My latest column in Small Biz Daily offers advice to entrepreneurs on how to make their businesses more attractive to potential investors.
Read the original article here.
Starting a business takes a lot of effort and commitment. Because of this, it’s likely that your business means more to you than just a source of income.
The company that you’ve created is an extension of you. It’s a community you’re the leader of, a place you call home for a large part of your waking life.
While having a personal connection to your company and a desire to help it grow can boost your chances of getting the most value for it when it’s time to sell, you don’t want to be so wrapped up in your business that you can’t step back and see it like a potential buyer sees it.
I have worked with many small- and medium-sized businesses to help assess their companies’ strengths and weaknesses — information that allowed these companies to make improvements that boosted their sale price.
You may think of your business as a close-knit community, but keep in mind that investors care more about your business as an asset. As you plan for the potential sale of your business, it’s critical that all of your decisions are based on this reality.
Here are some thoughts on how to do that:
1. Take a step back.
Seeing the big picture will probably require you to take a break from day-to-day obligations. It means working on your business, rather than working in it.
When your focus is working in the business, the needs of customers and employees distract you from seeing bigger problems and opportunities. When your focus is working on your business, your priority is making sure that your company is running at its highest potential. This may include developing long-term customer contracts that are easily transferable if your business changes ownership, or standardizing procedures so the business can run without you.
2. Solidify your five-year plan.
Thinking far into the future is difficult for many business owners. Most have a broad outline for the next few months. Very few actually have goals set for the next year, much less the next five years. With other priorities capturing your attention, anything that’s not a dire situation will get pushed to the bottom of the stack.
However, investors are most concerned with how a business will grow five to seven years into the future. They must see how will your business make them money.
As a business owner, are you even in a position to request an investor’s money if you don’t know where your business is heading?
The future may be hard to determine, but business trends can help foretell your business’s potential. Piloting your business plan across various scenarios will reveal how your plan will hold up against obstacles.
3. Tell investors the good and the bad.
Nothing will hurt the sale of your business more than uncertainty. Investors are unlikely to invest in your business if risks aren’t quantified, so make sure you never answer a question with “It can’t be estimated.”
Telling investors negative facts about your business isn’t always a bad idea. They will see through unrealistic optimism and question your knowledge of the business if you can’t delineate the problems as well as the opportunities.
Be upfront in communicating any risks your business faces. Hearing about bad news later on in the process will be a major red flag that could kill a deal. Transparency and trust go hand in hand, and failure to report on dangers early on will only cause a domino effect in which they question if you are hiding anything else.
4. Remember that it’s all about the numbers.
The underlying question an investor will ask is “How do I make sure I get my money back?” It is your job as a business owner to show that a reasonable return on their investment is not a far-fetched idea. Appraise your business honestly, and elaborate on ideas that will ensure that investors see an attractive return on their money as an attainable goal.
By clearly outlining your company’s intentions and potential growth, you can give your business a shot at meriting attention from a worthy investor.