M & A Rainmaker

Written by Guy Rigby, Head of Entrepreneurship at Smith & Williamson

http://www.smith.williamson.co.uk/entrepreneurs

Family and friends are a great source of funding for start ups and early stage businesses, but raising money from external investors or business angels is challenging.

Here are ten of the key issues that investors will be considering when they meet you or read your business plan.

1. First impressions

First impressions are critical. Most investors will decide not to proceed within the first 30 seconds of any discussion, or within a minute or two of picking up your business plan. Think about your approach, test in on your friends and practise it to perfection. Don’t fall at the first fence.

2. Demonstrable need

Where is the pain and what exactly is the need for your particular product or service? Most businesses offer ‘me too’ opportunities which are not obviously exciting to an investor. Make sure it’s clear how and why yours is different. Is it better, faster, cheaper or is there some other reason why you will succeed when many others fail?

3. Existing Revenues

Raising money for a business with pre-existing revenues is far easier as demand for your product or service has already been partially proven. The fact that you have already established the beginnings of a customer base will carry huge weight in any discussions.

4. Strategy

You may have a great idea, and you may have existing revenues, but what is the future for your business? Do you have a vision? If so, is it realistic or just “pie in the sky”? We have all seen those hockey stick shaped graphs showing an embarrassment of riches only a year or two down the track. Don’t be tempted to over-promise and under-deliver. It’s normally transparent from the start.

5. Business plan

The credibility of your proposal will be reflected in the quality of your business plan. A poorly presented, badly researched plan will kill your proposal before it has a chance. An idea may be good enough to gain the backing of family and friends, but it won’t cut the mustard with any serious investors.

6. Business model

Your business model will determine how and where you make your profits and how you will build long term value in your business. A model that requires huge revenues to deliver small profits is inherently unattractive, whereas a business in a niche market with high barriers to entry will be of interest to potential investors.

7. You

Are you credible in the eyes of the investor? What is your track record and what experience do you have of your business? Most successful entrepreneurs “stick to the knitting”, creating businesses based on their passion (ie something they know and understand), personal knowledge or experience. If this is limited, get the support of a mentor or partner. This will demonstrate maturity in the eyes of your investor.

8. Financials

Businesses go bust because they run out of cash, so be sure to demonstrate a good understanding of your financials. Margins and overheads will be part of the discussion, as well as working capital and cash flow. Remember that small businesses are normally cash constrained and prone to overtrading, so the investor will need to understand how you will manage this.

9. Pricing

Don’t be tempted to overvalue your business. We are a long way from the heady dotcom days when investors were persuaded to part with large amounts of cash based on little more than an idea. Nothing will put an investor off more quickly than an excessive or unsupportable valuation. The more you need, the more you will have to give away, so be realistic, cut your cloth and take in as little external funding as possible.

10. Exit

It’s very easy for an investor to put money into your business, but how will he get it back? A vague idea that you would like to buy his shares back at some future date is unlikely to be attractive. Taking in external funds means that you need to “begin at the end” in terms of thinking about exit, having a clear strategy and plan. This may change as the business grows, but you need that stake in the ground.

These are just some of the issues an investor will be thinking about, often subconsciously, in the short time that he focuses on your business. If you’ve thought it all out beforehand and you can tick all the boxes, you will have a strong chance of success.

Good luck!

A friend of mine Evert Bopp is pulling together a team and equipment to help re-establish communications in Haiti.

If you know anyone that can help here is the list of equipment that they need:

http://haiti-connect.org/what-do-we-need/

Please pass this on to anyone who you think may be able to help or may know anyone that can help.

Thank you.

H2O Car Valeting has recieved a £5 Million Loan backed by the SBLGS see more here

http://www.birminghampost.net/birmingham-business/birmingham-business-news/automotive-business/2009/12/31/car-valeting-group-making-a-tidy-future-65233-25499988/

The M&A Rainmaker has been made aware that Government backed funding and loans  are available to small and medium sized businesses in the Birmingham and West Midlands area.

Discussions with experienced and long established Birmingham based consultancy Genesis Consulting have revealed a particular interest in supporting High Technology ( ICT and Advanced Manufacturing ) companies.

Typical companies might be small ICT start-up teams or ICT companies with a product and intellectual property who need assistance in developing and selling thier products and services.

Other examples might be established Engineering companies of around £1 Million turnover who are seeking to take thier business to the next level.

For further information and an informal discussion contact us here at M&A Rainmaker or give Arun Luther a call at Genesis on 0121 681 6880 and mention M&A Rainmaker.

M&A Rainmaker can provide business strategy, sales and marketing support to complement these loans and grants.

A useful article and reference in Fresh Business Thinking ( which is a great site )

http://www.freshbusinessthinking.com/business_advice.php?AID=4248&Title=Finding+Capital+To+Fund+Growth+Or+A+Turnaround+

according to

http://www.techcrunch.com/2010/01/03/top-ten-digital-deals-2010/

This is an interesting review from Icon Corporate Finance of Q2 M&A activity and mentions 365iT as being on the acquisition trail which it is for selected companies that fit the portfolio, such as the acquisition of 5i earlier this year and the very recent acquisition of 7 global.

http://www.iconcorpfin.co.uk/NewsEvents/M&ATechnologyReviewQ22009.pdf

VCR Directory Online is a searchable database of information on 3,000 investors in unquoted businesses across Europe and Israel including business angels, venture capital firms, private equity houses, secondary fund managers and corporate venturers. Go to

https://www.vcrdirectory.co.uk/

for more information.

A few months ago I was at The Comms Business Gala Dinner in London sharing a table with the guys from Fused Group, the Manchester based converged solutions provider, Nortons, the High Tech M & A boutique and Solution 1, a Siemens focussed solutions provider.

Let’s just say that there are some strong personalities at Fused Group !! The guys were having fun and were clearly a very strong and united team. In common with many small to medium sized businesses they were having some “ interesting “ conversations with their bankers and other potential bankers.

Of course around that time some banks staff were running around like headless chickens, half trying to carry out the latest instructions of their failed and bailed out masters – de-risk, de-leverage ?? - and half watching out for their own jobs and alternative places to work. It really depended on which bank you were with as to how much headless chickening you got.

Apparently Fused Group was a financially strong business and a model that was working well so they were looking to expand.

It was great to hear that they secured investment from High Net Worth Individuals ( HNWI’s ) recently enabling them to continue their growth and development.

They have moved into new/larger premises, added demonstration facilities and plan to add departmental management. We will keep in contact with Fused Group and see how they progress in the future.

Banks have never been a great source of funding to the ICT industry – I always think that this stems from an attitude of some bankers thinking that there are no assets to seize if things go wrong. ICT companies are basically people, processes and maybe some Intellectual Property – no really valuable fixed assets like buildings, machinery and equipment.

The current economic crisis has further emphasized that the only people with the balls to invest in ICT companies are, generally speaking, HNWI’s i.e. successful entrepreneurs and not banks.

Banks are not prepared to risk ( unless we are talking about investing is sub prime derivatives which they seem to love !! ) and will therefore not reap any rewards either. It would seem that some banks are destined to become low risk, low growth, money handlers and as such they themselves are not worth investing in !!    

I have always been a Chris Evans fan. I loved TFI Friday and pretty well everything else he’s done aswell. It’s funny to think of him on Radio 2 and just about to take over from Terry Wogan though!

Whilst being interviewed on the Jonathan Ross show last night he talked about the time when he borrowed £85 Million to buy Virgin Radio. Probably this deal will be explained in greater detail in his new book.

What caught my attention was the fact that when he was holed up in a room in London, within a taxi ride of all the potential lenders, dressed in a black suit and black polar neck, he had to come up with a business plan and an exit route or strategy for the banks and investors. In essence I guess it was that he would buy Virgin Radio for £85 Million and in 5 years time it would be worth somewhere between £150 Million and £300 Million and he would sell out ( trade sale ) then.

To close the deal the banks asked how much he had – apparently about £2 Million at the time – and that had to go into the pot as the “ junior debt “ to get the £ 85 Million he needed. So, here is a classic case of “ leverage “ using bank funding. £2 Million of Chris’s own money attracted the other £83 Million of bank and other investors money. Within 18 months or so Virgin Radio was bought by SMG for around £220 Million – ahead of plan for the exit and within the range that he predicted – in fact about mid-way between £150 Million and £300 Million. So, he and the banks and investors got their money back – and some !!

Somebody had obviously worked with Chris on the business plan and the financials to back up the strategy which was basically that Chris would take a radio station, add some of that old Chris Evans magic ( Chris had already massively increased listening ratings ), make it worth much more money and then sell it. All within a 5 year timeframe.

Of course whoever bought it probably expected that Chris would stick around for a while. No doubt there was some sort of earn-out and lock-in period. As we know, and Chris admits, he then went
“ off the rails “ a bit and left the purchasers holding the baby.

He then got into a bit of a legal spat with Virgin and SMG and ended up worst off. I think this was also when he started buying Billie Piper Ferrari’s and holed up in Spain !!!