The fear of failure haunts most entrepreneurs. Business owners in the early stages of developing a new venture work every hour of every day to overcome the threat of failure. People who start and grow a business tend to be the personality types that yearn for success – they want to make money, to grow their business and have an impact on the world around them.
To avoid failure, it is useful to understand what causes a business to fail. The answer is surprisingly simple. I have spent the last few months studying entrepreneurial failure, and I have found that entrepreneurs generally fail for one reason: they run out of money.
Guy Kawasaki, venture capitalist and author echoes this sentiment when he says: “Start-ups face one primary challenge: To never run out of cash.” Many businesses have a great product, good customer service, innovative marketing and slick operations but they run out of cash and end up filing for bankruptcy because their finances are not effectively managed.
Managing finances is part of being an effective business owner or manager. It is an essential skill. The number one reason why new managers choose to do an MBA is to improve their understanding of finances.
Financial management can appear complex and intimidating to the un-informed outsider but once you understand some basic principles and concepts, you should be able to master finances at a level required to make wise strategic decisions and to recognise the warning signs of an impending crisis.
Understanding financial management principles will not automatically make you an effective manager but not understanding finances will make you a poor manager. A general understanding of finances is something that you must have to allow your business or career to progress past a certain level. Entrepreneurs and general managers can be divided into three different categories based on their understanding of financial management principles.
Categories of Understanding
At this level the entrepreneur or manager knows very little or nothing about how to track the financial health of their business and use the management accounts to make wise strategic decisions.
At this level the manager understands enough to be able to get someone to set up a decent financial system, to read a basic financial report and to ask intelligent questions about what he or she sees in a set of management accounts. The manager with managerial oversight will usually rely on someone else to deal with the day-to-day financial details but will be party to the important financial decisions and able to identify problem areas.
At this level a manager usually has some background in finance and will get intricately involved in the financial details of the business, understanding the details of every transaction and how it affects the business. This can be useful but is not essential. It can also blind a manager to other things that are going on in the business if they are too lost in the financial details. To be effective as an entrepreneur or manager, you should be able to operate at level two – managerial oversight – when dealing with the finances of your business or department.
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Case Study: ActivePro – Mitch Thomas*
Mitch had always loved endurance sport: running marathons, doing triathlons and cycling multi-day races were his passions. Although a talented athlete, he soon discovered he did not have the genetic make-up for the transition from competitive amateur to professional athlete, but he was still intrigued by the science of training and racing. He read widely about training principles and practices to succeed as an endurance athlete and volunteered as the triathlon club coach at university.
His exuberant personality, attention to detail and patient focus meant that he was very successful as a coach and he later moved into paid coaching positions, first as an employee of the university and later as a freelance coach at schools and clubs in his area.
Although these were rewarding roles, they did not pay very well and he decided that if he was going to be able to make a long-term career of coaching he needed to be more proactive about turning his passion into a business. Mitch had found that more and more individuals were willing to pay for good coaching advice:
An executive at a large corporation who decided to fulfill a life-long goal to run the comrades, or a mother of three who wanted to lose some weight and set herself the challenge of doing a sprint triathlon. These were people with little time but lots of disposable income who were looking for advice and guidance on how to train for an endurance event in a limited amount of time.
Over the last twelve months Mitch had been developing a system for devising training programmes for such people. With some upfront information about current fitness levels, weekly schedules and personal aspirations he was able to create customised training programmes for individuals. He now wanted to turn his coaching system into a business.
Mitch decided to establish an online coaching business. He would advertise in sports magazines and target individuals who had a specific goal in mind. In return for a monthly fee he would provide the individual with a customised training programme, feedback on their progress and advice on how to maximise their performance.
Because he did not have any finance training or experience in business, he decided to hire an accountant to prepare some financial forecasts for the business that he had decided to call ActivePro. He provided the accountant with some details of what he planned to do and how he planned to do it and a few weeks later, after a few additional phone calls the accountant delivered a neatly bound document with financial forecasts for three scenarios – high, medium and low.
Mitch and the accountant talked through the scenarios briefly and although Mitch understood very little about what he was saying, he noticed that even on the low scenario he would still make a profit, so he forged ahead, hiring an assistant to do marketing and administration for the business, taking out adverts in magazines, buying the necessary computer equipment and working with a web design and hosting company to create the website. Everything seemed to take a little longer than expected but his business eventually “opened its doors” for trading.
Because he had understood very little about what was contained in the accountant’s report, he had paid very little attention to the contents while setting up the business. His first few months of trading were slower than expected, people were “just not responding to the adverts as I had hoped”.
On trying to compare his performance to the financial forecasts he was confronted with terms such as “accrued for”, “deferred tax” and “PBIT” all of which he did not understand. He estimated that he was operating somewhere between the low and the medium scenario but his bank account did not reflect the profit that he should be making according to the forecast.
He also noticed that even when he did get a surge in new clients in response to an effective promotional campaign, the increase in clients did not always have a positive impact on his bank balance. He was confused and frustrated and every time he tried to get answers from the accountant he had hired all he seemed to get was “more confused” and “a bill for the consultation”. He had sleepless nights worrying about whether the business had adequate clients to survive and why as they got more clients they appeared to lose money. It made no sense.
Over time Mitch felt that the only number he could really trust was his bank balance. At least he understood what the bank balance was telling him and he began watching it like a hawk. He also started to realise how decisions that he made impacted his bank balance.
For example, with his first batch of clients he provided his service, issued invoices at the end of the month and was generally paid a month later. So it took at least two months from the time of devising their training plan for the month to getting paid.
When he asked clients to set up a debit order for payment to be made at the beginning of each month of service the impact on his bank account was profound – all of a sudden he had more money for the development and operation of the business. He also started to realise the impact of different costs on the business. Certain costs such as web hosting, his employee’s salary and office rental remained the same regardless of whether he had 15 or 150 clients.
Other costs increased with each additional client that he brought on. His email and telephone costs increased as more clients signed up and more and more of his time was required for devising training programmes as his client base increased. Mitch began to factor these types of different costs into his planning for the month and he looked for ways to minimise certain costs, such as installing a DSL line with a flat monthly rate for email. He also examined how he could spend less and less of his own time devising programmes for people so that he could offer more programmes each month.
He refined and advanced his software so that it took less time to devise programmes and he hired another coach to devise some of the programmes using the ActivePro proprietary software. As Mitch became more familiar with the finances of the business he began doing detailed forecasts of income and expenses for six months into the future.
He also had fun considering the future of ActivePro and how much he could be making on a monthly basis in three years time if the business continued to grow at a reasonable rate. He put systems and processes in place, hiring more people, building a more solid IT infrastructure and further developing his software, to deal with the growth.
Mitch likened the process of starting a business to an incredibly tough ultra marathon: “You start off and it is exciting to be engaging in this big test, you are filled with aspiration and hope as well as fear and anxiety. Over time the reality of the challenge sets in, you experience set-backs and pain and realise that you are not as well prepared as you should be. In dealing with these challenges you learn a lot about yourself and your level of resilience.
If you reach your goal you are filled with joy and soon begin looking for the next challenge. If you are under-prepared and take advice from the wrong people before you start out then the chances are it will be a far more painful experience. I learnt the hard way”.
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7 Numbers You Need to Know to Grow Your Business. Get Them Here
* The name of the business and business owner have been changed to ensure anonymity
The ten principles of effective entrepreneurial financial management:
- Budget for CASH FLOW
- Build your OWN models
- It’s not just about HOW MUCH but also about WHEN
- Know the NATURE of different cash flows
- Short term = DETAIL; Long term = big picture
- Your BANK BALANCE is your truth
- Know your BASELINE (breakeven)
- Keep UP TO DATE
- Balance off being overly PEDANTIC versus dangerously LACKADAISICAL
- Report results with PURPOSE
1. Budget for cash flow
Accounting debits, credits, accruals and provisions are not only confusing but also misleading. Cash in the bank is a far simpler concept to comprehend and cash in the bank is what really counts. Therefore in planning for the future of your business focus on how much money you will have in the business bank account from one month to the next.
I know of a number of qualified chartered accountants who have launched their own businesses and in so doing, set up elaborate budgets complying with all the accounting laws and standards. Yet, within a few months they simplified their forecasting system to focus on actual cash flows.
A business can be profitable, growing and showing huge promise but if it does not have enough cash to meet its obligations, it will fail.
Budgeting for cash flow means drawing up twelve columns for the twelve months of the year. At the top of the first column, write your current bank balance, then list and subtract all the money you expect to pay out in month one – salaries, operating expenses, marketing and anything else for which you will need to take money out of the bank account. These are cash outflows.
Then list and add all the money you expect to get into your bank account – money from customers paying for goods or services, money from investors, interest earned and any other money that will flow into the bank account.
Total up the column and come up with an expected cash balance at the end of month one. This then becomes the opening balance at the top of the column for month two. Do the same thing in forecasting cash flows for month two – listing and subtracting outflows and listing and adding inflows.
Total the column and that will be the bank balance at the end of month two. Repeat this for all twelve months and you have a cash flow forecast for the following year of operation. If the number at the bottom of any column is negative, you have a problem and will need some capital to make up the shortfall or rearrange your spending and cash collection to avoid running out of cash.
2. Build your own models
The case study illustrates what happens when you, as the owner or manager outsource the process of building the financial models and forecasts for the business. Firstly, you fail to understand the intricacies and important relationships within the business and secondly you are unable to change the model when circumstances change.
You can learn so much about your business by building your own financial models and it empowers you to control and change the forecasts as the business develops. If you feel that you don’t have the competence to build your own financial models, rather than outsourcing the entire process to a professional, pay the professional to coach you on how to build and adjust your financial model and cash flow forecast in a simple spreadsheet package.
This is a classic case of the application of the Chinese proverb “give a man a fish and you feed him for day, teach a man to fish and you feed him for a lifetime”. If you get someone else to prepare your financial forecasts you will know for a day, if you get coached on preparing your own financial forecasts you will be empowered for a lifetime.
3. It’s not just about how much but also about when
The timing of cash flows is absolutely critical. A few years ago the parents of a friend of mine moved to George and bought a dairy farm with the intention of developing a cheese brand to sell to the major higher-end grocery stores. They were thrilled when after many hours of selling and persuading, Pick n Pay agreed to carry their brand of specialty cheese.
A few months later the business almost closed because they failed to provide for Pick n Pay’s strategy of only paying suppliers about a hundred days after the products are delivered. They therefore incurred the cost and paid out the cash for producing and packaging all the cheese but only got the cash from their sale over a hundred days later.
Their failure to truly understand and provide for the timing of cash flows almost cost them their business. It is therefore important to plan when you will receive money into the business and when you will be required to pay for items.
Most customers will push for late payments and suppliers will try to get you to pay early. Being aware of payment terms and negotiating favourable payment terms can be the difference between success and failure in a growing business.
In Mitch’s case study, he radically enhanced the financial health of his business by adjusting the payment terms and the payment process he demanded of his clients. By insisting on upfront payments via debit order he collected cash from sales two months earlier than he had before and therefore had much more money in the bank to develop the business.
4. Know the nature of different cash flows
Broadly speaking, any expense results in one of two kinds of cash outflow – fixed cash outflow for expenses, such as rent or salaries, that will be paid no matter how many units of product are sold, and variable cash outflows, such as sales commission, that vary depending on how much is sold.
Fixed cash outflows create a risk for the business if it has a bad month or doesn’t reach sales targets because this may result in failure to generate enough income to cover all costs. For example, in the case study, Mitch did not have enough clients in the first few months of operation to make enough revenue to cover the cost of the salary for the admin assistant and rental for the office space.
As he acquired more and more clients these costs did not increase and this enabled him to benefit from economies of scale and make reasonable profits as he earned more revenue. In the early stages of a venture when a business still has few clients, an entrepreneur can benefit from turning fixed costs into variable costs.
For example, Mitch could have benefited from using a part time admin assistant in the first few months of his business – he would then have only paid her for the time that she worked. In the later stages of the business when the client base increases and the business stabilises, the entrepreneur can sometimes benefit by turning variable outflows into fixed outflows. In the case study, Mitch did this successfully by changing his email from a pay per use basis to a fixed cost basis using DSL. This enabled him to reduce his overall email expense per month and increase his overall profit.
5. Short term = DETAIL; long term = big picture
Preparing budgets and forecasts for the next few months is distinctly different from planning for three to five years into the future. In the short-term it is important to focus on the intricate details of cash flows, monthly sales and detailed operating expenses, ensuring that the company has enough money in the bank to survive.
Budgeting for the long-term is about setting realistic but motivational goals and seeing the big picture of where the business could go over time. The benchmark is that you should prepare a detailed cash flow forecast and sales budget on a week-to-week or month-to-month basis for the next six to twelve months and you should prepare long-term, big picture budgets for three to five years out. These can be done on a quarter-by-quarter or year-to-year basis.
6. Your bank balance is your truth
A bank balance is like a scale for someone on a diet. When you get on a scale you get immediate, honest feedback on how you are doing in your effort to lose weight and there is no way of falsifying or hiding what the scale says. A bank balance is the same for a business – it is the best measure for monitoring the financial health of your business on an ongoing basis. With money in the bank you have the power to do things and with no money in the bank the business can become crippled.
Too often I have seen business owners and entrepreneurs ignore their bank balance because “it is too painful to know what is in there” they say. This is irresponsible and dangerous and can ambush your business without you even knowing. Monitor your cash position on a regular basis – check your bank balances daily and take corrective action where required to ensure that you have enough money in the bank.
7. Know your baseline (breakeven)
Entrepreneurs are renowned for enduring sleepless nights worrying about their business. I can attest to this. When I launched my first business I worried endlessly about whether we would survive and I would lie awake at night questioning:
“Did we have enough clients?” “Would we be able to pay the expenses at the end of the month?” “Could we expect to make a profit this year?” “What more should I be doing?” One of the things that helped me overcome this problem and sleep peacefully at night was working out how much I needed to sell each month to break even.
In my case I needed to sell a certain number of hours but for others it may be that they need to sell a certain number of products or have a certain number of subscribers, as in Mitch’s case. Whatever it is that you sell, it is important that you know how many of them you need to sell to break even.
This number is called a baseline and it not only serves to give you a level of comfort when you know that you will hit that target, but also serves to jolt you into action if there is a risk that you won’t achieve the baseline targets.
8. Keep your financial records up to date
It is so easy and tempting to put off updating financial records to a later date. It is the kind of thing that many entrepreneurs think that they will get to tomorrow, next week or next month. When I was training as an accountant at a major accounting firm one of the worst things that could happen was to be asked to work in the entrepreneurial services division and be given a box of out-of-date invoices, delivery notes and stock count sheets and be told to create the accounting records.
Invariably the business was in bad shape because the owner or manager had no idea of what was happening. Letting your accounting records get out of date can be crippling in the medium term. Firstly, you lose control of what is happening in the business; secondly, the records become less and less accurate and less and less relevant the further down the line they are prepared; and thirdly, there is a real risk that you will run out of cash if you don’t accurately monitor the cash flow in the business.
9. Balance off being overly pedantic vs dangerously lackadaisical
Some entrepreneurs and managers are so pedantic and particular about managing their finances and the cash flow that they forget about actually running the business and preparing for the future. Other entrepreneurs or managers choose to ignore their finances and their cash flow until it is too late and they have exceeded their overdraft limit and are receiving lawyers’ letters from their suppliers.
The key is to find a balance between the two extremes. If you are inclined to be pedantic, allow yourself to err on the side of being lackadaisical. If you are inclined to be lackadaisical, strive to be a little more pedantic than what you think is reasonable.
10. Report results with purpose
So many managers and entrepreneurs get their accountants to churn out financial reports because it is the “right thing to do”. They don’t understand or use these reports in any effective way. If you want to effectively manage your finances you need to create reports that are useful and understandable.
If you are reporting results for internal decision-making, be sure to include all the detail that will empower you and your team to make an informed decision. If you are reporting results to the bank in an effort to raise additional financing, try to report a strong balance sheet and healthy cash flows.
If you are reporting for tax purposes, make your profits look as weak as possible within the bounds of what is legal and ethical. Be very conscious of your ethical compass as you construct financial results for different purposes. Unethical entrepreneurs are seldom successful in the long run. Ensure that your financial reports serve a meaningful purpose and that you are able to use the reports effectively to make decisions and drive the business forward.
These principles of financial management are not going to make your business famous or wildly successful but they may prevent it from failing. So if you want to give your business a realistic chance of survival remember the wise words that a Professor once passed on to me: “Turnover is vanity, profit is sanity, but cash is king”. Being an effective business manager or entrepreneur is not about understanding every accounting standard ever published or applying intricate finance theories. It is about taking a practical, common sense approach to planning, monitoring and reporting on the cash flows in your business.
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6 Hacks For Getting Clients To Pay You Faster
Almost everybody pays eventually but almost nobody pays sooner than they have to. That’s a problem.
Getting your clients to pay you on time is a real hassle. After a sale, it is easy to think you did your job and just relax. Nothing is set in stone until the payment is final.
Not getting your payment on time can be detrimental to your company. This is especially so if you need or were expecting that money to come within a certain timeframe. It is frustrating, and there is a fine line because often you are working with people who could be recurring, valuable customers.
Therefore, it is critical to you find ways to get paid on time. Here are seven hacks to avoid the hassle and get paid faster:
1. Set payment expectations early and give gentle reminders
From the onset, ensure that your clients know what their cost and payment schedule look like. You do not want to give them any reason for confusion or an excuse not to pay on time. Make it crystal clear when they need to pay by and how much they will need to pay. It will properly set their expectations to avoid surprises.
Offering gentle reminders about an upcoming payment can continue to keep their expectations in check. They might not be prepared to pay if they signed their contract three months ago and forgot that their payment date was tomorrow. Instead, put the pieces in place to ensure, with total certainty, that they know how much they will owe and when they will owe it.
Poor communication also sets a poor standard with your clients. It will give them the message that they can receive your services without having to pay on time. It is hard to change this precedent. Therefore, being consistent and straightforward from the very beginning will help you keep these payments coming.
2. Follow up
Do not hesitate to follow up after sending the invoice. Your clients are busy. They likely overlooked a payment if they did not make it. You can send friendly reminders to pay after a few days have gone by. No one minds a gentle follow-up as it demonstrates your ability to act professionally. I built my calendar app for this very reason. Follow up frequently till they pay.
Streamline the payment process as much as possible. There are some awesome tools to help collect payments today. The less time it takes your customers to make the payment, the faster you will get paid and the less hassle you will deal with. It is worth the upfront investment to set up the right systems in order to get faster results.
When possible, take the payment upfront, too. This way there will not even be an issue of getting them to pay. Today, people are more comfortable paying for a service before they see its full value in. Take advantage of that.
3. Offer small incentives for quick payment
Offering incentives for quick payments will speed up the process and build customer loyalty. Customers know they are going to have to pay at some point. If they know that making the payment immediately will give them an additional benefit, then they will often do so.
You can even form these incentives around your product or services. It could be sending company stickers, access to an additional feature, or a free week of service. This will reward them for paying on time and give them further reason to continue coming back.
4. Send the invoice to the right person
At larger companies, it is crucial that you send the invoice to the right person. When your clients are originally agreeing to pay, make sure they know how that payment will take place. It takes two minutes to discuss who will be making the payment, and it will save you significant stress on the back end.
5. Establish personal connections with clients
You might not always have the bandwidth to do this, but getting to know your clients will give you a much easier route to payment collection. In the case that someone has not paid, you will feel more comfortable asking them. It is easier to send a quick reminder to someone that you know than it is when you feel like you have to be more formal. Personal connections with your clients will ensure you get your money faster.
6. Think about the little things
There are a variety of small factors that add up to improve the speed in which you receive payments. Think about the time of day that you are sending the invoices out, the styling of the invoices and the actual content within them.
You can streamline the process with a clean and concise invoice. Make it visually appealing and include descriptions of what they are paying for. The process will slow down if you make mistakes. Instead, take the extra time to make sure that everything looks as it should.
This article was originally posted here on Entrepreneur.com.
Why Bartering Can Be Your Untapped Revenue Source
More organisations are experimenting with cash-free solutions. Here’s how bartering may drive the future of B2B commerce.
Many small- to medium-size business owners have begun to barter, trade and swap goods and services without any cash involved.
Take the city of Portland for example. Unsurprisingly, the culturally tight-knit and self-proclaimed weird city has given rise to a thriving underground bartering network. A recent Rolling Stone article showcased the colorful personalities and supportive business community that is Portland’s bartering economy. Some of them call themselves “swappers,” others simply identify as community-oriented business owners. All of them share a common bond of exchanging goods and services to help each other grow.
The trouble with traditional bartering like this is that it’s incredibly difficult to scale. The idea of a coffee shop exchanging beans for fresh food from a local grower is nice, but any business looking to expand can’t possibly expect that kind of barter to lead to scalable growth.
That’s what gave Bob Bagga, CEO and founder of BizX, the idea to create a community that enables businesses to turn their excess capacity into potential capital. Bagga explains:
“By using the BizX dollar, businesses are able to turn extra business capacity and assets into cash flow, which can, in turn, be spent at member businesses without any cash involved. The goal for us is to reduce waste, maximise member potential and help companies earn new customers.”
By creating a complementary currency to power commerce through the sharing of excess goods and services, Bagga and his team have given business owners a chance to create cash-free lines of capital for little more than their incremental cost of goods sold.
Most business owners have plenty of great ideas to grow, but lack the capital and cash resources needed for those growth initiatives. Take a restauranteur, for example. Expanding or upgrading the restaurant may be their desired path for generating increased revenue, but the cash required for such an undertaking might not be readily available.
What if that same restaurateur was able to exchange empty seats and excess food for a shared currency that they could then spend at other businesses in the network? While trading one meal with a contractor might not result in enough capital to exchange in return for a major overhaul, many units over time will eventually add up.
That’s precisely why business owners are looking for alternatives to traditional financing and venture capital raising. Those models, though effective, often edge out small- to medium-size businesses in favour of rapid growth SaaS companies or user-heavy business models.
As a result, businesses looking at growing should explore growth opportunities that require little to no upfront investment.
The future of B2B commerce
B2B companies often operate at less than their full potential. Bagga pointed out that small businesses in the United States, on average, only run at 80 percent capacity. In many cases, this is simply because connecting with new customers presents a real challenge.
Also, most B2B companies have excess business potential because they offer products or services that could field more customers at a small marginal cost of goods sold. As such, many can afford to accept an alternative form of payment, as long as they can use it for other practical applications.
While traditional bartering usually doesn’t result in additional cash flow, companies that are able to exchange services based on a shared or complementary currency can determine when and how to spend their newfound capital. Many will use that for marketing, advertising and public relations services that would otherwise have been too costly.
Cash flow isn’t always confined to exchanged services either. In many cases, these unique partnerships result in cash business resulting from direct referrals from services rendered in exchange for other goods.
This article was originally posted here on Entrepreneur.com.
The Steps Involved In Joining An Investment Holding Company For High Growth
There are many growth capital avenues available for established entrepreneurs. One of those is joining an investment holding company. Is this the right move for your business?
Let’s say you’re a high-growth, high-impact business that’s reached a ceiling; a point at which you need to seek investment partners as a growth tool. Many mature businesses approach an intersection at which it becomes clear that they need to unlock capital, identify mentors, or collaborate beneficially with other subsidiaries.
If your goal is to join an investment holding company, what are the steps involved and what can you expect from the process?
Sustainability and scalability are the key
To begin with, it’s important to clarify the difference between a private equity (PE) investor and an investment holding company. PE investors need to go into an investment knowing what their exit strategy will be, while groups choose to invest in businesses that have shown themselves to be sustainable and scalable. As long as they continue along that road, the group is more likely to hold onto them. You are also a member of that group, and subject to its board.
In the case of MICROmega, we seek first to understand the business. If we are able to do that, we look for sustainability and scalability, and if these characteristics are clearly evident, we go on to pursue an investment opportunity. This is typical of investment holding companies.
Once we become the investment holding company, we try to remove as many of the subsidiary’s distractions as we can: Alleviating administrative and financing burdens so that business owners are free to focus on growing the business. In our experience, growing businesses become more and more administratively intensive, which can bog entrepreneurs down.
This is ultimately a partnership, so everyone should benefit from the association. At the same time, you need to be sure that the investment holding company shares your values — this is a long-term relationship, and you need to know that you’ll be happy down the line.
What would-be subsidiaries need to do
1Define exactly what you want
While there are some basic strategic values that any partner should be able to bring to the table — namely, access to capital, industry-specific networks, and economies of scale — it’s wise for an investor-seeking business to have a predetermined idea of the specifics that they require from a potential strategic partner.
2Research, and research again
Any long-term investment relationship should begin with extensive research on the investment partner universe. There are many potential investment partners out there, but each has specific investment mandates, sector or industry preferences, and value preferences. Ensure that you can identify and understand these.
3Be clear on your own risk profile
The quantum of funding required will impact the choice of funding partner. When you understand your risk profile relative to the type of returns on offer, you’ll be able to determine, and strive to seek out the most appropriate funding source.
4Unpack your plan for the capital
Businesses seeking to be acquired should be clear on what they will do with the capital to be contributed by the investment partner, and how growth will be achieved.
5Ask the investor the right questions
I’m a firm believer in would-be subsidiaries ensuring that they adequately evaluate potential investors. The starting point is to ensure that the interests of both parties are aligned.
Thereafter, further questions should cover:
- Investors’ detailed track records
- Their investment mandates
- The returns that they target
- Their typical risk profiles
- The origins or sources of their funding.
6Ensure a sense of shared spirit
It is essential that the investor and the organisation’s priorities and approaches are aligned at the outset; that they are on the same page. Many things can go wrong between entrepreneurs and financial partners, and the worst outcome is that the investor crushes the entrepreneur’s pioneering spirit.
In such a scenario, no one wins. This is why I believe that both parties should be happy, with a sincere sense that they have entered into a partnership that will create value on both sides.
Regardless of who your investment holding company is, you should expect it to provide access to capital and support throughout the business; provide mentorship and ideas around innovation; and help you to create an environment in which you are able to focus on innovating, and not on administration management.
- Do you know what you’d like from an investment partner?
- Have you thoroughly researched potential partners in your sector?
- Have you determined your risk profile versus potential returns?
- Do you have a plan on what you intend to do with any capital raised?
- Do you have a clear list of questions to ask any potential investors?
- Have you evaluated whether there is value-alignment?
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