Some entrepreneurs borrow money to finance their business ; doing so, they go into debt from the beginning and , in most cases, must repay their loans with interest. The equity financing , however , allows you to remain debt free , but you must give a percentage of your business or your profits to an investor.
Some investors could expect to have more weight than others in exchange for their investment, given their contribution in terms of expertise and business relationships , and time available to help you run your business . You can negotiate the scope of the strategic and creative partners that may have within your organization before signing any contract control .
The key to achieving equity investments is preparation. You need to prepare a rigorous plan to convince an investor that you know what you do and that your business is worthy of his time and his money. Take the time to study the elements you need to consider before going ahead.
On this page:
1 Financial . Requirements and Performance
2 . Financing Options
3 . Investment Potential
4. Management Skills
Investment Project 5.
6 . Identification of potential investors
Investor Meetings 7 .
9. Closing the deal and due diligence
1 Financial . Requirements and Performance Top ↑
First , make a detailed strategic business plan that shows your financial needs and performance of your business in the future, and that meets the following key questions for investors :
Where will you be in five years?
How would you take to get there ?
It takes time to develop a plan and gather the required financial information . It also requires special skills , given that the economic environment is constantly changing . Your management team and your external advisors should be able to lend you a hand.
Investors will review your business plan and your projected financial statements very carefully to determine whether your company will produce an acceptable rate of return within a reasonable time .
Your plan and your financial projections should demonstrate in detail how you will use the funds that will give you and what your company will get financial results over the next two to five years ( long term).
Determine your financial needs
To fund your growth plan , you will know how much money you will need to :
working capital ( daily and monthly operating costs) ;
fixed costs ( equipment, buildings, etc.).
marketing activities (advertising, promotion, etc.).
the airbag .
Investors want evidence that you will actually achieve the expected gains . They look very closely at your project to determine if:
your analysis of the market outlook is compelling and realistic ;
your needs for working capital , production capacity and needs in human resources are consistent with the growth rate you expect ;
the expected growth rate is reasonable, given your current market and conjecture ;
your projections will be realized in various economic situations and market environments .
Your investment proposal should include:
annual projections for a period of one to five years ;
a projected monthly cash flow budget for the first year ;
sensitivity analyzes your projections under various scenarios.
2 . Financing Options Top ↑
For the expansion of your business, there is a good chance that you will turn to the three main sources of funding :
conventional methods of external loans ( eg , mortgages, lines of credit. )
internal sources of capital ( eg , improved cash flow , reduced inventory levels, obtaining better terms from suppliers . )
investors in venture capital.
The number of investors in venture capital who are willing to invest in return for equity include:
corporate venture capital ;
institutional investors ;
corporate venture capital workers ;
certain Crown corporations .
Cost control and risk
Investors in venture capital funding will consent to companies that conventional sources could avoid . Investors in venture capital assume part of the risk of growth, but there will be a price to pay in return ; it may be that you have to pay more or to give a little of your influence within your business .
When reviewing the different types of funding, you will find answers to the following key questions:
How much does it cost ?
To what extent would I give away part of my decision-making power within my company?
What is the level of risk to which I will outline ?
A stake in venture capital :
is more expensive for the contractor that debt financing ( because the investor expects a high rate of return ), but
generally , the cash cost to the company is less ( because the investor usually retain its shares for a number of years before selling them on the market) .
The equity financing will result in a loss of control as investors :
buy a part of your company in exchange for shares ;
require likely to sit on the board of directors;
probably take part in the management of the company and decisions.
Entrepreneurs are not all open to the idea of sharing their ownership - the are you? Before you answer, remember that often the active participation of the investor can be valuable because it brings experience in management, business relationships and other resources .
When you have a debt , the level of risk increases because you have to make payments on a fixed date to repay ( capital and interest). However, if you opt for an equity investment , the investor will take a part of your financial risk, but also take the advantage that provide equity .
3 . Investment Potential Top ↑
You must demonstrate to investors that your business project meets their three basic requirements:
excellent growth potential ;
exceptional level of performance;
how to make an investment .
Also, when capital is scarce , you must demonstrate why your company is a more secure and predictable investment than other potential companies that an investor could support .
Be sure to show your growth potential
Investors will want proof that you can actually achieve the expected growth rate in your project. The situation analysis is a good way to meet this requirement. It is to analyze :
the external business environment: threats and opportunities ;
internal business environment: strengths and weaknesses of each of the key functions of your business.
Assessment rate of return on invested capital
To demonstrate to investors the rate of return on their investment that they provide , you must first determine the value of your business ... today and in the future. Why ? Because equity investors bet on increasing the value of the company to be able to realize their investment. If the value of your business increases, it will be the same on their investment.
Determine the value of your business - assessment - is a complex process , but essential. You will most likely appeal to an expert ( financial adviser or expert in business valuation ) to properly assess your business .
How much is your business? Guide to Business Valuation
Before approaching investors or potential buyers, it would be helpful to assess the value of your business. Learn about the different methods to assess your business .
Because the investor will probably not the color of his money for several years , the best evaluation method is to assign a present value to future earnings .
The details of your agreement all depend on the value of your business . The amount of the value of your business will determine :
the amount to be invested ;
how great is the part that investors get in return ;
the return on investment they expect .
Withdrawal of money from the investor
Investors will seek assurances that they will be able to withdraw their money from your business . You must include an exit strategy in your project to investors to know how they can realize their investment. The exit strategy also has an impact on how the value is calculated.
Exit strategies for private equity investments include:
initial public offerings ;
the sale of all shares in the company ;
purchase of shares of the investor by a third party ;
redemption of shares by the investor company .
4. ↑ Top Management Skills
Investors try to determine if your management team is able to execute the business plan and realize the potential that an investment in the company.
They do not want a company headed by a person orchestra. They want to have a talented team :
has the skills and experience required ;
justifies strong work history for each major business functions ;
is well structured ;
communicates well and is able to make decisions and build consensus ;
is able to follow the growth of the company .
Assessment of your team
One of the main criteria for investors is that your team is able to meet the new challenges of growth. Rate your team skills and ability to ensure business growth by comparing the skills that its members have the skills they should have . You can use to this end , tools such as:
the audit ;
report cards by function key management .
Prepare to meet investors
You must demonstrate to investors the competence of your team and the competitive advantage it provides. Prepare to answer difficult and specific questions about each of the management functions of your business :
marketing and distribution ;
production and operations ;
accounting and finance ;
research and development.
Strengthening your team
If your team has some shortcomings, now thinking of ways to fill them. You can strengthen your team :
improving the skills of your managers ;
recruiting new people ;
changing the structure and role of the team;
recruiting directors and outside advisors .
Find training for you and your employees, and learn about essential workplace skills.
Investment Project Top ↑ 5.
You must develop a concise and powerful investment project, because it is the tool used to capture the attention of investors.
An investment project , it is not a business plan . The business plan is for internal public ( ie to your managers . ) And aims to regulate their activities; the investment project is aimed at an external audience and aims to sell an idea to obtain the necessary funds.
After reading your project , investors will want to know :
conditions of the agreement;
what makes your project a unique opportunity ;
the balance sheet of your business ;
the quality of the people involved ;
the specifics of your business and your industry .
The summary should be brief, but complete. If it is good, it will encourage investors to continue reading. In summary , you must:
specify the rate of return they will provide your project ;
demonstrate that your team has the skills to execute the plan ;
explain the means at their disposal to monitor their investment;
explain how they will achieve their investment.
Capture the attention of investors
The investment project must capture the attention of investors by providing them with an attractive and easy to understand the information. Pay special attention to the drafting and visual appearance.
Write a clear and concise text.
Avoid jargon and, if necessary , explain technical information.
Have use of graphics and layout techniques to properly convey your message.
Structure your project so that it is easy to read.
An investment project typically includes the following sections:
company history and profiles of shareholders;
external environment ;
products and services;
financial structure and evaluation;
6 . Identification of potential investors ↑ Top
What are the potential investors?
We distinguish various types of investors in venture capital, each having different characteristics.
Capital investors friendly risk : Family and friends are important sources of capital in the early stages of development of the company .
Angel investors : These are individuals who, in some cases , want to actively participate in the management of the company by his service experience and expertise.
Companies Venture Capital: There are companies that are run by professional investors in venture capital and usually have strategies or investment preferences .
Institutional investors : pension plans , insurance companies life , banks and other institutions also offer financing through venture capital.
Companies benefiting from state support : The Business Development Bank of Canada and other organizations offer of equity financing ; they also offer advice, guidance , training and mentoring services to small businesses.
Strategic investors : Large companies often invest in small companies when they are looking for strategic partners.
How to find them?
Let people know what you are looking for. Talk to people who can introduce you or recommend you , for example:
business relationships or personal ;
experts to work for your business ;
a financial advisor specializing in venture capital.
You can use the following resources or means to make valuable connections :
trade fairs, conferences and forums investors ;
local chambers of commerce ;
industry associations ;
bodies of local and regional development;
investor associations .
Among other possible sources of information include the Internet; newspaper articles dealing with investment agreements ; directories and lists of professional and industrial organizations ; and local entrepreneurship or services regional economic development centers.
Sources of private sector funding
Learn about debt financing and equity financing from the private sector to meet the needs of your business.
Looking for a long term financial solution for your business? If so, an equity investor might be willing to wager on your potential.
Who should you target ?
You must identify investors whose criteria match your situation. Here , to this end , the key elements you need to consider.
Stage of development : The stage of development of your business is it that search the investor?
Amount required : The amount you need to fit into the limits set by the investor?
Industry: The investor he likes a particular industry ?
Geographical location: The investor is it close to your business?
Initiative : If you want to spread the investment , the investor he agrees to take the lead ?
Meetings with investors ↑ Top 7 .
The first meeting with the prospective investor is an opportunity to give life to your investment project. During the meeting , the investor will examine the confidence you have in yourself and your product or service. In addition, it will attempt to assess your credibility and integrity. It will also be an opportunity for you to learn more about this potential investor .
Usually , only a few people - you and your advisors , potential investors and advisors - attend this first meeting. This session typically incorporates the following components:
Official presentation of your presentation ;
questions and answers ;
Preliminary decisions on the next steps , if any;
tour of the facility , if the meeting takes place in your office.
Be ready for the meeting
The first meeting is not a social event . You must carefully plan the meeting and plan your strategy carefully . To this end , you should:
send your investment project to the investor prior to the meeting ;
request prior to the investor to make his needs;
pay attention to detail - meeting room , equipment, attire ;
rehearse your presentation.
Be prepared to answer tough questions. In fact, more questions will be difficult , the more it will reflect the interests of the investor. The latter want to get answers to questions like :
Who are you ?
What are your accomplishments?
What is your commitment ?
Do you have a strong management team ? If yes, who is responsible for what and why?
Your earnings forecasts are they based on reasonable assumptions ?
She enjoys your company a competitive advantage ?
Your business opportunity is it accompanied by a viable exit strategy ?
How the funding strategy does affect the business strategy ?
Here are the questions you should ask at the first meeting .
Investors judge he your realistic financial forecasts ?
The investor understands it well your particular needs ?
The investor does he need more information?
The investor has he the type of capital and the amount that you consider necessary to finance your business opportunity ?
The investor he will play an active or passive role in the management of the company?
The investor has he experience and the skills to work with the management team to improve operations and financial performance of the company?
The investor is there anyone with whom you can discuss challenges, opportunities and threats facing your business?
8. Negotiations Top ↑
Negotiations officially begin when you receive the investor a subscription offer . It is neither more nor less, the response of investors to the project. The subscription offer covers the main elements of the agreement :
the amount that the investor is willing to invest ;
the share of investment that represent equity ( shares) and one representing the loan ;
procedures relating to shares or loan ( shares, dividend payment frequency , repayment terms of the loan, type etc. . )
other elements that investors would like to see integrated into a new or revised version of the shareholder agreement.
Price: The value of the company, the outlay of the investor and the share of the business it intends to acquire are key elements of the negotiation .
Control: The investor will want to find ways to monitor its investment (eg , representation on the board or any involvement in decisions . ) . You, the entrepreneur must decide how far you are willing to give up control of your business.
Performance Indicators : You must decide by mutual agreement of the performance indicators and targets that will make your project a success. Then you must specify the details ( eg . , Sales volume, level of cash flow, debt repayment ) .
Exit Strategy : You need to determine how and when the investor will achieve its investment (eg , sale of the company , initial public offering , redemption of shares of the investor. ) .
Employment contracts : It may be that the financing agreement requires that employment contracts are concluded with key employees to ensure that they remain in position.
Here is a good strategy to adopt during a trading session.
Start the discussion : Outline the differences you see between your investment project and the subscription offer .
Focus on the interests and objectives of the parties : Expose your interests and allow the investor to share his.
Find common ground for the calculation of financial information : Some differences may reflect the fact that you have chosen different assumptions or using different methods of calculation . Try to clarify things and to reach consensus . If necessary, consult specialists.
Imagine alternatives that benefit both parties : Be flexible and consider alternatives . Allow time to explore other options and do not hesitate to be creative .
Do not forget to consider the future: Make sure that you enter into the agreement will allow , if necessary, mobilize other funds in the future .
Hold many negotiating sessions : Between sessions , imagine alternatives , analyze the position of the investor and get more information to support your goals.
9. Conclusion of the Agreement and prior checking ↑ Top
Go to comb the agreement keeping in mind the elements here .
The future of your business : Is it a wise choice for you and your business - today and tomorrow?
Your financial needs and goals : A good agreement will benefit the financial health of your business and does not restrict its ability to raise capital in the future or to participate in other ventures .
Trust and affinity : You engage in a long term relationship . Also make sure you can build a profitable and constructive partnership will remain strong , even if your business sometimes does not turn as smoothly as you would like .
Review your legal and other obligations
Elements to consider:
Legal aspects: Make sure you understand the legal consequences of the agreement , particularly regarding representations and warranties that the company is willing to give the composition of the Board , the policy on the payment of dividends, remuneration arrangements .
Regulation : Ask your lawyer to check all regulations, all restrictions and all registration requirements.
Existing contracts : Determine the effects of the agreement on existing contracts (licenses, employment contracts, contracts with suppliers and bank loans, etc. . ) .
Before concluding the agreement, the investor will conduct due diligence to verify your information and get more information as needed. Each investor proceeds differently . Some entrust this task to consultants (usually large accounting firms ) , while others will take care of themselves.
Upon exercise of due diligence , we will look generally on the main elements of your business :
Financial Review : the financial situation of the company ;
management review : the skills of the management team;
Market Review : plan and marketing activities;
review of the operation and technical activities: equipment, facilities and processes.
Tie good relations with investors and maintain them
It is important to remember that an agreement marks the beginning of a relationship. For this relationship to flourish, you need two ingredients: good communication and trust . You can strengthen this relationship by ensuring that the investor obtains all relevant information in a timely manner and participates in decisions.