Be Prepared When Business Investors Look Beyond The Numbers
BE PREPARED WHEN BUSINESS INVESTORS LOOK BEYOND THE NUMBERS
"Here's a quick review of items you should expect business
investors to look into beyond their analysis of the financial
Let's say you have spent a year seeking an investor to invest in
your business venture; you spent considerable time pulling your
business plan together, contacting potential investors, making
management presentations, and now all you have to do is get past
the investor's due diligence.
*** What Exactly Should You Expect? ***
Business investors want to be sure there are no skeletons in the
closet and that your venture is not the next Madison Priest
"black box technology".
Priest's famous black box was a revolutionary technology that
claimed to allow ordinary phone lines to transmit data into
people's homes at unprecedented rates 'rates faster than fiber
optics. By staging impressive demonstrations, Priest convinced
private business investors and seasoned companies, such as
Blockbuster and Intel, to invest money in his venture. In the
end, Priest's 'magic box' turned out to be nothing but a
*** Four Important Areas Business Investors Will Hone In On' ***
Finance, management, manufacturing, and marketing are four areas
of concern to most business investors. Specifically, these
concerns can be segmented as follows:
* Cash. Cash is king. It's the lifeblood of all businesses '
start-up or on-going businesses. Business investors know this.
They will spend the time understanding your cash flow assumptions
and, if you're an existing business, they'll analyze your cash
management practices. Poor cash management or shaky cash flow
projections are immediate red flags.
* Profitability. Expect investors to compare your actual or
projected gross margins from year to year. This provides a quick
indicator of your historical or projected manufacturing
efficiencies and pricing environment. It can also highlight
potential control issues, excessive overhead, or under pricing
strategies to capture market share.
* Bank problems. Out of compliance financial ratios, scrutiny
from banks, or suspect bank relations 'personal or business '
are all red flags to business investors about how you manage your
* Outdated financials. The lack of monthly financial statements
or detailed cash flow projections or, for an on-going business,
statements that are not prepared on time are all indications of a
loosely run operation or a lack of planning.
* Continual crisis. Business investors watch closely for signs of
weakness in you or your management team. Constant interruptions
by emergency phone calls and demands for immediate decisions are
signs of disorganization and lack of management.
* Substantial changes in key personal. Unusual turnover in key
management positions can be viewed as a lack of leadership.
* No changes in senior management for many years. An established
company with little or no changes in the management team can
indicate a stagnant business, not current in new methods or
processes, or a very autocratic management style.
* Lack of pride or enthusiasm. Seasoned business investors can
just sense the true tempo and spirit of an operation and its
management team. Ask them how they do it and they'll tell you
it's a sixth sense or gut feel. Nonetheless, it is something they
are looking for and expect to see and feel.
* Outdate methods and processes. Your manufacturing and service
methods and processes provide a quick indication of your ability
to compete in the markets you serve and shift gears if the
business doesn't go as planned. Even if you're a start-up,
business investors will want to know the methods and processes
you plan to use to manufacture your product or provide the
services you plan to offer.
* Rejects. If you are already in production, investors expect you
to know your reject rates, the problems causing them, and the
quality controls you have in place. How you handle rejects is an
important issue to business investors. Remember, rejects are not
limited to only production rejects. They also include missed
service calls, late deliveries, and other process failures.
* Just in time (JIT). Inventory is often the first place business
owners and entrepreneurs get into trouble. Too much of it and you
can quickly run out of cash; too little and you'll quickly start
missing deliveries and losing customers. How well you manage
inventory and understand it is a key strength business investors
are looking for in the management team.
* Sales per employee. The measure of overall productivity is a
good, simple benchmark investors can use to measure your
historical or projected performance against other companies in
your industry. Questions like: What is it that you plan to do
differently than your competitors to allow you to use the number
of employees you use or plan to use? Why do you think you can
earn more or less per employee than the average for your
* Market share. Be ready to compare your expected market share or
changes in it to your competitors. Remember to only measure the
relevant markets you serve. Also, avoid justifying your market
share by taking small percentages of extremely large markets.
"Our projections only assume we get 1% of this billion dollar
market" is one of the most meaningless statements a business
owner or entrepreneur can say.
* Trade shows. Investors will be interested in the activity and
interest your company's booth generates at trade shows compared
to your competition. Some may even want to attend and observe the
next trade show you attend. Be sure to take pictures, videos and
conduct customer surveys to demonstrate and support the interest
and activity surrounding your booth.
* New products. What is the percentage of new products or
services that generate future sales? How often will new products
or services need to be introduced to maintain your market
position? What is your success rate with new products and
Business investors are constantly trying to sniff out symptoms of
trouble. It's important that you never mislead or deceive them.
Most investors have extensive business experience and regularly
see or have seen many different businesses and industries. The
questions they ask often stem from their real world experiences.
That's why it is important not to get defensive by their
Smart business owners and entrepreneurs take the time to tap into
the knowledge and questioning business investors have to offer to
improve their business and prepare for other investor meetings.
About the Author
Mike Elia is a chief financial officer and an advisor to
venture capitalists and leverage buyout specialists. His business plan manual "Business Plan Secrets
Revealed' (http://www.business-plan-secrets-revealed.com/business-plan-manual.html)shows how to make your business the most appealing investment choice. His free business plan guide is available at http://www.business-plan-secrets-revealed.com/free-business-plan-guide.html.