The decision to bring outside investors into your company will be one of the most important decisions of your life. Raising money through angel investors, private equity, or venture capital can put you on a path to great expansion and market share. Against that, you must weigh the loss of control you will incur, and the increase in oversight you will most certainly experience. Still, for many companies—particularly those with serious growth ambitions—outside funding is a necessary precondition for success. So how can you prepare your business so that it will be attractive to potentail investors? Here are 9 suggestions:
1. Have audited, or at least reviewed, financials for the prior three years. Validation of your numbers and processes from a quality accounting firm greatly will help your sale and valuation. Most important, the buyer and potential lenders will have confidence in your numbers and company. This will save time, cost and potentially increase available leverage. Three years of review or audit isn't required, but the more years the better. Read more.
2. Every dollar you add to profit increases value—so eliminate excess costs. It may seem counterintuitive that you have to reduce costs in order to bring on outside financing, but showing careful financial control—and maximum cash flow—can make your company more attractive to investors. Ideally, you should give yourself at least a year to prepare your company before you seek outside funding. Once you have made the decision to seek investors, you should look to eliminate any unnecessary costs you can. And don't take a gradual approach: You may only get full credit in terms of a higher valuation for lower costs that have been in place for at least nine months. Read more.
3. Be sure your stated objectives for the sale match your personal objectives. In the fundraising process, you are going to be telling your story again and again. Make sure that the story you tell prospective investors why you want to expand your business, what your eventual exit strategy is, and what you want to do after that. If not, potential deal-killing issues can arise further down the closing path. Read more.
4. Have in place qualified leadership. Company leadership is one of the greatest concerns of most buyers. If you are not going to be there, a buyer needs to have confidence in those who are. The ideal scenario is if your company can grow and flourish without you there. Read more.
5. Have an actionable strategic plan that shows growth. Without question, the more potential an investor believes your company has, the higher the valuation you will receive when you raise capital. If you have a believable, actionable strategic plan that shows significant growth, investors will be excited. The important thing to keep in mind is that your plan should be both ambitious and reasonable. Investors will be turned off if you present them with farfetched numbers or if you fail to acknowlege market realities. Read more.
6. Hit or exceed your annual budget, particularly prior to and during the fundraising process. This also is about buyer and lender confidence. If, during the sale process your company does not hit the numbers you said it would, they begin to doubt and second guess the entire transaction. If, on the other hand, you beat the numbers, they become afraid of losing the transaction and work harder to close as quickly as possible. Read more.
7. Don't be your company's best salesperson. A typical weakness of entrepreneurial companies is a lack of sales talent, other than the owner, not to mention the lack of a formal sales strategy. If your company has a sales department that can close deals and increase revenue while you are busy with other things (or on vacation, for that matter) investors will have much more confidence in your plan. Read more.
8. Bring in experienced legal counsel. Lawyers with experience in the field of entrepreneurial dealmaking will help you conduct efficient negotiations. They should know the issues to fight over and those that don't matter. Your existing corporate counsel may not have sufficient experience. Read more.
9. Be patient. Raising outside capital almost always takes longer than the entrepreneur wishes. The typical fundraising process lasts about six months, but can take much longer, particularly if your company is still in the start-up stage and lacks a trackrecord of meeting its goals. Be mentally prepared for a long and winding road paved with rejection. There will be countless economic, legal, and emotional hurdles that you will have to overcome to get the best result for your business. Read more.
Dan Lubeck is the founder and managing partner of Solis Capital Partners, a Newport Beach, California private equity firm.