Bullish entrepreneurs often think their dreams have come true because, after a long search, they’ve found an investor who wants to put money in their firm. The optimism is understandable, but it can push business owners into accepting the wrong deal too quickly. And getting into bed with a bad investor, or simply not structuring investment correctly, can easily prove fatal to a promising business.
For this reason, the first piece of advice we give to business owners in this situation is to be patient. Serious investors will take their time before finally committing to an offer and making cash available. If an investor doesn’t, then his or her mercurial nature might well work against you when you’re trying to grow the business. Proper negotiation takes time.
Moreover, unless you have particular expertise in this area, you need good advice during the negotiation process. An investor will have his or her own advisors, or a particular expertise, and you don’t want to be at a disadvantage during the polite jockeying of investment negotiation.
Before you enter serious talks (really, before you start looking for investment), you should know exactly what you want from an investor: how much cash you need, when you need it, and what it will be used for. If you require something else from an investor, such as experience in a market you’re targeting, then you should make this requirement clear from the outset.
Investors will, of course, have an idea of what they want in exchange for their cash or other, less tangible assets. In our opinion, a business owner should be pro-active about this end of the investment equation, offering what they think represents fair terms to investors. ‘Fair’ is the key word here – asking for a deal clearly weighted in your favour is worse than useless, as it sends negative signals to a potential investor. In other words, you should base your offering on a realistic valuation of your business. Valuing a business is a rare skill in itself, and this is why we recommend getting someone outside the company to do it. An independent valuation also carries more weight in negotiation.
Placing a value on an investor’s cash is relatively straightforward. Valuing the other things they bring to the table – whether that’s expertise, market contacts or synergies with other businesses – is far more difficult. An investor will often seek a better deal by leveraging these, and their value shouldn’t be discounted either. To use two famous examples, successful entrepreneurs on Dragon’s Den often give up substantial chunks of their business for comparatively small amounts of money. In private, those entrepreneurs will often say that the sheer exposure of appearing on the programme and being associated with a semi-celebrity was more valuable than any cash investment. Moreover, Warren Buffett typically gets excellent value on his investments because of his well-deserved reputation as a businessman and a positive boardroom influence.
Chances are that you won’t be sitting down with Bobby Kerr or Warren Buffett, so don’t be afraid to ask questions: find out about their professional background, current interests and past investments. The more open an investor is about this information (ideally, they should be ok with you speaking to previous partners), the more faith you can put in their claims.
We often advise both investors and entrepreneurs through the process of seeking potential partners, negotiating and implementing agreements. If you want some guidance in this area, we’d be happy to talk to you. Just contact us to set up a free initial appointment.
DCA Accountants and Business Advisors.