Things that improve your chances for loan or equity funding
Whether you are a fresh startup or a multi-million dollar conglomerate, you always need outside funding. You need funding for starting up, for new projects and business lines, for building your brands and for working capital amongst other things.
Depending on the risks involved and the timeline for repayment, you might approach a bank, a peer organization (for short-term inter-corporate loans) or an investor like a private equity fund, a VC or an angel investor. Each of them will follow their own process to determine whether to fund your request and how much to fund.
While there is a lot of number work that goes into this decision, there are a number of other factors that play a significant and often more important role in deciding both, whether you are funded and how much you are funded by.
- The business plan
The business plan is the basis on which funding is done, whether it is a loan or a venture investment. The business plan is where your funding pitch starts. Enough and more has been written about how to create the best business plan. Fact is no two organizations look for the same things in a business plan. Some banks, for example, have standard formats. Further fact is that a business plan is just not enough.
- Your existing brands
Well-established and easily recognized brands are a big plus in pushing your case for funds. In case of loans, you can actually get your brands valued and can provide them as collateral. Otherwise, your brands per se are not that important in the case of loans. In the case of investments, particularly late stage funding like private equity, the value of the brands go a long way in enhancing the valuation of the business.
- Infrastructure (land and buildings the company owns)
Bankers place a very high premium on owned infrastructure when deciding the extent to which to fund you. Investors on the other hand do not place too high a value on this, unless you are in the business of infrastructure or real estate (in which case your land bank is your asset), in which case, you need to approach only those who specialize in funding such businesses.
- Increase profitability & establish scalability
It’s common sense that buyers are willing to pay more for companies that can quickly generate a profit. Showing buyers that you are profitable is certainly a good first step but if you can show them that your profits are still increasing, that will certainly drive up the price they are willing to pay. Look for new ways to cut costs or create efficiencies that will give your business that extra profit boost leading up to a sale.
- Establish recurring revenue agreements.
Sales are the engine that drives successful small businesses. In the years leading up to your exit, consider ways to consistently increase sales and revenue, with special attention on recurring revenue sources that generate gross income for a new owner right out of the gate. Building recurring revenue streams and shoring up any pending customer or vendor contracts will give buyers comfort that they will have a consistent revenue flow
- Create seamless processes and routines.
Savvy buyers understand that in some businesses, the most valuable asset is the seller. As the seller, your job is to convince buyers that they can continue to successfully operate the business after you leave the scene. The way to do that is by developing airtight processes and routines that enable the company to function effectively without your direct involvement. Make sure these processes are also documented so the new owner essentially has a guide to running the business successfully.
- Keep key employees on board.
The last thing a new owner wants is employee turnover. Skilled employees bring stability to the business and generate real dollars for the company. By actively cultivating a high quality workforce, you can increase your company’s worth, especially if employees are committed to remaining with the company after you exit. Build long term incentives for key employees, such as equity ownership that vests over time or bonus plans tied to profits that motivate key employees to stay on after a business sale.
- Differentiate your product or services.
Differentiation is an important priority for any small business. But in the business-for-sale marketplace, companies with differentiated products or services can command a premium, but you’ll need to demonstrate that your company is uniquely positioned to dominate a slice of the market. To do this, be sure to develop and promote any patents, intellectual property or other unique features of your products or services that give you an advantage over your competitors.