Increase your company's value before raising capital and financing

Establish your company’s value

Whether it is a private buyer, a Private Equity firm, a VC or a lender, who is looking at your company;

Whether you’re trying to raise growth capital, secure financing, or sell your company – all would look at same fundamental parameters and, with some variation, would be interested in same things.

Essentially, all are trying to assess the value of the business, the growth potential, the risk, and the likelihood of your business to generate profits in the future.

I know it sounds obvious. But, when potential investors’ critical eyes are looking at your business, things are less obvious.

Your job, as the one who is trying to raise capital, secure financing or sell the business, is to prove that your business is indeed that machine that you have created that will generate profits and return on investment, at minimum risk.

For that you need to show that your company is indeed the vehicle that is going in the right direction (great product or service in the right market), that your vehicle is fast (growth strategy and velocity), that your vehicle is solid and reliable (great management team, processes in place, healthy balance sheet) and that your navigation system is advanced and accurate (current financials, KPI and metrics tracking).

Here are a few words about some of these points:

Sales growth and velocity

Growing revenue, especially at high velocity, is the ultimate proof that you have something here. It shows that there is a market to your product or service, consumers like it, there is potential and that you figured out something good.

1. Growth is simply essential. Not showing growth would make vast majority of the different type of investors, buyers or lenders, walk away.

2. Growth ultimately is measured in revenue. However, there could be some exceptions and different scenarios, such as –

a. For a younger company, different parameters of growth that would indicate that revenue growth is around the corner can be measured. Such parameters could include growth in users, subscribers, downloads, MRR (monthly recurring revenue), social platforms engagement and more.

b. Transitioning from one business model to another – I do see these days many mature companies, that are transitioning from license or contract model to SaaS or service charge model. There are many other examples. Often time in such cases, there would be a temporary drop in revenue and margins. It is important to be able to show the growth under the new business model by showing continuously growing MRR and by analyzing other supporting parameters.

Profitability

You must show that your company can be profitable, for long term.

Gross Profit - no excuses on this one. You must demonstrate that you are able to generate gross profit, in other words, to sell at a higher price than you buy.

It is okay to make assumption that growth would bring scalability, purchasing power and other efficiencies that would increase the current gross margins, but it would be hard to argue that you can be profitable in the future if you cannot generate gross profit today.

Contribution – Contribution refers to revenue less all direct, not fixed, cost. Practically, in most cases, it would include the gross profit, less other direct sales and marketing costs, such as cost of leads, sales commission etc (= Cost of Acquisition).

If your company is matured, stabilized, there is no excuse – you must show a solid and sustainable contribution.

If your company is in its first 24 months, still a startup, and cost of acquisition is still high, you do need to show how and why you believe the cost of acquisition would go down in the near future and healthy contribution levels would be achieved.

Cost of Acquisition – if your company is a mature company, stable, then you need to be able to demonstrate that the cost of acquisition, has been low, and has been improving over time and it allows for healthy contribution. If you are a startup, not stabilized yet, there are two major points that are related to the Cost of acquisition –

1. How and why the cost of acquisition will be reduced over time.

2. How it is going to be funded.

Your “Revenue Machine”

How revenue is generated, how “automatic” the process is, how sustainable it is.

As much as possible and relevant, you want to show that the company has figured out variety of methods and channels to generate revenue, so the company is not dependent on one or two factors, or one main source of leads, rather has multiple solid and cost-effective ways for generating revenue for the long run.

Obviously, there are many different factors that come to play here. Depends on the type of business, industry etc. Just as an example, this could include geographic locations, online assets and presence, reviews, footprint and online/offline reputation, technology, data, market conditions and more.

Growth Engines

What drives the company’s growth, currently and in the future. As an example, growth engines could include –

- Paid engine – online marketing, salespeople and other paid marketing effort

- Retention and Lifetime Value of customers

- Viral growth

- Market growth

- Growing need for the service or product

- M&A

- Geographical expansion

It is common for startups and young companies to focus only on one or two engines. It is expected from stabilized companies to have a broader strategy.

It is important to track relevant growth engines KPI and to be able to show the right trend and growth.

It is also important to show well thought through plan of implementing new engines as part of your future plans.

Growth Strategies

There are a few important points regarding the company’s growth strategy –

Past experience – show that your growth strategy is based on data and past experience. Show that you’ve done it before, that you know how to do it, track it, be able to show supporting metrics and the right trend.

Can the company afford it, realistically – does the company have the cashflow to support the implementation of the growth strategy? For example, often I see young companies, projecting growth, but when questioning their Cost of Customer Acquisition and modeling this out, we learn that it would take 2-3 years and millions of dollars before

breaking even.

Market

You must know everything about your market. All statistics, competition etc.
Defining your market –
1. Has to be large enough.
2. Yet, the company must be focused on a well-defined and not too broad market.
Differentiation and need – what is different about your company, what make your company stand out.

System and processes

Companies fail on lack of processes. Proper processes are necessary to ensure efficiency, risk management, durability, and transparency.

Team

A company that is not dependent on the owner, rather has a full set, and depth, of management, would have a higher value. A company that is dependent solely on the owner, who is transitioning out, would require much more effort from the buyer and would create a higher risk for any investor.

Points to pay attention to –

1. It is important to have the right mix of talented experiences management, together with younger and promising team of stars.

2. Keep them for long time. Having a team that has been with the company for a few years is a sign for a solid management and employees’ satisfaction. Not being able to keep your employees is a bad sign.

Financials

Having your accounting and financials current and accurate is crucial, for many reasons, including -

1. Transparency – financial visibility – Current and accurate financials provide any investor or lenders comfort level on couple of levels –

- Reliance on information presented during due diligence.

- Knowing that they can rely on routine reporting from the company after investment or financing is done.

2. Having current monthly accounting schedule demonstrate that management monitors business results and key performance indicator regularly and has control of what’s going on, and is able to react fast to any development.

3. When you get an LOI, you will have to move fast. Not having current financial statements are often the cause for delay, when getting to the Due Diligence phase.

4. If you make more than $20M in revenue, you would be expected to have audited financial statements.

Clean / explainable past

Businesses go through different cycles and have sometimes past experience that doesn’t match the current story you are trying to tell.

This past will come up during the due diligence. Therefore, it must be addressed. Sometimes it can be done by some restructuring, different re-class and presentation on the financial statements, internal financial reports and proper explanation.

Clean up balance sheet

In short, a healthy balance sheet refers to a strong working capital, excess of short-term assets over short-term liabilities, and proper positioning of shareholders loans and cap table.

A few things to consider -

1. Move short terms liabilities to long terms through refinancing.

2. Make sure to be current on A/P and A/R.

3. Be current on filing and paying tax returns.

4. Shareholders Loans and intercompany balances – this item has to be reviewed and addressed based on different considerations, including tax planning, owners’ plans, strength of balance sheet and more.

5. Many others

Corporate Structure

Plan it and make the proper tax planning. Take the right tax advice when incorporating, or now, even if you are not planning an exit for the next few years. Solid and timely tax planning could leave much more cash in your pocket.
Cap Table – if possible, keep it small. Too many investors are a headache to a potential investor.

Risk – inherent business risk

There is always a risk. It is important to identify the different risks factors, to continuously evaluate them, and, to address them.

When presenting your business, show that you are aware of the different issues and that you address them.

IP - Patents, technology, others

From copyrights on brands and company name, to technology, formulas and others. It is important to protect these assets and to be able to show the value.