Many businesses with high growth aspirations seek to raise debt or equity capital, list on a reputable stock exchange, or eventually effect a trade sale. In most cases, it is the investors who ultimately set the price at which they will invest in your company. The cost of the debt or equity or the value realised by the listing or trade sale can vary greatly depending on how the investors perceive your business.
Regardless of which of the activities above the company is undertaking, one of the key objectives for the CEO or business owner in this situation is to maximise the value of the investment in the company to the business itself and the shareholders.
One strategy to achieve this aim is to reduce the risk discount being applied to the value of their business by the investors. The risk discount is a reduction in price paid by an investor as a result of their subjective perceptions of uncertainty about your business, and represents a loss of value to your business or its owners.
Most investors are perceptive, discerning and prudent. They are generally experienced as investors and often short on time. The investor will want to test you and your business, and in many cases will want to do a due diligence or at least a threshold due diligence on your business. It is important to be cognizant of the fact that the investor does not have the same degree of insight into your business as you do, and so the investors risk assessment of your business will generally be higher than your own.
The number one tactic used by astute CEO’s and Business Owners to reduce the risk discount applied to their business by investors, and so increase the value of their business in the corporate transaction, is to undertake a formal Investor Ready Program.
The benefits of an effective Investor Ready Program are immeasurable and include:
• Premium value for your business by reducing the risk discount
• Reduction in time to complete your transaction
• Easier to get the right investors interested
• Builds the investor’s confidence and willingness
• More efficient and effective process
• Less distraction to your business and your management
Remember that you are competing with many other companies for the investors attention and funds. There is a huge gap between businesses seeking investment and those providing it, and being truly Transaction Ready is a competitive edge.
There are several components to a well-managed Investor Ready Program:
• Understand the investment process
• Identify the characteristics of your ideal investor
• Comprehend what investors are interested in and how they will view your business
• Getting your house in order and strengthen aspects of your business if necessary
• Ascertain commercial weaknesses and remedy any deficiencies early
• Risk identification and mitigation planning
• Financial forecasting and modelling (in an investor friendly financial model)
• Gathering supporting information for your business plan and financial forecasts
• Presenting relevant information concisely in a format suitable for investors
• Learning how to explain your ideas, plan & financials succinctly and confidently
• Develop a pitch deck or sales document and determine how best to pitch your business effectively and credibly
• Preparing for due diligence and prepare a dataroom if required
Getting transaction ready is something that you can of course attempt yourself, however corporate transactions like raising capital, listing or selling a business are heavily reliant on experience and particular expertise, and so it is usually recommended that you partner with a trusted expert firm and go on the journey together.
It is important to commence your transaction readiness program a far in advance of seeking the investment, listing or trade sale as possible. Leaving it until the last minute will result in missed opportunities, distraction to your business, and a suboptimal result.