Cash flow is like blood to a human body. It is very important to a business. Without it, a business is primed for failure. Within limited resources every business is expected to manage all its cost centers including operations, personnel, marketing, compliance etc. and still declare profits at the end of the financial year. This constant pull on scarce resources coupled with the exorbitant bank interest rates has propelled entrepreneurs to regularly seek funding from willing investors.
Investors can either be friends and family or properly structured equity funds, however before bringing on investors, the entrepreneur must keep in mind the following essential elements which would enable a friction-less relationship.
1.VALUE YOUR BUSINESS.
Despite the lure of cash, an entrepreneur should be careful in rushing an investment pitch without knowing what exactly both parties are putting on the table. Business owners sometimes fail to understand the value of their business and in the course sell themselves cheap to crafty investors. On the other hand, some business owners overvalue their business by failing to understand market realities thereby discouraging the investor. A way to avoid this is to take proper stock of the company to ascertain the value of all tangible and intangible assets. Doing this requires a brutal assessment of the entirety of the business including but not limited to its assets, liabilities and goodwill.
Whilst the business owner needs to put a value on the business in order to raise the worth of the company, investors need to put a value on their investments in order to properly measure returns hence there is a need to view the worth of a business from a balanced perspective.
2.MAKE A CLEAR OFFER
After making your pitch to potential investors, it is also important to convey your offer in clear and concise terms. In doing this it is important to take cognizance of the returns you are prepared to give to the investor in return for funding. It is also important to state the level of control you intend to give the investor as comfort e.g. Board seats, right to nominate Chief Financial Officer etc. Whilst the offer should be direct and practical it should however not be sweetened in a manner that would mislead the investors
3. NEGOTIATE WISELY
The tricky part of bringing investors on board is the negotiation process, which involves the consideration of your offer by the investor and in return their giving a counter offer for your business. It is advisable for the business owner to get as much professional advice as possible at this stage in order to avoid a situation where the business gives away too much of the company. Some of the terms to be negotiated at this stage include board composition, voting rights, rights of share transfer, exit points, confidentiality and non-compete, dispute resolution etc.
Now is the time for the entrepreneur to negotiate as much as possible especially if the business has something the investor wants. It is also important not to be fooled by the phrase ‘standard practice’. Everything on the table is negotiable including the interest rates, equity stake and operations of the company.
4. DOCUMENT YOUR AGREEMENT
This is a crucial element of the investment process which serves to document the intent and agreement of the parties. It is important to clearly state what parties have agreed to in the course of negotiating in a manner easily understood by all stakeholders.
Taking a business to the next level needs funding which can be sourced through investors who typically have their own ideas on what they need from your business. The key to maintaining smooth investor relations is to strike a balance between the business owner’s projections/need for control and the investor’s needs and this process requires skill, foresight and creativity in a bid to avoid unfavorable consequences.