Are you investment ready?

There are many steps or hurdles to overcome before your business may be attractive to an investor, and consequently achieve the required funding at a high sale value. All too often, small to medium sized businesses (SMEs) do not take the time to address key issues, which can result in the business never reaching its potential (or worse, self-destructing).
Equity funding is usually sought once a business has maximised its debt funding (usually bank borrowings) on acceptable terms. With equity funding, an investor will own a portion of the shares in your business, and will typically expect to have a say in the direction and operation of your business.  
‘Venture capital’ is a term loosely-used to describe the raising of equity in your business. Venture capital is properly defined as being investors, investment companies or fund managers who pay cash in return for part ownership of the shares in your company.  
What investors look for
From our experience, investors look for a Complete Business Case to complement your Business Plan and Financial Projections.  
A Complete Business Case should include: 
1. Potential return on investment. This may be affected by many factors, including who is on your management team and how good they are; how good your product and/or service is; your reputation/brands; the size of your market and a SWOT analysis. Like you, your investor will be exposed to much of the business risk. Consequently they will expect a significantly higher return than you pay for debt funding. 
2. Achievements to date. These may include any milestones achieved to demonstrate commercial success, and could also be a barrier to entry for a competitor. For example, you may have received an award, government funding, or protected your IP. 
3. Competitive advantage. This is your point of difference or winning edge. Do you compete on price or differentiation? If you compete on price, you are simply cheaper than your competitors and require a mass market. If you are to compete on differentiation, then you compete on the benefits you offer – for example stronger, faster, leading technology, etc. You should not compete on both.
4. Marketing strategy. An investor will want to see where your growth is going to come from and how much growth you expect. You should also summarise how you will get your product to market, and what your pricing and promotional plans are.  
5. Money sought/deal offered. How much money do you need? When do you need it by? What deal are you prepared to offer? What will the investor get for their money? And what is the exit strategy?  Venture capitalists and angel investors typically want to sell their shares within three to five years. An option to de-risk your business for an investor is to ask for funding in stages upon reaching certain milestones.  
6. What the money will be used for. The money should be used to assist the company to grow and create shareholder wealth. For example, enable R&D for a new product, employ key staff, or research new markets. Proposals to repay debt are less likely to be successful.
7. Financial Projections. These should detail underlying assumptions and are crucial as they should inform the reader why certain events or changes from your projections may occur. Your Financial Projections should include the receipt of money from an investor, and show how that money will be used.
Your next steps
Now that you have a Business Case, Business Plan and your Financial Projections are up to date, your next steps are : 

1. Obtain a valuation. You need to know what your business or shares are worth.  Where appropriate advice is not sought your business or shares can inadvertently be sold below value. Alternatively, if your business or shares are significantly overvalued, potential investors may question your commercial judgement.
2. Obtain legal input. If you are going to raise equity, you should consult your lawyer in relation to the requirements of the Securities Act 1978. You cannot simply offer equity to the public without first considering the provisions of the Act, which is intended to protect investors.
3. Profile your investor. This step is often overlooked, but may be vital as you may be working with an investor day in, day out. When profiling an investor, ask yourself:
 • Do you want an active or a passive investor?
 • What else besides money does your business need to succeed? This is where an investor can add real value to your business. For example, your business may need someone with a marketing background and contacts in Australia. Therefore target an investor that not only has the money required, but also the marketing background and contacts necessary to ensure success. 
4. Due diligence. When the investor  methodically reviews your business and you personally, so that they can assess (and adjust?) the price for your business or shares. The process typically involves investigating all the facts that would be of material interest, and can be time consuming for both parties.
5. Doing the deal. This includes: 
 • Negotiating the terms of the process and negotiating the deal itself.
 • Legal agreements such as Heads of Agreements, Sale and Purchase Agreements and Shareholder Agreements.
 • Ensuring all matters are complete.
Amanda Watt is an associate principal of WHK Gosling Chapmanwww.whkgoslingchapman.com, and wrote this column in collaboration with associate principal Mike Atkinson