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Before you look for an investor…

Questions to ask, investment options and goals to establish.

A Moneyweb readers asks:

I love Moneyweb and enjoyed your recent article. I do have a question not sure if you can advise me but let’s give it a shot.

I own a company [name withheld] which I established in 1998 which specialises in the collection of lower balances of monies outstanding, as most companies write off these amounts. I believe I have a good reputation in the market place. What I need is an investor with contacts as well as being a business relationship manager.

As I am a SME; one cannot wear all the hats and my specialty lies in the collection of debt.

Apart from two listed clients, I have the call centre, trained staff and systems to do more with the company, but my weakness is in obtaining more clients.

As a SME how would I approach an investor?

Moneyweb MD, Marc Ashton responds:

Unlike the majority of start-ups who are looking for funding, you already bring three things to the party:

  • A track record
  • Existing clients
  • Revenue

These all make it far easier to approach a potential funder.

However, if I were you, I would try and answer two questions:

1. What is your return on capital employed (ROCE) at the moment. In other words – how much money are you spending to generate what (if any) profits. This will inform a lot of your other decisions down the line including how much you can afford to invest and whether you are actually optimising the amount of money your are pouring into your business.

2. What are you trying to achieve with your business? Do you want it to be a lifestyle business? Do you want to part with equity? Do you want to sell out to a larger competitor?

For a lot of smaller businesses, the first calculation is incredibly important. A lot of entrepreneurs may discover that the money they are investing could be better spent simply being left as cash in the bank. If you are looking to run a lifestyle business then this may be an acceptable return as the trade-off would be freedom around your time.

Want to grow?

However if you are looking to grow then you need to start thinking about what your exit plan is.

If you want to grow the existing business and stay fully invested then one option could be to use your existing debtors or cash-flow to gear up a bit and invest in a quality sales person with solid industry contacts. You may then choose to offload some equity, but essentially you are investing in a sales resource and that is going to be the majority of your investment.

A financing organisation like Grofin or Business Partners could probably help you here and the cost of financing would not be prohibitive.

Sell to a bigger fish

If you are looking to sell to a bigger rival then you are going to need to raise significantly more capital and put a lot more on the line.

Option number one could be to go to a potential angel investor and ask them to join your board “on risk” and give up a chunk of equity. Here you will typically be looking for an individual who has industry experience and has time to dedicate to your business on both an operational and strategic level. The goal here is to demonstrate that you can turn their time – which is probably one of their biggest assets – into a real investment return in a relatively short space of time. If they have some corporate deal-making experience as well, that is a plus.

If you are looking to exit into a larger business, your goal has to be to build your business up to ‘be sold’. This includes:

  • Asking for more capital to invest in systems and people – investors won’t do a due diligence on a business whose records are in a shoebox;
  • Securing watertight long-term contracts that will be viewed as an asset by an acquirer;
  • Becoming a business worth buying that is actually a business and not just an individual who happens to be good at debt collecting.

The idea of introducing a new investor into a business can be appealing, particularly when your business is battling to kick on to the next level. However you need to be able to demonstrate to both yourself and/or the potential investor that there is sufficient return potential on the table, if new capital is introduced. It’s a tough discussion but an important one.

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