Chapter 5: Raising money, buying and selling a business
When you need to raise finance you will have 3 options. Borrowing from a conventional bank; a venture capital company; angel investors. The best options, for many reasons which I explain in the book, is the best route. Using a VC is very helpful for major expansion now and in the future. VC want a share of the business for their investment and in return provide the support of their vast business experience as well as great contacts. Angels more or less the same but their investment money will come from individuals. Both will want shares and usually a seat on the board.
Do not be put off by their requirement for shares in your business. What you have to consider is that before their investment you have 100% of nothing, with them you may have 50, 60, 70% of something.
The true value of any business, or item, is what the buyer is prepared to pay for it. Sales of businesses usually fall down because the seller puts a ridiculous price on the business. If you are serious about selling your business then think of a price that makes it saleable and offers a good deal for the buyer.
You can consult an accountant but I do not think there valuations are realistic. They will take an academic view of the value, but what is needed is a practical value based on the person running the business.
One guideline I used when selling a business was to look at what I was earning from it, how much did I get from the business. You could then decide how much cash you need to maintain this lifestyle or an amount that will keep you content without working. Alternatively, an amount of money that allows you to peruse other business interests.
A guideline that you can use is the stock exchange. You can see the price earnings multiples (p/e) of companies in the same business as you and use the multiple which applies to them, but a bit lower. For example if they had a 10 times p/e you should look to 8 or 9 times net profits.
My first suggestion is that you dress appropriately for a meeting with a banker or investor. You don’t have to go overboard be neat and tidy. Men wear a jacket and tie, ladies dress or suit. No flip flops, or open toe sandals, proper shoes. Hair combed nails and hands clean.
When meeting a banker remember that first impression count. The first thing he sees is you, do you look good, honest, reliable, confident, and attentive, and someone they could trust with their money?
Present your business plan, one that is concise, brief and to the point. They do not want to read that the business you are going into is part of a multibillion dollar business. The reason is you are likely be a little part for this business sector so don’t try and fool them with facts like this. Remember they have seen every type of business and know a lot about every business. Stick to your business plan and they will decide if it will be a success.
What you have to do is be able to answer satisfactorily every question that they will ask. Do not try and give negative replies. If you cannot answer them, say so, and that if they want a full answer you will get back to them with this.
Loaning money is about trust in the person who wants the money. Does he understand his business, does he understand cash control and financial management, and will he carefully look after our money and not lose it. If you present yourself well then you stand a good chance.
To me, a well constructed business plan is one that will tell me all about the business on the first page using the smallest number of words. It will simply say, that we intend to start a business in X industry, we will be better than our competitors because of X, or be different to our competitors because of X. Immediately I can see what you intend to do and the reasons that you think you will succeed.
Using my experience I can then ask questions based on your idea. In the plan I want to see how the business will be set up, Will there be any employees, if so what will be there functions. Do you need business premises, if so the reason for its location, the size and how it will be used.
Produce a cash flow and a draft profit and loss statement. Make sure that you understand these documents as you will be asked questions about them. If you cannot answer them then trust in you will be lost. It is no good saying an accountant produced them for you. It will be OK to say this if he is working full time in the business, if not they will question your ability to manage the business finances and their money.
When you produce your cash flow and P&L make sure you allow for repayments of the loan and interest and your salary. If you do not intend to take a salary you can still include it and point out that you will not take it until the business if profitable and can afford it. You must also show why you want a loan and how every penny will be spent.
Investors think that if they register a patent then they are safe from anyone copying their idea. This statement is partly true.
When you register a Patent it shows to the world at large what you idea is and how it is created. All formulas and designs will be in the public domain. So while it offers some protection it also exposes your idea to others who will try and find a way around you patent or lead them to create something similar if they like your idea.
There is no security as your secret is fully exposed. Large organizations study every patent that is lodged. They examine everything to see if it breaches any patent they may have, or if the like you idea they will work on overcoming the design in attempt not to breach your patent. They may also take the option of breaching your patent because they know that litigation on patents is very costly and small businesses cannot fight them.
My suggestion is that you wait before you patent your idea. First get it tested thoroughly so that you can make any changes that may be needed. Get it right, make the design as wide sweeping as you can. Use every application you can think of as this will give you additional protection and reduce the opportunity of the idea being copied or overcome. Then if another company looks at it and sees that it is very tight design and hard to copy they may come to you to buy the idea or offer you a royalty deal.
Read selected chapters from the book on the links below:
- 1. Starting a Business
- 2. Identifying Your Audience: Marketing & Selling
- 3. Maximising Your Audience
- 4. Financial Management
- 5. Raising Money: Buying & Selling a Business
- 6. Professional Advice
- 7. Why Businesses Fail
- 8. Motivate Yourself to Success
- 9. What is an Entrepreneur
- 10. Summary of Points to Remember