Being investor-ready means preparing your business to make it an attractive proposition for future owners and investors.
Even if you don’t have any immediate plans, embarking on the process of improving your business will often assist in driving shareholder value and enhancing your bottom line.
As a starting point you should have a clear idea as to who the likely investors are and what your business needs to look like from their perspective. Developing an achievable growth strategy and determining the critical success factors for your business are important steps.
1. Who are the likely investors?
Businesses require different types of capital and attract different sorts of investors depending on the nature of the business and its stage in the life cycle, be it late stage start-up, growth or a mature company with stable cash flow. Understanding where your business is at in terms of its evolution will often help determine who the natural investors are.
For early stage businesses often the logical investors are family and friends. In addition, venture capital and angel investors are now more common and accessible in the New Zealand market. For smaller businesses, those in management are also logical investors or buyers.
For larger growth businesses and mature companies the potential investor or buyer universe is more varied. Careful consideration needs to be given as to which option best suits the scenario you want to create. Options include:
- Private Equity – typically New Zealand or Australian-based mid-market buy-out or growth funds are most active and will generally partner with management to grow earnings organically and via bolt-on acquisitions. Most firms have a five- year investment horizon with a preference for controlling stakes. Each firm has a different investment strategy, targeted transaction size and specific industry experience.
- Trade buyers – Usually domestic or international competitors looking to take a controlling stake and build value through scale, synergies or a complimentary product/service offering. Trade buyers can also be key suppliers or customers that would benefit from vertical integration.
- Initial Public Offering (IPO) – For larger businesses an IPO or dual listing either on the NZX, ASX or other international exchange is an option worth considering. For the right business an IPO can create significant shareholder value. Market appetite, timing, cost, compliance, governance, resourcing and management expertise are important considerations when assessing feasibility.
- In terms of finding the right parties or options, it pays to talk to your bank or a trusted intermediary such as an adviser, accountant or lawyer, as often they will have significant experience and strong investor and trade networks you can leverage. The New Zealand Private Equity and Venture Capital Association (NZVCA) is a good source of information and contact point for investors.
2. Being investor-ready
In the current market, businesses need to be leaner and adaptive. The rapidly changing competitive environment, fluctuating demand cycles and increasing cost structures are driving this. It’s important, therefore, that business owners and management teams undertake a dispassionate assessment of their business, not only to drive efficiencies and remove risk from the business but also to identify what growth options are on offer. Bearing in mind that the same competitive pressures and market forces often create strategic opportunities for those companies with the capital and operational capacity to grow.
Investors are increasingly selective in terms of what businesses they will invest in. Moreover they’re prepared to walk away if there are perceived risks that have not been adequately mitigated. Identifying and addressing the key issues or critical success factors in your business, prior to engaging with investors or buyers, saves time and face.
3. Critical Success Factors
In today’s climate, these are the factors that make a difference;
- Management – quality of the management team is vital, as is locking them in via an effective remuneration and incentive scheme. For smaller businesses reducing the reliance on owner/founder is also important.
- Governance and Ownership – developing a robust corporate governance structure will bring fresh perspective and experience to any business. Introducing independents directors and/or an advisory panel will greatly assist in preparing the business. Tidying up ownership structures and shareholder agreements is also important.
- Legal Contracts – customer contracts, supply agreements, staff contracts, insurance, premises, are all covered by an investor’s legal due diligence (DD). Getting legal advice and a review of the business will identify potential issues to be resolved.
- Financials – engage your accountant to review your company structure and financial accounts, separating out any personal or related party transactions. Quality Management Information Systems (MIS), an accurate and detailed financial model showing three to five years of financial forecasts is also a valuable exercise. Audit and tax issues also need to be reviewed.
- Growth Strategy – being able to articulate a well thought out and realistic growth strategy, including a robust business case that documents the plan, is critical.
- Risk Analysis – undertaking a risk assessment will help to identify what the main issues facing the business are, the probability of them occurring and potential impact. Other useful analytical tools are SWOT, Porters 5 Forces, and basic value chain analysis.
- Marketing Material – prepare a succinct investor presentation and an investment memorandum.
4. Seek and you will find out
Being investor-ready can be a time consuming and costly process. Employing the services of a reputable adviser will help with a lot of the heavy lifting and not distract management from running the business.
A good adviser will assist in establishing a timetable, managing the clean up including DD, help prepare the investor memorandum and presentation, identify who the likely investors or buyers are, present the business in the best possible light, provide advice on structure and valuation and where appropriate, lead negotiations.
5. Banking your future
How your bank can help? Actually in a variety of ways.
- Your bank has established and long standing adviser and investor networks and will be happy to make introductions and open doors for their customers.
- The bank can assist with the capital raising process including structuring and arranging capital markets issuance, introducing potential investors, and delivering total capital solutions.
- Your bank will provide feedback on capital structure and optimising your funding model so that it is aligned with the strategy of the business.
- Similarly, it will ensure there is sufficient working capital to support growth plans.
- Then there are the issues of managing risk—the bank can reduce FX, Interest Rate and Commodity price risks through Global Markets hedging.
- Prior to engaging with investors, negotiating a stable financing with your bank can enhance the sale process and potentially boost enterprise value through agreeing an efficient financing package to support the sale of your business.
Talking to your bank about your strategic plans, capital raising requirements and future ownership will help you succeed.
Henry Withers is a Senior Vice President at ASB Institutional