|Illustration: Sam Griffin
For small-to-medium sized enterprises, it takes more than just a well-rehearsed sales pitch to catch and keep the eye of a cashed-up suitor.
Private equity investors are prepared to make sizeable investments in established businesses that are geared for future growth.
The competition for suitable business partners is hot, so it’s worthwhile making sure your business is the most attractive option in a sea of worthy competitors.
HAVE A CLEAR STRATEGY
Business operators and owners need to have a clear strategy for the future to woo investors and secure their interest in a long-term relationship.
Also, they must be clear on how the funds will be used and be able to demonstrate the advantage of their strategy over their competitors.
In short, an investor wants clear reasons why they should commit funds to your business. What’s the expected return on their investment? Over what timeframe? Do you already have the ‘runs on the board’? And is there a defined exit strategy?
The private equity investment process can be a rocky road for business owners. For many people, their business is their life and they can understandably be very emotional about its future.
While a strictly objective view of your enterprise is imperative when courting investors, it’s difficult because sometimes you’re so immersed in the day-to-day activities that you can’t see the forest for the trees. Seeking advice from an independent advisor is essential. Although owners and operators usually have the ideas to take their business to the next level in, say, five years, they need help to develop the strategy and financial plans to get them from A to B.
ACCEPT THAT THINGS WILL CHANGE
While private equity investors can assist SMEs entering a growth stage, business owners have to be prepared for the realities of this form of ‘active investment’ – things will change.
Private equity investment brings with it a number of conditions that might not sit comfortably with some people, such as having input from outside parties into the day-today running of your business.
My advice to owners and operators seeking growthstage capital is to prepare for the rigorous due-diligence process and avoid some common mistakes, which include underestimating the amount of information required by the potential shareholder.
CONSIDER THE INVESTOR’S VIEW…
When you think about the size of the investment that private equity funds are willing to make, it’s surprising how many proposals lack a definitive business strategy.
When preparing investment submissions, SMEs should consider their proposal from the investor’s perspective and seek professional assistance for an objective and experienced viewpoint.
Understandably, would-be investees tend to be over-optimistic about forecasts, but investors can see straight through this. Take the time to carefully consider the investor’s requirements because this will form the basis of your investment proposal.
…THEN PREPARE THE PROPOSAL
A good investment proposal from an established SME will outline its success to date and its business development strategy, including the concept, product development tactics, infrastructure, marketing and management structure.
You, the investee, should also consider:
- an exit strategy
- the potential market opportunity
- resources required to execute strategy
- funding requirements and the use of funds raised
- core competencies and competitive advantage
Primarily, investors are motivated by the potential return on their investment and their potential exit strategy.
Here’s what investors are looking for:
- attractive and realistic returns
- a clear exit strategy
- strong track record
- thorough strategic development
- clear plans for your business’ direction
- an understanding of the due diligence process
Prepare a solid, honest strategy with assistance from an objective third party and be truthful with yourself about how the investment will change your business.
Most importantly, you’re embarking on an exciting new phase of your business’ development, so enjoy the evolution.
Mark Watson is a partner in the Corporate Finance division of business advisory firm mhm and can be contacted at [email protected]