When I am asked to invest in a start-up or early-stage business one of the things I want to see is a clear plan for an exit. After all, if I am going to put my money in your business, I want to be assured that you and I are both aligned in terms of how I will get my money back out of your business. I’m not investing for fun; I’m investing to help both of us increase our wealth.
One of the most common exits for business owners is of course a sale of some sort, either to a competitor or to a third party who sees the opportunities in your business that they can exploit, and thus increase their investment. Some of you will go on to take your company public and sell shares to the masses.
In either of these cases people tend to look for the same things from your business, and although when you are first starting up some of these seem a “pipe dream”, your strategic plan should be looking to deliver a business with a unique set of attributes that make it investible.
I have seen these best expressed in a recent book by Peter Seilern, a fund manager with over 50 years’ experience. The book is called “Only the Best Will Do” and in it Peter lays out his rules that have to be passed in order for him to invest.
My feeling is few businesses truly have all of these, but when you are building your business and growing you should have one eye towards achieving all of these if you can.
Firstly, he talks about having a scalable business model. You must be able to take your early-stage business, where you treat each customer like royalty and be able to do that with a much larger number. If you can’t I would suggest that you don’t have something you can call a business…after all even soccer agents generally have more than one client!
Something that will attract investors, or buyers is if you show superior growth to other businesses in your sector. You often see this with software businesses. There are lots of very good ideas, but often only one or two in a sector that grow faster than others. Try to be one of those.
Industry leadership is important. To be seen as the business in your industry who is truly the knowledge leader, who innovates and delivers a superior customer experience is worth money. It helps you become the growth leader and maybe your name will one day become synonymous with the task you deliver. After all, in the UK very few people vacuum their houses, they still “hoover” them, and I have heard nobody say they “dyson” their homes. Having said that Hoover still exists but is no longer the first name people in the UK talk about when buying a vacuum cleaner. They lost the innovation race.
Another big plus is if you can demonstrate a sustainable competitive advantage. To be the business who is the leader, to be the business who others aspire to be. But most of all to be the business that it would take large investment and many years to topple from your position of superiority.
Something else investors like is that you can demonstrate strong organic growth. That you market, sell and scale your offering. That you develop new markets, service or products from your own resources and make them successful. This is not to say that acquisitions are not a good way to grow, but very many acquisitions fail to deliver their promised benefits. So, they should be very well considered and researched. After all investors or potential buyers will look to see how you grow with just as much interest as the revenues, cash, and profits you generate by these means.
If your business can demonstrate a wide geographic coverage, or a wide customer diversification this is also a plus point. What this simply means is that you have a large addressable market and are not a niche business. Now, having said this many niche businesses are very successful, but often because they have many of the other attributes I have already discussed as well as the ones to come further in this article. Put simply you want to be able to sell to as many buyers as possible, but without over stretching your resources by needless unprofitable expansion.
If you are looking at building a business, capital, the amount of money it takes you to develop and run your business, is of course important. In the book Peter favours businesses with low capital intensity. In other words, businesses that invest low amounts of money for every dollar they generate in revenues. So that means if you are thinking of making the next best automobile, well, you had better be very sure you are going to sell a lot of them. Whilst on the subject of capital you would be wise to keep a very good eye on the return you get for the capital you employ in your business. The ROCE. A high value indicates that you can eventually return larger amounts of money to the shareholders of the company. If your ROCE is consistently high, then it is likely the profits you reinvest in your business rather than pay as dividends to shareholders lead to even higher ROCE. A good rule of thumb is that ROCE should be at least twice the level of underlying interest rates, but in these days of very low interest rates it would be wise to compare yourself against others in your industry and aim to better them.
Your financial position is of course critically important. I like to define a strong financial position as one where you have fairly valued and readily available “liquid” assets, combined with low amounts of debt when compared to the equity the shareholders have in the business. You can thus service your debt and you have a business that can respond to challenges and capitalise on any opportunities. It’s pretty much the same as having a healthy personal financial position.
Now the last point both Peter and I would make is that you need to secure the best management team you can afford, reward them well and ensure that you have good governance standards in place. In other words, the rules, practices, and processes used to direct and manage your business. This includes your accounting practices which should be transparent. When it comes to selling your business, if you are selling for millions of dollars expect to undergo a long and detailed examination by the buyer. They will carry out due diligence checks on you, your fellow directors, and your company. One of the first things I advise start-ups to do is to get their governance and accounting practices right and continue to pay attention to them. This level of discipline will make your run your business well and will ensure at the time you come to sell it, or make it public, the process will be much easier.
Now, I am sure you are thinking that this is a massive and daunting list. Like I said earlier, few companies genuinely tick all these boxes. But if those you can control early; that cost you little at the start and help you run your business are put in place such as good governance, then you are not left trying to catch up.
Many of these attributes are simply the sign of a good business. Especially one that wants to be a leader in its industry sector. Developing a position as an industry leader will help you drive superior industry growth.
Keep these in mind as you build and run your business, aspire to them and measure your strategic plans against the achievement of these attributes and you truly won’t go far wrong.