We have had enquiries from four totally different businesses over the past 1-2 weeks regarding access to potential investors - unfortunately, all four gave the impression they had left things to the last minute ie. the potential for expansion was there but they were running out of cash.
Finding a suitable investor today is a lengthy process & given the current global recession, expect higher returns for taking on risk. Investors are of course inundated with approaches by business owners to invest in their businesses - to really attract their attention right upfront, you have to put 'your best foot forward'. By this I mean taking the time to put together a professional business proposal in which you tell a compelling story as to why they should put money in your business. They will look for the following :
1) A business that is unique in some way - does not have to be the latest, most advanced product on the market, it could mean having expertise that very few other businesses have
2) Management - who is running the business, how experienced are they & can they achieve the future targets they have set ?
3) Financial projections & return on investment - are the figures realistic & are they backed up with sound assumptions ?
4) An exit in 3-4 years time - an investor will look to 'cash in' their original investment some time in the future. This could be a sale back to the other shareholders or to an outside party.
There is definitely no substitute to a well prepared & professional business proposal - if necessary, get help from someone who has experience in this area to ensure you 'put your best foot forward'.
Monday, June 29, 2009
Tuesday, June 9, 2009
Working on your business
Determining a value for a business is not an easy exercise and is commonly described as the most inexact science around ! When it comes to valuing a small private business, the task can become even more difficult - why is this the case ? To a large extent, it is a subjective exercise where the opinion of the valuer regarding the future of the business is expressed.
There are various methods used today to value a privately owned business - from earnings multiples, discounted cash flows, net asset value, return on investment etc. Without getting into the technicalities of this exercise, thought I would mention a few aspects of a business that could affect it's value either positively or negatively (again, they are subjective) viz.
1) The industry in which it operates - is it growing or mature, what recent or current developments could have an impact ?
2) Up to date, reliable & verifiable financial information - outdated and disorganised financial records create doubt in a potential buyer's mind
3) Is past profitability sustainable - it is always difficult to justify future projections if past trading has been below par (unless of course you have secured tangible new contracts)
4) Reliance on the owner of the business - how did he create his success and are his existing client relationships very dependent on him?. Creating a management structure with clear roles & responsibilities covering key aspects of the business becomes critical as the business grows. He may also have certain key skills that no one else in the business has - once he goes, a lot of value could go with him.
5) What is the extent & diversibility of the client base - having one or two big clients is a major risk should you lose one together with having a large exposure to one industry sector
6) What are the barriers to entering the industry in which the business operates ? - if they are low, it makes it very easy for a competitor to enter the industry
7) How many competitors are they - a large number of competitors can place pressure on your margins
8) How unique is the business in terms of the products or services it provides ? If they are easy to replicate, you could lose any competitive edge you may have.
There is a great saying that applies to all business owners - ' Are you working in you business or on your business ?' As business owners, we should be continually working on our businesses to ensure that we improve
the way we do things & how we present ourselves to the market - our goal must be to ensure the long term sustainability of a business so that ultimately, it is very attractive to investors or buyers.
There are various methods used today to value a privately owned business - from earnings multiples, discounted cash flows, net asset value, return on investment etc. Without getting into the technicalities of this exercise, thought I would mention a few aspects of a business that could affect it's value either positively or negatively (again, they are subjective) viz.
1) The industry in which it operates - is it growing or mature, what recent or current developments could have an impact ?
2) Up to date, reliable & verifiable financial information - outdated and disorganised financial records create doubt in a potential buyer's mind
3) Is past profitability sustainable - it is always difficult to justify future projections if past trading has been below par (unless of course you have secured tangible new contracts)
4) Reliance on the owner of the business - how did he create his success and are his existing client relationships very dependent on him?. Creating a management structure with clear roles & responsibilities covering key aspects of the business becomes critical as the business grows. He may also have certain key skills that no one else in the business has - once he goes, a lot of value could go with him.
5) What is the extent & diversibility of the client base - having one or two big clients is a major risk should you lose one together with having a large exposure to one industry sector
6) What are the barriers to entering the industry in which the business operates ? - if they are low, it makes it very easy for a competitor to enter the industry
7) How many competitors are they - a large number of competitors can place pressure on your margins
8) How unique is the business in terms of the products or services it provides ? If they are easy to replicate, you could lose any competitive edge you may have.
There is a great saying that applies to all business owners - ' Are you working in you business or on your business ?' As business owners, we should be continually working on our businesses to ensure that we improve
the way we do things & how we present ourselves to the market - our goal must be to ensure the long term sustainability of a business so that ultimately, it is very attractive to investors or buyers.
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