The biggest problem in selling your business is what you value goodwill at

June 19, 2010

When I do post-mortem reviews with business owners about business sales that have fallen over, one of the most common points of failure is a dispute over the value of Goodwill.

It is fair to say that establishing a reasonable value for your business is fairly straightforward – in most cases it is a defined multiple of the EBITDA.  However, when this number doesn’t match up with what the current owner(s) want they resort to Goodwill to create the necessary “padding” to create the total value they want.

As the current owner, you’ll unconsciously factor in how difficult it was in the beginning and how much sacrifice was necessary to weather the difficult times.  The owners must realise, however, that others will evaluate your business from a much narrower point of view … it’s ability to return an investment over a fixed period of time with an acceptable margin of risk.

This doesn’t mean that a prospective buyer fails to appreciate your efforts in building the business.

But goodwill is the single most difficult portion of your business to value.  Your reputation and relationships with your customers, vendors and the community, along with your participation in trade-related activities, all contribute to goodwill.  In fact, your customer list is probably among your business’s most valuable assets.  In fact … sales of some businesses are based on this alone.

One of the key factors that causes sales to fall over is greed, or ignorance, with respect to Goodwill.

This is because the factors used to increase/decrease the EBITDA multiple have already been assessed and the judgement has been made.  Therefore you can’t have those contributions to the business valuation TWICE.

Some examples are:

  • The quality of your current clients;
  • The duration of your current contracts;
  • The level of current revenues that are annuity-based;
  • The reputation of the business in the industry/sector it trades in;
  • The strength (or lack of strength) of your competitors;
  • How much of the effort has already been completed that is needed to yield a great return on a product/service.

Some factors that legitimately contribute to Goodwill, and are not likely to be reflected in the EBITDA:

  • Brand recognition;
  • Product recognition;
  • Intellectual Property that has yet to be fully commercialised;
  • Intellectual Property that has real licensing potential;
  • Intellectual Property that can be OEM’d into the product set of a major global player.

As a rough guide, if the Goodwill value is more than 20% of the total business value then you’re double-dipping on Goodwill factors and will have trouble justifying the price.

Remember that in the final analysis, your company is worth only what someone will pay for it.

Generally, a potential buyer’s offer will be influenced by how soon they expect to see a return on their initial investment.  As a guide, anything longer than 5 years is too long … therefore you’re trying to get a higher price than the business can actually deliver to the new owners.

Feel free to contact us if you want to understand more about business Goodwill as part of selling your business.


Developing a Successful Strategic Plan

May 29, 2010

I thought I’d provide some guidance in an area where I get lots of questions, plus there is lots of information (too much) available to help businesses but not typically expressed in a language that they can act quickly and simply on.

This is predicated on the business having an idea about what its Products/Services are, and what are the basic profiles of likely purchasers of these Products/Services.

OK … now that you’ve developed your Marketing Plan, you need to put it into action through the Strategic Plan and Sales Plan.  The processes of Strategic and Sales Planning is completed via 11 key building blocks.

1.  Potential Problems and Company Objectives:

First spot and rank the Potential Problems in your Company Operations.  Some examples of the areas that need to be analysed:

  • Cash Flow;
  • Market Changes;
  • Competition;
  • Costs;
  • Distribution;
  • Productivity;
  • Staff Turnover;
  • Market Regulation;
  • Market Acceptance;
  • Product/Service Pricing;
  • Quality of Offerings;
  • Customer Experience Management;
  • Capital Management;
  • Control Systems and Facilities.

With your Problems identified and ranked in importance and severity, you can develop Company Objectives you aim to obtain.  These Objectives should strive to minimize and manage the identified Potential Problems, while emphasising your Company’s Strengths.

2.  Risk Analysis:

Building on your Potential Problems identified in Section 1, this Analysis produces Expected Risks.  Look at Litigation Threats, Liabilities, Regulatory Issues, Major Risks and Problems and answer the following questions:

  • When are Problems plausible to occur?
  • What is the Expected Monetary Value of a problem if it occurs?
  • What can you do to mitigate the potential risks and problems?
  • How will you deal with these problems?

The last part of the Risk Analysis looks at how you can turn these problems into opportunities.

3.  Company Strategies, Tactics and Operational programs:

First develop your Strategies, then the relating Tactics and next the resulting Programs of work.

  • Strategy is Focus.  Strategy consists of key factors that distinguish your Company and are most expected to contribute to your success.  It is important that your Company Strategies complement each other so you are not sending your business in separate directions.
  • Tactics are used to implement strategies and relate to a specific Strategy.
  • Programs are specific business activities which have concrete dates, assigned responsibilities and highly-developed Budgets.  Programs relate to one/more Specific Tactics of a Specific Strategy.

4.  Sales Strategy:

It is important to remember that sales close the doors (deals) which Marketing opens.  Sales are dealing directly with your Customers.  Develop the Sales Strategy as it specifically relates to the Marketing Strategies you have already articulated.

If you’re trying to sell something that you haven’t developed marketing strategies around previously you will just waste time, confuse and alienate customers and burn-out your sales team.

Describe and develop the different sale methods and channels you will use to sell your Products and Services.  Determine your Sales Goals and your Sales Process.

You will also need to develop an effective Salesperson Training Program and suitable Compensation Structures.  You should also look at order processing optimisation, sale milestones expectations, price maneuvering, sales leads generation, distributor roles; credit and collection policies; how Internet, social media and viral channels will be utilised; and so forth.

5.  Sales Programs:

After developing your Sales Strategies, it is time to define the Sales Programs, which will address how your Sales Strategy will be implemented.  Once implemented, you should have systems in place to measure the implementation of your Sales Strategy and support your sales efforts.

6.  Strategic Alliances and Joint Ventures:

Define your Keystone Strategic Alliances and Partnerships.

Identify and develop Co-Marketing and Co-Development Opportunities; Sales Commissions and any Product/Service Agreements.

Is the fate of your Company tied to another Company?  Explain how these Alliances help your Company and any inherent risks that have to be managed.

7.  Operating Budget — Rolling Monthly Outlook (Yearly Basis):

The Operating Budget is a Planning and Control Mechanism which also helps you develop the Sales Forecasts.

It should be on a Rolling Basis 12-month basis, including Forecasts and Actuals.

Rolling Basis means after each quarter you re-Budget for the next 3 months, based on the Actuals for the last 3 months.

The Budget should be 12 months forward looking, as well as Financial Year YTD figures.  You should have Targets and Actuals so you can track results and adjust throughout the year as necessary.

Your Operational Budget should directly reflect your Strategic Planning Goals.  Determine whether it is best to use a Top-Down, a Bottom-Up or Blended approach for your Operational Budgets.

Ask yourself:  How will your Budget be used as a Control Measure?  How will your Budget be used to judge Company, Management and Key Employee Performance?  Your Budget is a valuable tool to use for Employee Management, Education and Delegation; Managerial and Executive Goals.

8.  Sales Forecast:

Using your newly developed Sales Strategy and supporting Programs, plus your 1-Year Operational Budget, you now need to develop a 5-Year Projected Sales Summary Forecast.

This Forecast will then be used to develop your Detailed Profit & Loss Statement in the Financials Section of your Business Plan.

If you’re an existing business, you can show your Historical Sales Trends going back 2-3 years, and how this trend will continue/improve based on the new (or revised) Sales Strategy.

It is VITAL to show how you will attain your Annual Sales Targets, and the Assumptions that have been used to develop the Sales Forecast.  The key here is create a Sales Forecast that is achievable and also believable.

It is also very important to show how your Sales Forecast relates to your Market Analysis, Target Market Segments, Sales Strategy and Marketing Strategy.   This ensures your Marketing Plan is a direct influence on your Strategic & Sales Plan, which then keeps everything (and everyone) focused on the Company-Wide Strategy.

9.  Milestones Table:

Your Future Company Goals, Milestones and Strategies, along with your Marketing and Sales Program rollouts need to be measured and managed.  The key way to do this is to define milestones for each key event/outcome, as well, as intermediate milestones that get your business towards the key outcomes.  As a guide, if an event/outcome is more than 9 months away you need to have at least 2 intermediate milestones to track against (that way AT WORST you’re 3 months behind if everything is totally off track, rather than 9 months behind if you didn’t have the 2 intermediate milestones).

For each Milestone Event you need:

  • A Qualitative Description – what does the milestone look like;
  • A Quantitative Description – a measurable number that validates you’ve made it;
  • Start and End Dates;
  • Budget Numbers;
  • Individual Manager, and Department, Responsibilities;
  • Dependencies on other internal (or external) groups to meet the Quantitative measure.

    10.  Control Mechanisms:

    What Mechanisms for Control of each critical Skill and Resource are available to you?

    Is direct ownership necessary for your Resources and Skills or can they be Outsourced and at what discount/premuim?

    What contractual incentives/penalties do you have at your disposal with your critical Resource/Skill/Service Providers?

    11.  Strategic Planning Advisors:

    Strategic Planning is such an important part of running a Successful Business, you NEED to retain a competent team of Professionals, Advisors, Experts and Consultants.

    An Experienced Business Consultant can be a very important part of your Strategic Planning Team, ensuring your Strategic Plan is not just effectively developed, but most importantly, effectively implemented throughout your Company Operations.

    The key here is that good Advisors have a very broad set of knowledge and experience, particularly in terms of what works and what doesn’t.  Why make the mistake somebody else has already made, when you can avoid the mistake and still get the benefits of the learning that would have come from the mistakes.  It will save you buckets of time and money.

    After your Strategic Plan is implemented, an experienced Business Consultant can also help you ensure the Strategy stays on track, reaches its goals and is adjusted as necessary due to market changes and unforeseen problems.

    IN SUMMARY:

    Some key things to remember, as a cheat-sheet if you like, to get successfully through this sort of a process as quickly (but effectively) as possible.

    Products and Services Development:

    1. Market Analysis and Segmentation
    2. Market Trends
    3. Market Growth
    4. Competitive Analysis, Positioning and Edge
    5. Marketing Strategy:  Positioning, Pricing, Promotion and Distribution Strategies
    6. Marketing Strategy Profit and Loss Projection
    7. Marketing Programs

    The above equals an Effective Marketing Plan.

    From the Marketing Plan, you then move through these steps:

    1. Strategic Potential Problems and Risk Analysis
    2. Company Strategies,  Tactics and Operational Programs
    3. Sales Strategy
    4. Sales Programs and Alliances
    5. Company Operating Budget
    6. Sales Forecasts
    7. Milestones and Control Mechanisms

    The above gets you to a Successful Company Strategic & Sales Plan.

    Once you have the Strategic Plan and the Sales Plan, you can build a believable set of Financial Forecasts.

    With all of the above in place, you not only have a bit of a clue about what you need to do, but have a comprehensive set of plans, actions and measurements to take the entire business forward to your financial targets.

    As the saying goes “If you Fail to Plan, then you’re Planning to Fail !!!!”.

    Feel free to contact us if you want more information, or specialist assistance in this area.


    Success Leaves Clues, So does Failure

    May 15, 2010

    I’m regularly asked questions that come down to “how come they can do …… and my business doesn’t seem to be able to ???”.

    This leads me to the question … Why do some businesses achieve great success, while other seemingly similar businesses struggle forever?

    My own answer to this is to look for the trail of clues that indicate why a business has (or will) succeed, or conversely why a business has (or will) fail.

    The reality is that even though there are many businesses out there with great products and excellent services, they never seem to get beyond survival let alone achieving stellar performance.

    Below are 5 critical mistakes that will kill your business’ chances of attaining above-average success.

    I see these every day in businesses looking to sell, or raise capital, so I can say with great conviction …. If you make any of these 5 critical mistakes, your business will achieve average performance at best, and likely create a trap where you end up working long hours for mere survival, or even eventual failure and bankruptcy.

    Feel free to read on and check to see where you and your business are at.   Be honest with yourself when looking at these common, but highly-detrimental, mistakes.

    1.  Short-term focus

    Most SME business owners are focused on short-term survival rather than long-term success.  Typically, short-term cash requirements become the driver for most things that happen in the business.

    If this short-term requirement is constant, the future development needs of the business are totally neglected.  This also leads to feast and famine as the business pipeline is managed for next month rather than next quarter or next year.

    This also tends to create transactional business rather than long-term relationship business.  The cost of acquiring transactional business is 4 to 5 times higher than acquiring relationship-based business.

    If you’re spend more than 10% of your time, as a business owner, putting out fires then you’re sealing the long-term fate of the business …. and it won’t be a good fate.

    The only way to stop this sort of problem in the long term is to work on prevention in the short term, at least you will know that at some point “it will get better”.  This means taking time out to analyse what’s going wrong and planning what needs to be done to achieve the long-term goals (as well as eliminate the things going wrong).

    You need to become proactive instead of reactive if you want to achieve real success.  You need to define what that success looks like and then develop a plan to get it.  Then go out and make it happen.

    As Yoda says “Try, there is no try.  Do or Not Do”.

    2.  Haphazard advertising

    Advertising decisions in SMEs are commonly made based on how busy everyone in the business is.  The corollary being “let’s do whatever is easiest”.  The signs are:

    • There is no defined marketing plan;
    • Advertising is initiated when sales slow down and stopped when sales pick up;
    • Advertising is usually tactical/opportunistic rather than strategic.

    This endlessly reactive cycle just tends to keep the business operating around the same level of sales (survival).  In turn, this level becomes the limit to the future success of the business.

    Smaller, struggling businesses tend to react by using price as their main competitive strategy.  This sets up a knee-jerk approach to price setting and sales/marketing activity, creating a response from competitors that ends up damaging everyone’s profits and cashflow.

    Marketing is about communicating to the market the distinctive reasons why your company’s products should be the logical choice compared to competitive offerings.

    Successful companies determine their strategic advantages over the competition and then proactively communicate the value of those advantages to the market.  More often than not, this style of marketing allows them to sell at higher prices than their competitors because they’re focusing on what customers really value.

    3.  Ineffective delegation

    You can’t grow your business without delegating work to someone else.   THERE IS NO OTHER WAY.

    However, most business owners would prefer to do the work themselves rather than learn how to choose the right people, set them up with the right systems, then motivate and nurture them.

    Partly this is a trust issue, but mostly this is a control issue.  You just need to learn to hand the steering wheel to the Universe over to somebody else for a while and focus on the areas of your own business where you can significantly increase the capability/competitiveness of your business.

    The trust/control issue is commonly caused by the business owner having expectations of employees that are not communicated clearly – therefore they don’t get the results they expect.  The outcome will always be frustration followed by the assertion “you just can’t get good staff these days”.

    The best managers know clear interactions between people and good relationships are essential to productivity, so they develop effective communication processes.

    These include job descriptions, operations manuals, work instructions and appraisal systems to ensure that expectations about an employee’s role in the business are effectively communicated and understood and that the employee’s performance results are fed back and effectively worked through to the satisfaction of each party.

    Delegation can then occur without frustration and antagonism, and everybody is clear about what/why/how/when leading to a highly-productive and positive work environment.

    4.  Ineffective control

    Many business owners/managers are so focused on getting the work done that they never stop to check how efficiently it is being done or whether performance levels are improving/deteriorating.

    Running a business without performance indicators is like walking across a highway with a blind-fold on (you just wouldn’t do it would you ???).

    Some business owners/managers don’t even know what their financial position is from month to month.  That’s like guessing how much fuel you have left, then being surprised when the car stops.

    Many businesses stay at the level of growth where the business owner can physically see/check how hard people are working.

    This method of maintaining control is self-limiting, because it puts a self-imposed cap on business growth.  However, it is often also ineffective because activity and productivity are not the same thing.

    Staff have a tendency to try to look busy, even when they aren’t working hard.  Many managers are then lulled into a false sense of security by visual checking.

    Without real performance measures that identify actual levels of productivity, operational costs and relativity to targets, a business has no real controls.  Making this critical mistake almost guarantees that it will be impossible to achieve above-average success.

    5. Doing it all yourself without looking for help

    Significant achievement always involves help from others.

    In small business it has long been accepted that you need external professionals for preparing accounts and dealing with legal matters.

    However, it is also becoming commonplace to bring in specialist skills to work on improving specific business functions (eg: Strategy, Marketing, Sales, HR).

    Running a successful business requires effort, and the effective leverage of everybody’s time.  It is unusual to achieve without a significant amount of mentoring/guidance from people with the right experience and expertise.

    It is accepted practice in all sports and almost every elite athlete uses a coach to provide external guidance and tips to improve performance.

    The best business owners also accept this principal and look for advice whenever they can.  It seems that only the poor performers try to go it alone and think they have all the answers themselves.

    Conclusion

    If you make any of these mistakes in business, your performance – and the businesses performance – will suffer and you will most likely tend to spend your time struggling to survive, or at least working longer hours than you want to get where you want to go.

    Success leaves clues.  Successful businesses operate in a different way from most average businesses …. that is why they’re successful.

    Wouldn’t it be a good idea to find out how they do it and how you can eliminate the mistakes that keep you trapped in a business that is a continuous struggle and a constant source of frustration ?.

    Feel free to talk with us if you want to break out of this “Cycle of Despair”.


    3 Things Working Against You When Selling a Business

    April 29, 2010

    Google recently acquired Aardvark, a social media company that lets users tap into the knowledge and experience of their extended network of contacts to get quick answers to specific questions.

    Let’s say you’re from Melbourne, but in Sydney on business, and get a dose of back spasms. You can post a question to Aardvark that will ask your friends and friends of friends for a recommendation on a good chiropractor in Sydney.

    Google paid US$50M for Aardvark.

    Aardvark is a good case study on building a company to be sold. They didn’t try to compete with Facebook for all forms of social media.

    Instead, Aardvark specialised in getting obscure questions answered by trusted contacts.

    Google is in a Coke vs. Pepsi- battle with Facebook for dominance of the social media category, so it made sense to look at Aardvark as an acquisition.

    Could Google have built the same technology? Absolutely !!.

    Could Google have acquired Aardvark for less money and time than it would have taken Google to build it from the ground up? Yes again.

    Aardvark therefore gets acquired.

    We all know that becoming the world’s best at something can help you win business; becoming famous for one thing can also help you sell your company.

    Strategic buyers are looking to pick up something new they don’t have and couldn’t easily create on their own. Before doing a lot of due diligence, strategic buyers ask 3 basic questions:

    • How much would it cost us to build from scratch?
    • How long would it take?
    • How much could we buy that company for?

    If you offer a broad set of products/services that a potential buyer also offers some/all of, that potential buyer will argue that it would be easier to just build what you’ve created and drop its price below yours or hire a couple of salespeople to go after your customers.

    However, if you offer something truly special that is difficult to replicate, the acquirer will want to buy your business instead of wasting the time and money to build it from the ground up.

    Becoming a specialist in one thing will not only help you in your marketing; it will also help you get acquired for a premium when you’re ready to exit.

    To find out more about where you currently stand as a business you can check out the “Sellability Index Quiz” by going to http://builttosell.com/siq.php and answering the 10 questions to get a view on where your business is at.

    Either way, if you’re thinking of selling, you should contact me to help you understand your options (plus I may even know who your “buyer” will be, based on my current clients).


    In 2010, high-net-worth individuals are looking to invest in private companies

    April 22, 2010

    According to a recent survey of 4,169 Australian investors conducted by Wholesale Investor, investor sentiment in private sector investments is buoyant.

    The statistics revealed:

    • 76% of investors are seeking investment into private companies
    • 53% have $500k or more to invest
    • 72% believe now is a great time to invest
    • 79% of investors have over 50% of their funds in cash, ready to invest
    • 91% would invest in an early-stage/start-up if strong Board/Management was in place and in a preferred sector
    • 55% said their biggest challenge was finding suitable deals
    • 63% were looking to invest directly into companies
    • 61% sought an equity stake of less than 20%

    In addition, the survey revealed several positive factors influencing the private company market.  These include:

    • Former MDs and CEOs are now actively pursuing high-growth businesses.
    • Many smaller VC and PE firms are forming and looking to gain exposure to high quality companies.
    • Larger private firms are taking advantage of market conditions and looking to make strategic acquisitions.

    Contrary to the prevailing attitude of doom and gloom, these figures reveal that this is a golden period for business – for those investors and entrepreneurs who are prepared to see the bigger picture, take a calculated risk and back themselves.  As they say “a crisis for some is a blessing for others”.


    What is an Information Memorandum, and why do I need one ?.

    April 17, 2010

    When I first start working with new clients, that are looking to raise capital or sell their business, this is almost always the first major obstacle we have to get past.

    The Blog entry has been created to assist company owners in understanding what is involved in preparing an Information Memorandum (IM), during the process of selling a company or raising new capital for the company.

    It deals with these 4 questions:

    1. What is an IM ?
    2. Why prepare an IM ?
    3. How should a company go about preparing an IM ?
    4. How is an IM likely to be used by investors ?

    What is an IM ?.

    An IM is a document provided by a company to prospective investors after the investors have reviewed a brief Investment Summary, or “teaser”, and signed a Confidentiality Agreement.

    Some business owners and financial advisors look at an IM as a marketing document which provides a selective overview of the attractive features of a company.  In Australia this was the major criticism of Prospectus’ in the old days …. They were pejoratively called “The Glossy Bit in front of the Application Form”.

    In most Westminster-based legal systems – notably Australia, US, UK, New Zealand, Canada and at least 20 other Countries, an IM by law must contain a full, true and complete disclosure of all information which may materially affect the value of a company.  NOTE to Company Owners …. You’re personally liable if you sell a business whilst withholding information that would have affected an investor’s ability to come to a different conclusion about your business.

    However, IM’s are most often targeted at “Sophisticated Investors” who are not protected by the layers of regulation and red-tape that are applied to “Retail Investors”; therefore the law’s position on sophisticated investors is that they had the skills, knowledge, money and track-record to know better and if they lose their money then they understood the risks that could result ion that and still chose to invest.

    A company and its advisor(s) must strike a balance when preparing an IM.  The document ABSOLUTELY is a marketing document, in the sense that it should motivate investors to want to invest in the company – but it needs to avoid hype, exaggeration, or omission, and provide a complete disclosure of ALL material facts.  Hype or exaggeration will only diminish the credibility of the company and its management in the eyes of investors, and may also create legal liability for the Directors of the company.

    Why prepare an IM ?.

    In general, an IM allows the owners of a company to present a comprehensive, accurate, and attractive picture of a company.

    It’s also worth stating the obvious here – Investors EXPECT an IM, if you don’t have one you almost certainly will not get anybody interested let alone get their $$$’s.

    An IM also helps to ensure that all investors receive the same information.  This is particularly crucial when a seller is running a competitive process.  The more information that finds its way into the IM, the less need there is for investors to pose written questions, saving time for both buyer and seller.

    From an investor’s point of view, a good IM demonstrates the professionalism and motivation to sell of the sellers, as well as the quality of the management—all important factors when deciding whether to invest in, or buy, a company.

    How should a company go about preparing an IM ?.

    Preparing an IM requires a high level of internal organisation.

    The CEO or business owner should lead a small team of experts in the main areas (e.g. sales/marketing, legal and finance) that will need to be covered in the IM.

    Deliverables and deadlines should be decided for each member of the team. When this process is complete, the final version of the IM should be reviewed by the owner, CEO, and all members of the team, to ensure consistency, completeness and accuracy.

    When MSC prepares an IM, we generally aim to provide investors with details of clients, market position, operations, finance, risks …etc – information sufficient for them to prepare a non-binding bid, with an indication of the bidder’s valuation of the company.

    As a sanity-check, the Seller(s) and their advisors need to ask themselves what information they would require if they were buying the company – using a company they know little/nothing about as their reference point.

    Given the IM is designed to solicit a non-binding offer on the company, with valuation, the omission of one or more key facts may give a distorted valuation, and provides investor with an opportunity to renegotiate their offer – typically downwards !!!!.

    How is the IM likely to be used by investors ?.

    An IM is the most efficient way of providing a large volume of information about a company to investors.

    Even though there may be one person or a small group of people performing due diligence on the company at its premises, there is also a need to communicate with a wider range of decision-makers (e.g. investment committees, boards, advisors) that may never appear on site.  The IM is by far the best way to do this.

    Conclusion.

    In conclusion, a high-quality IM is critical when selling a company, it is in some ways the equivalent of a CV for candidates looking to get that next great job/role.

    And importantly, you don’t get a second chance to make a good first impression.

    If you’d like to know more about this topic – feel free to contact me.  I’m also interested in any comments, or experiences you’ve had either involving a good IM or a bad IM.


    The Art of Capital Raising

    March 29, 2010

    I get approached all the time by businesses/entrepreneurs/inventors looking to raise capital, and not understanding that they’re nowhere near ready to go chasing VC/PE/HNWI funds and particularly the current state of the business is best described as “uninvestable”.

    So, before we get into the guts of this the very first thing we have to work out is “Are you, and your business, INVESTABLE ?”.

    Determining Investability.

    To determine the answer to this, you and your business need to be able to pass some important tests:

    1. Is your business in a sector/industry/area that can support rapid, and sustainable, growth ?.

    2. Can your business achieve a significant size and scale within a maximum of 2-3 years ?.

    3. Can your business achieve much higher profitability than equivalent (eg: Competitor or “benchmark”) businesses ?.

    4. Do you have the right team in place to make 2 and 3 above realistic ?.

    5. What results do you have, in this business or previous businesses, to be considered a “reasonable bet” ?.

    What Is The Best Way To Raise Venture Capital?.

    [1] Get off to a “Smart Start”

    • Have a simple company structure, with a sensible number of investors (more than 1 but less than 10).
    • Have your employees, consultants, contractors and advisers engaged with well-documented agreements.
    • Get your intellectual property well-protected.
    • Have your “seed investors” and any business loans properly set up.
    • Have good corporate governance practices in place, refer to my blog on this topic https://investoritis.wordpress.com/2010/03/27/what-does-good-governance-look-like/
    • Have the right Legal/Financial providers in place – preferably “brand names” even if not the absolute best in their field.

    [2] Be able to tell a Good Story about your business

    • Know how to articulate the fundamentals of your business … all day, every day.
    • Have a good bio on your Team, and how they deliver results for you (and any incoming Investors).
    • What Problem do you solve, and/or what Opportunity are you exploiting.
    • What Technology are you using/creating, and what is it a solution to/for.
    • How can you deliver sustainable advantage (as/when the competition adapt).
    • What is your business model, and how does it deliver value to your Customers and Investors.
    • What sort of Partnership/Network/Leverage arrangements do you have in place to maximise your opportunities.

    [3] Make Sure the Numbers Add Up

    • Demonstrate a solid grasp of your business economics
    • Provide long-term financial projections (ie: 2-3 years from now at least)
    • Have a tight near-term operating plan (the current Calendar Year and/or Financial Year).
    • Clearly capture your capital requirements, both in terms of $$$’s and what they’re for.
    • Look to set up a capitalisation structure over multiple rounds, as this benefits Earlier Investors who’ve had to take a higher risk than Later Investors.
    • Understand and Show your Levers of Profitability and Expense.
    • Articulate the Key Business Metrics are, and how they will be Measured.

    [4] Find the Right Investors

    • Use (well …. prove) your sales and marketing skills in how you approach potential Investors.
    • Actively generate momentum and interest in your business.
    • Target your Investor contacts – go for the best ones first.
    • Don’t flog your business pitch all around town … Once you’ve had 3 or more knock-backs then everybody gets to hear about it and has to assume your business is a “dog with fleas” and won’t return your calls.

    [5] Build Credibility with your Potential Investors

    • There are many factors that enhance/devalue your business. A number of them are covered in the following points.
    • Who your Customers are (assuming you’ve got some).
    • Who your Strategic Partners are.
    • Who your current Investors are.
    • Who your current Board members are (and you’d better have a Board in place).
    • Who your Advisers and industry experts are.
    • What your Milestones are for the next key achievements/targets within the business.
    • How well you’ve been meeting your Milestones in the past 12 months.
    • Being overly defensive about the business model, or the business results.
    • Blaming others for the inability of the business to meet its Targets.
    • Telling Lies that potential Investors can easily research (AND THEY WILL) to prove them untrue.

    The Sorts of Entrepreneur Lies That Irritate and Turn Off Potential Investors

    10. Our projections are conservative

    9. Our target market is $56 billion

    8. We have a world class team

    7. Our average sales cycle is 90 days

    6. We have no direct competition

    5. No one else can do what we do

    4. All we need is 2% of the market

    3. We’ll be cash flow positive in 12 months

    2. Our contract with Nokia will be signed next week

    1. I’ll be happy to turn over the reins to a new CEO!