Whether it’s the entrepreneur looking for start-up capital, the owner of the small business looking for growth capital, the CEO looking for acquisition capital, or the company founder looking to recapitalize for an eventual exit, there are certain rules which, if followed, will dramatically increase the likelihood of success. Many of these rules may seem obvious, but the financing expressway on-ramp is littered with businesses that neglected them.
1. Establish and follow a process. Haphazard casting about hoping to secure financing yields haphazard results. Identify a process for seeking financing and methodically follow that process.
2. Start raising capital before you need it. The time to begin is not “when the iron is hot.” Your sense of urgency and your immediate need will likely leave the financing source cold. You must allow the investor or lender adequate time to perform their due diligence. It’s part of entrepreneurial lore that banks are most willing to lend when you least need it. If you have financing lined up in advance, you will be in a position to strike when the time is right.
3. It is relatively easy to get an audience with investors compared to getting funding. Be prepared for the tough questions and know your business (get your house in order):
- Know your market and competition (details).
- Know your weaknesses and have a solution.
- Define a clear use of funds (this leads to alternative capital structure and funding sources).
- Be able to explain your strategy.
- Identify relationships and levers (this sometimes reveals funding sources and partners).
- Prepare the management team and rehearse your presentations.
4. Select only a few prospects; otherwise you waste time and get a reputation for shopping the deal.
5. Know what kind of money you need and how it plays into the overall capital structure of the company. If you are looking for additional financing, you must understand the effect it will have on your balance sheet. Your creditors, whether banks or investors, will monitor key financial statement ratios. Know in advance which ratios will be affected and will be a cause of concern. If this is not your strength, find an advisor who can support you in this analysis.
6. Sample the market for acceptance and issues; listen to criticism and learn. Go to sources where you have relationships for quick and candid feedback. Look for trends. Use mentors and advisors. Find out where the issues and concerns are before you go to your prospects.
7. Be realistic regarding valuation, issues, strengths, weaknesses, and timing. Anticipating concerns by calling out issues and concerns up front will cast you in a much more favorable light than having them called out by the potential stakeholder. It demonstrates thorough preparation as well as an absence of rose-tinted glasses.
8. Have alternatives and be creative. There are myriad types and sources of financing. Have not only “Plan B”, but sketch out C,D, and E as contingencies.
9. Follow the operating principles of “do what you say you are going to do” and “no surprises.” Nothing builds stakeholder confidence in a company and its management team like delivering on performance commitments.
All of this can be summed up in a single word: credibility. Nothing is more important to the process than carefully establishing and scrupulously maintaining credibility. The documents you present and the statements you make must be accurate. Bankers have countless stories of the business owners who come to them with incomplete and obviously inaccurate financial statements, yet are bewildered and frustrated by the bank’s reluctance to lend. Potential investors time and again see business cases that are based on an assumption of securing one percent of some enormous market or other. I recently reviewed one such plan. When I asked the entrepreneur where he got the one percent, his answer was, “I pulled it out of my [hat]”. Certainly candid, but not a help to the credibility of the business plan.
These nine guidelines will help you obtain the growth financing necessary for your business. Disregard them and risk being stranded by financing sources. Find a professional advisor who understands and can implement the recommendations here. He or she will assist you in navigating your way onto the financing expressway. At B2B CFO® we have long-term, trusted advisor relationships with our clients. Our many banking and financing relationships enable us to consistently deliver on our tag line: Cash. We help you get it®. Feel free to contact me for more information.
Adapted from the preface to “The Handbook of Financing Growth“, Second Edition, written by Kenneth Marks, Larry Robbins, Gonzalo Fernandez, John Funkhouser, and D.L. Williams; published by John Wiley & Sons.