Len McDowall

Venture Capital can be raised from many different sources and quite often, business owners are unaware of the avenues available to them.

The reality is, for businessess looking to raise capital it can become a nightmare for the unsuspecting owner. You always read about the successful ventures, but rarely do you hear of the challenges associated with raising capital for your business.

When it comes to capital raising, most business owners believe they have 3 places to go; Banks, Angels and Venture Capitalists. Few people realise there is a 4th way to go if you want to raise between $1m and $5m.

Banks

Although the most common option for people, it is not ideal for early stage business. This is why…..

1. Are you willing to put your own personal assets at risk?

2. The interest you pay on the loan could be re-invested back into the business.

Venture Capital or Investment Banking Firms

VC’s will traditionally look for growth companies with good earnings, an industry with good growth potential and founders which they believe in. Rarely do they seek to invest in pre-revenue companies.

For the right business a venture capitalist can be a great asset, as they can provide not only the capital required, but also exposure to additional business opportunities through their network.

If a company is seeking captial from a Venture Capital firm, they should be prepared to discount their finanical projections significantly. A VC will correctly make a business accountable for those projections, with equity claw-back for non achievement.

Sophisticated Investors, Business Angels and Venture Capital Groups

Business Angels and Venture Capital Groups are generally created via the networks of high net worth individuals and families, or their companies. Often these groups are not promoted to the main stream public. The discovery of them generally comes from an introduction or association of someone involved in the group.

Generally they will have their own team of specialists to manage and oversee the transactions which they become involved in. For an Early Stage or Start-Up company these individuals or groups can be a valuable source of funding and networks for your fledgling company.

When raising capital the questions you want to be asking are….

1. What percentage of the company am I willing to offer? How are the shares going to be split up between the current owners and stakeholders?

2. Is your business structure investor friendly?

3. If you are utilising the banks, are you willing to put your personal assets on the line?

4. Do you want to retain control of your business, or are you happy to for a 3rd party to have an influence?

5. Have you put in place a strong management team?

6. How unique is your offering, and what is the realistic potential growth?

All of these questions are important, and you should definetly know the answers before you approach any organisation to assist you in funding the growth of your business.

Len McDowall

If you are a business owner and are looking to sell your business, achieving the best price requires a lengthy and detailed process in terms of preparation. Anyone who has been through this process will tell you it is no easy road - however nothing worthwhile has ever been easy. With a little effort and a lot of preparation for an exit, you can dramatically improve the result.

Risk

Basically it all comes down to risk - both within your existing business and risk of whether it can sustain its current earnings or improve them in the future. So the key to success is to lower the risk for the incoming buyer. This will greatly increase your chance of getting the highest price possible for your business.

When selling your business

If you have decided to sell, there are many things to consider. But fundamentally, the more stable the business is, and the rosier the future growth, the higher the price you will achieve. Also who you sell to is very important. This is called Strategic Value. You might be worth X to one buyer - but to another buyer - say a competitor (through a merger and acquisition process) you could be worth double that because they can leverage off your business, take you out of the market or save substantial start up costs.

Potential buyers could include existing management through a management buyout or (MBO) a private equity groups.

Here are some points to consider when looking to sell a business:

1. Make sure your financials are up to date - including historical and future

2. Make sure the business systems and process are documented

3. Tidy up your marketing material

4. Have a business plan updated and ready to hand over

5. Makre sure your staff and management are the best you can find

6. Make it easy for the buyer to come in, and easy for them to achieve what they want

7. Allow adequate time to prepare and execute the sale. Fire-sales will not get you the result you want.

8. Make sure your advisors are up to the task. This includes accountants, lawyers and coroporate advisors.

9. Do a legal and financial check up on your business and address any key risks that are uncovered.

10. Ensure all your contracts are in place and up to date - this includes staff, suppliers, licences, contracts, distribution agreements, leases etc

11. Ensure your IP is fully protected and can be easily transferred to the new buyer.

There are many other factors which can affect the sale price of your business such as:

• General market conditions - both on a macro and industry specifici level
• Your ability to ‘market’ your business to the right potential buyer - so targeting is the key
• The buyer’s current situation - e.g. they might be going through a re-structure and are not in ‘buying mode’. In the case of indiviudal buyers, maybe they are about to go on holidays or are in the middel of selling another business. So timing here is critical.
• Luck - sometimes you can be in the right place and right time.

The best advice is for an entreprenuers and business owners to prepare well in advance when they are planning to exit their business.

Len McDowall is the managing director of Integral Capital Group