialist to review your business’s policy and procedures and internal control environment is a good way to ensure your governance framework will withstand investor scrutiny.
5. Investor due diligence
Due diligence is a comprehensive appraisal of a business undertaken by a prospective buyer. Investors will undertake due diligence before committing to an investment. Often investors will engage a specialist third party to ensure that due diligence is undertaken professionally and efficiently.
Generally, due diligence consists and providing supporting documentation and answering questions about your business with an aim of identifying business risks, undisclosed liabilities and assessing the value of your business. Due diligence is a time-consuming process especially for the founder or CEO.
Get a head start by preparing a Due Diligence File containing copies of the documents investors will request. The internet is a good source of due diligence checklists you can use as a guide. This due diligence checklist for buying a business is worth a read and gives a decent outline of the process from the investor/buyer perspective. Alternatively seek guidance from your lawyer and/or part-time CFO.
Being prepared for due diligence is a key element of getting investment ready and will create a favourable impression with the potential investor.
6. Ensure your business is compliant with all applicable regulations
Apart from being good practice, your business will need to demonstrate compliance with all applicable tax and business regulations. Documentation showing that you have lodged tax returns on time, registered your business appropriately, and worked in accordance with all applicable regulations will need to be passed onto potential investors during due diligence.
7. Key employees retention strategy
Investing in your business is also an investment in your key employees. This is particularly true for businesses in industries where staff have a high level of technical expertise or are viewed as industry leaders. Potential investors will want to understand your strategy for retaining key employees. It is recommended you document your key employee retention strategy as succinctly as possible and include in your due diligence file together with a copy of all employment contracts.
8. Mitigating business risks
All businesses face internal and external risks. Identifying and managing or mitigating business risk is a core responsibility of the founder or CEO. Investors will be quick to identify the risks faced by your business so be prepared for the questions they will raise during due diligence by documenting them and your mitigation strategies.
9. Investors expect timely financial reports
For your business to be investment ready, it’s advisable to have a minimum 12 month history of timely financial reports. These reports should show comparisions to budget with commentary on significant variances. Having a formal monthly or quarterly financial reporting pack demonstrates an understanding of investor expectations and will be favourably regarded.
10. Business valuation supported by financial model
Fundamental to attracting investment is having a compelling business case and value proposition that can be easily communicated. Ideally your business case and value proposition will be supported by a financial model to support your business valuation.
Many financial model templates are available for download from the internet however it’s better to engage a specialist to develop a bespoke financial model and provide a valuation for your business. Doing otherwise runs the risk of leaving money on the table or having an unrealistic valuation that deters potential investors.
11. Have a great pitch deck and slick elevator pitch
Investment ready means you have a great pitch deck and slick one minute or less elevator pitch. Again, the internet has abundant examples and tips on developing/writing best practice or “killer” pitch decks and elevator pitches. Check them out and then consult a professional for bespoke guidance. Creating the right first impression is critical to getting the attention of potential investors. And don’t forget that practice makes perfect!
Experienced founders and CEO’s will already have implemented many of the tasks identified above, so their business’s will have a head start on getting investment ready. If you are just setting out on this journey allow yourself a minimum of 12-18 months to get your business’s affairs in order. This will require you to think about your business strategically and not operationally. If you’ve not travelled down this road before it’s best to seek advice from experienced professionals in order to maximise the value of your business and to minimise the impact on your business.