Being ready for investment is not the same as being investment ready

“I’d like to raise funding to buy another business.”

“I’d like to raise funding to invest in growing my team and fully commercialising my idea.”

"I’ve just won several substantial new contracts and I need to raise some funding to support the resultant growth”.

“I’d like to de-risk and bring on board an investor who can work with me to take my business to the next level”.

As a leading UK investment bank, we often hear statements like those set out above from clients or potential clients who are keen to raise funding and take investment into their business.

However, as with most things in life preparation is key and believing that you are ready to take on investment is not the same thing as being investment ready. In this article we will take you through some key considerations and things to reflect on to ensure that you best capture the opportunity available and maximise value at the same time. After all, success is where preparation and opportunity meet…

What is your goal?

Fundraising is like an interview – you need to make yourself stand out and be noticed, you need to be credible and enthusiastic but not over the top and you need to be prepared to answer any questions about your business.

You firstly need to be clear on your message and the reasons why you want to raise funds. Is it to buy another business? Is it to invest in the team and scale up? Is it to enable you to sell a share in your business to either de-risk or to bring in an investor that can unlock further potential (or both)?

Whatever the reason(s), focusing on the ‘why’ and ‘what’ rather than the ‘how’, and having a clearly articulated rationale, objective, and well thought through and detailed plan is a good place to start. Its likely that you will already have a plan of sorts – that could be your annual budget or it could be a longer term strategic growth plan, but if you are after investment, then you should consider standing back and revisiting your plan – you need to stand out, be exciting and in a crowded market where investors are typically time poor, ensure that you are the one that sparks their interest.

What should I include?

The best plans are those that are supported by evidence – as much as possible. An investor/ Lender/ Buyer is going to want to see where you have come from and where you are going, and they will try and relate the two. If you can evidence a strong track record of growth or experience in a specific topic, or field akin to what you want to do now, then an outsider is likely to take more comfort in the likely achievability of the plan than one that doesn’t have some grounding in reality or would constitute a fundamental shift in the business model.

A key component is a forecast financial model, ideally one that shows three years of historical actual trading information and then three years of forecast financial projections. The main three financial statements being a P&L, Balance Sheet, and Cash flow should be prepared and integrated so that they can be stress tested to show the outcomes of various sensitivity scenarios.

Investors will look for credibility and consistency of gross, net and EBITDA margins, with any movements being able to be explained and justified. A fast growing revenue line looks great and may be achievable, but if your balance sheet does not reflect an associated growth in working capital, if your overhead base remains static or if the forecast does not flex based on clear assumptions linked to your planned top line growth, then questions will be asked.

Forecasting is always tricky as a financial plan is usually out of date the day after you write it (if only we have the proverbial crystal ball!). However, most investors are realists and accept that there will be some ups and downs and businesses don’t grow in straight line, but they just want to see that on the way into an investment, they are making their decisions based upon credible and realistic expectations of growth.

A good indicator of this is for an investor to look at historical actual vs budget performance. If a company has a track record of meeting or exceeding its budgets then this suggests that the management team has a good handle on their market and business, as opposed to one that consistently presents budgets with high ambition, but consistently fails to achieve them.

Management

People deal with people. Yes, an investor will be focused on a financial plan as we have just discussed, but ultimately, they are looking to back a group of individuals who can work well as a team to deliver their objectives.

An experienced team can ride through the rough and the smooth and give the investor confidence that whatever happens in the future, they will be able to deal with it and drive ahead.

Consider what your growth plan is, as different skillsets will likely be needed depending on your growth journey. For example, delivering growth through a buy and build acquisition strategy will require integration skills and you will likely need individuals in the management team who have experience of delivering synergies post-acquisition. That skillset is less relevant if your growth is expected to come from investment in capex and the manufacturing process – in that case, having individuals in your ream capable of delivering lean manufacturing methods and maximising efficiency may be more relevant. Most investors will want to see a strong and experienced financial team in situ. If you don’t have an FD/ CFO then you should consider getting one as its highly likely that an Investor will require this.

This is all about confidence – investors want to know that you have the right people to deliver your plan. Thinking ahead and assessing what gaps you might have before going to market to raise funding is wise as it can take time to find the right people. Culture should always be a consideration too – high performing Boards are those that have the right mix of individuals around the table who can inspire each other, play on each person’s strengths, support their weaknesses, and build relationships to collectively bring success.

Investors will usually seek to bring an independent Chairperson or Non-executive Director to the Board post-investment to bring external challenge and additional strategic support based on that individual's experience of working in multiple similar situations. Consider if this could be relevant to you whether or not you take investment.

Market data

As well as your own experiences and data from your business, you should look to external market data to support your growth plans. Investors will benchmark your business against others so having a good feel for both successes and failures in your industry is important. Consider comparable transactions (i.e what M&A transactions have happened in your sector in businesses like yours) and try and understand why those deals happened (i.e what was the strategic rationale, why did one company buy or invest in another?).

Due diligence, risks, mitigants, and opportunities

A key part of a fundraising process is due diligence. This is where a potential buyer or investor will usually appoint external third party advisors to scrutinise all aspects of your business – this could be financial due diligence, commercial due diligence, insurance due diligence, IT due diligence, legal due diligence, management due diligence, sales due diligence…the list goes on! If you are not prepared, then this is where things can fall down.

I always like to think in terms of ‘Value Drivers’, i.e what are the key factors that will really drive growth in your business and create value, and ‘Value Drags’ being those areas that if you have not thought about them then they could have a real detrimental impact on your growth and business value.

Challenging yourself ahead of time and setting out what the risks connected with your growth plan are and identifying potential mitigants or steps you can take to remove the risk or minimise the impact of the risk is important. Equally, clearly articulating the opportunities your plan presents and detailing how best to capture each opportunity is compelling and it shows an investor that you have properly thought things through.

Whilst it is easy to focus on the financial details of a business, an often overlooked area by business owners and management is legal and insurance detail. T&Cs in customer and employment contracts are vital – what if your employment contracts are outdated and they do not ensure that any IP created by your employees in their roles is owned by the company? When you come to sell or seek investment, you may find that the value of your business is not what you thought as legal DD uncovers that the business doesn’t own the IP of your leading product or service that you thought it did.

Which investor is right for you?

There is a broad spectrum of investors available but their appetite for your specific situation will be dependent on how that fund has been raised. Funds typically get raised based on certain criteria such as sector focus, stage of business, size of business, and geography. The earlier stage “pre-revenue” businesses will typically need to rely on friends and family, high net worths, and potential pots of Government-supported funding to raise their initial rounds. As the business scales up and commercialises it will open up more institutional funds and investors such as VCT, EIS, and Private Equity funds.

A lot of the above may seem daunting but external advisors can help you with this. Working with professionals who can help you present your business in the best light, develop a plan with you, and help critique and challenge it will help. Of course, there is a cost to this, but you will likely achieve a better outcome as a result.

They can guide you through the myriad of potential investors/ lenders or buyers for your business and share their experience of who in their view would be a likely best fit based on your specific business, team, and objectives as well as support you through the whole process, including due diligence management.

Conclusion

Once you have a plan, make sure you step back and reflect on it. Seek external challenge, seek internal challenge from the Board/ fellow senior team members, and most importantly make sure you are fully prepared before going out to the market to raise funds.

Deals happen when a buyer and seller agree on a position or price. Being prepared, and identifying any issues and opportunities before you open yourself up to due diligence will ensure that you can maximise your value and protect against price chips during the deal process.

Always ask yourself “If I was investing my own money into a business, what would I want to know?”…