Show me the money

If you’ve got through the first three questions, investors are ready to get serious and decide if they are going to give you the money. Do not make the mistake of going with your story and expecting them to figure out the amount of money you need and how you are going to pay them back. To get the cheque books flipping open, you are going to prove three things:

1. What is the growth rate to make the business worth backing? 

2. What is the return on investment? This depends on company size, but can range from 8%, 25% to 40% plus.

3. How will your investor get out his money (exit) within his desired time frame? Demonstrate that you get the importance of an exit plan for the investor. 

What Is your financial growth? 

The investor needs a financial model that is built with real numbers from the past and detailed numbers going into the future. This is where many businesses fail. They do not understand the financial funding models built by business analysts. A soundly constructed model separates the wheat from the chaff, the growth business from the plodders.

There are drivers that make the money come into the piggy bank. For example, one of Tim Hortons’ drivers would be the number of customers per day. How would you increase that number? How much would it cost to increase that number? What is in the plan to show that the customer numbers will keep going up? Opening new coffee locations? Specifically, state what you will do with the money. Have clear action plans to demonstrate you know what to do once the money gets you on the runway. What’s the destination and who’s doing which job? The investor can play with the model and increase or reduce the drivers. For example, they could see what the returns would be if you only opened half the number of franchises you said you would. The investor will use your model to test your assumptions of what grows the revenue.

How to value your business

Mr. Deep Pockets ends our lunch with cups of rich Kenyan tea, and I decide now is the time to bring up the tricky subject of valuation. Fund managers think this is their sole territory, but it’s a huge controversy for owners. Valuation is the huge sticking point for all concerned. Some business owners accuse finance people of throwing the bones to come up with a number while finance people argue that owners have too much emotional investment in the business and see it through rose-coloured glasses.

Mr. Deep Pockets pays the bill and mulls over my question. As we stride back to the elevators, he finally speaks, “Value is in the eye of the beholder. It is that mix of art and science. Albert Einstein said that after a level of skill was achieved, science and art tended to blend. He believed the greatest scientists were artists too.”

I nod. 

He was on a roll, “Then throw in the incredible importance of timing because values are cyclical; you need to catch the peaks.”

I nod, “I suppose the baby boomers getting ready to bale, will drive down values soon?”

“Absolutely! Also, different buyers use different valuation methods. A business is worth what a buyer will pay. It all depends on the type of buyer.”

Curious now, I ask, “What are the different types of buyers?”

“Broadly speaking, they can be loosely grouped into two camps. There’s the “Financial” versus “Strategic” buyer. Come into my office and I will show you the difference.”

He sketches a diagram. At a glance, I see that valuation is driven by two simple concepts: financial and synergy. 

Financial valuation is given by laying out expected profitability or the future earnings. This valuation is used by professional fund managers and venture capitalists. A strategic valuation is given by competitors, suppliers or customers who could buy your company to fit into their business and value it more. 

strategic valuation will give you the most cash for your business. The greater the “fit”, the bigger the premium. All this means is plan your exit for years by knowing competitors and suppliers who might buy you.

Valuation by future earnings

Here’s where you show how much they can make on their investment: what is the value  today and what will it be in the future? Value boils down to the future earnings. The best way to see future earnings is to look at the present and make some projections. This is called discounted cash flow and you can find details on these in any introduction to finance text book. Investors get quite huffy about who sets the valuation as they believe it to be their prerogative. Nothing sets them off in a tailspin faster than a presentation or plan with a value attached. Do wait for the investor to throw the first valuation shot but you can have your own valuation estimate. 

The exit

We leave the building and Mr. Deep Pockets jokes, “That brings me to my final point. I want to see the exit strategy defined. How are you going to get a liquidity event?”I shrug, not sure what he means.

“You know, this is really important to know when looking for investment money from private equity. Within five to seven years (or less), the typical investor wants to exit. The entrepreneur will need a major cash infusion event to pay us off. This exit could be done by going public with an IPO. That was the favourite from the 90’s, but today the favourite is management buy-outs. You could target a competitor company that might like to buy your business.” 

This was the exit plan for a coffee shop entrepreneur in London—Big Ben and the Queen and all that. The Seattle Coffee Company owner designed his coffee shops to be bought by Starbucks. He even made his signs the same size and round shape. All the new owner from across the Atlantic needed to do was pop out the Seattle sign and snap in the Starbucks. 

With baby boomers about to start leaving the business world, investors are acutely aware that five years from now there may not be the easy exit. Help out and have a solid list of buyers. 

What exactly is “Investor Ready”

With the long-term view, you can work on how to affect the value of your business. That is the application of Covey’s very good habit: Begin with the End in Mind. Figure out the four questions. To summarize how to get investor ready, the investors’ hot buttons are: 

• Your Team

• Proof of concept: The investor wants to see that you have designed a light bulb, have made it, turned it on and sold it to a happy customer. 

• Competitive strength: Patents, barriers, partners and alliances: If Sony has offered to give you some chips to use in your technology, this is newsworthy. Alliances can be a deal maker.

• ROI: Are you going to be able to grow the business sufficiently?

We will go into more detail but there’s the big view. As I take leave of Mr. Deep Pockets, I see nervous looking people fidgeting in the waiting area and smile. Mr. Deep Pockets has given the inside scoop on the questions the plan and presentation must address.  As Leonardo da Vinci said, “Simplicity is the ultimate sophistication.” We need to work at refining down your business to a simple, but sophisticated concept. You will need:

1. The initial two sentence pitch—the infamous elevator pitch. 

2. A written investment proposal document—the financial plan 

3. A practiced verbal presentation and PowerPoint presentation

Each investor you are going to approach will judge why they should give you money. Your job is to make that process as simple as possible—you will show that you are beyond the string and chewing gum stage. You are ready to maintain a mature partnership. Let’s carry on reading and you will learn how to show future value and to put together a financial opportunity that gets investors shouting, “Yes—go straight to GO!”

** This is an excerpt from part 3 of my book.