A business owner can raise money to start a business or finance a growing business in the following ways:
1) Accept a partner
2) Angel investor
3) Venture capital
4) Private placement
5) Crowd funding
6) Employee stock ownership plan (ESOP)
7) Initial public offering
8) Mezzanine financing
Investors will invest in a business if they like the team, product and processes. In addition, the business must solve an unmet need that has a strong demand and that would generate a huge cash flow and return on investment. Here are just a small number of the issues that they will be concerned about:
How much money are you asking for?
How do you plan to use the money?
How long have you been in business?
How much money did you invest in the business?
What are the competitive advantages of your product?
Do you own a patent for your product?
Who are your customers?
How are you solving their problems or satisfying their needs?
How much does it cost to produce a product?
What is the selling price of a product?
How many products have you sold?
What percentage of your sales are recurring or repeat business?
What is the size of the market?
Who is your biggest competitor?
What regulatory treats are present?
What percentage of the business are you willing to give to the investor?
Preparation will differentiate you from other business owners in your industry who are also targeting the investor.
A business model is about value propositions. It describes how a business creates delivers and captures value. The concept should be simple, relevant and easy to understand without oversimplifying the complexities about how the business operates. During a meeting with a group of investors an investor may say to you, "Tell me about your business model," or "So what's your business model?" or "Define your business model for us." The investor wants to know if you have an innovative, competitive and sustainable business model.
Understanding your business model is an important part of the investor's job. Investing in the wrong business model could cost the investors' clients millions of dollars and ruin his or her reputation or credibility. Tell the investor(s) how you plan to generate income, pay expenses, pay taxes, make a profit and sustain business operations in a strong or weak economy and in a competitive business environment.
Business valuation method
Business valuation is the appraisal of the economic value of a business. It is a value that a willing seller and a willing buyer will agree to in an arms-length transaction. The value of a business can be determined in several ways. Hence, a business owner should know what valuation method an investor is looking for in a valuation report and prepare the report to meet the investor's requirement before approaching the investor with an offer. If you do not have a proper valuation analysis the investor may shy away from the deal or take advantage of the situation. For example, you and an investor may agree that the business needs $2 million of investment capital to start or continue production. However, the investor would refuse to accept 20% business ownership if you can't prove that the business is worth $10 million. Investors do not want to overpay. Therefore, a savvy investor will disagree with your offer of 20% and present a persuasive argument for a business valuation of $5 million and 40% ownership for investing $2 million. Hence, the investor has increased his/her ownership position by 50%.
Every business is formed to accomplish a mission or goal. A business plan contains facts and details that are important to investors. It clarifies the mission, goal or purpose, vision and direction the business owner wants to take the business and what the business owner hopes to accomplish. A comprehensive business plan is comprised of the following:
1) Mission statement
2) Executive summary
3) Cash budgets and financial statements
4) Owner's personal financial statements
5) Market analysis
Other financial projections
- a) Cash Flow statement
- b) Income and expense analysis
- c) Balance sheet and solvency ratios.
- d) Other details that will sustain or hurt your business in the long run
Clemson Barry is an entrepreneur, tax accountant, insurance broker, author, speaker, coach, mentor and a business-restructuring specialist with 30 years' experience in business and taxation. His new book, "Sweet Success: Knowledge and Quick-Skills in 30 Minutes" is available at Amazon, Barnes and Noble and AuthorHouse online bookstores.
"Sweet Success: Knowledge and Quick-Skills in Thirty Minutes"
by Clemson Barry, PhD.
Paperback: 278 pages, $19.99
February 18, 2014