Business Owners Need to Get Paid > How-To Create an Institutional Investment

Business owners always say to me, “Why would I need capital and advice once I get to $5M?”  

This is a short-sighted view and one of the main reasons why less than 1% of all companies reach ten years and $10M in revenues (SBA Department of Labor finding). AND also why very few business owners achieve financial freedom. 

An executive team is effective, healthy, and wise when it creates “Optionality” for itself. 

While the days of angel investors and “hockey-stick funding” went away with the stock market losses in 2008; enterprises with a unique business model, effective management, and positive cash flows have access to institutional investors (private equity, SPIC,  family office investors, strategic investors, to name a few options) whom can provide Optionality.  

A small business has the following limited options:

1. Grow organically;
2. Merge to become bigger; or
3. Sell.

Institutional Investment creates additional options such as:

1. Get paid for the business you created by selling a percentage to institutional investors while still retaining majority control;
2. Grow by acquiring additional locations, competitors/substitutes, technology add-ons, or distressed revenues;
3. Expand into new products/services or markets; or
4. Acquire top talent.  

Ten Criteria for Institutional Investment

1. Repeat Customers. The main reason why most small businesses fail is that they run out of cash. By building a business with a recurring revenue model a firm not only creates more stable financial footing, but also opens the door for institutional investment.  
2. Easy to Realize 5X+ Revenue Growth.  Growth capital investors are seeking companies that can grow at 40% per year or more and realize a 40% return on invested capital.
3. Significant Barriers To Entry. What is in place to prevent other companies from copying what you’re doing?
4. Strong Financial Indicators. EBITDA of at least 10%, above industry average Gross Profit, cost-effective customer acquisition costs. Understanding of these key metrics is requirement before scaling and growing. 
5. Consistent Operational Performance.  This means steady margins, EBITDA, and new customers quarter after quarter.
6. #1 or #2 Market Targeting.  Unless you are positioned #1 or #2 in your market your branding and strategy needs work.  At the same time investors like to see some competition because it validates that a market exists.
7. 30 Named, Referenceable Clients.
8. Investable Market Sector. There are a plethora of investable industry sectors.  A few “hot” investment sectors for the second half of 2009 include:
   • Healthcare business services
   • Healthcare technology-enabled business service-oriented solutions
   • Business Process Outsourcing (BPO) including Human Resources Outsourcing (HRO) and Finance and Accounting Outsourcing (FAO)
   • IT mobility solutions
   • Marketing and online technology-enabled business solutions
   • Workforce software and technology
   • Small and mid-market focused SaaS solutions
   • In summary: anything that improves productivity while simultaneously reducing costs.
9. Scalable operating processes.  Does each new dollar invested at the field-level result in a higher percentage return of profit?  If not, additional operational refinement is needed. 
10. Effective management processes.  Monthly operating, sales, and financial performance is known, reported, and effectively communicated to all employees.

The institutional investment criteria listed above is a roadmap for wealth creation.  Are you and your firm ready for analysis by outsiders on a regular basis? 

It all depends on your “Happy Ending.”  Is your “Happy Ending” to create wealth and ensure a lifetime of financial stability for your family or to have 100% control of your business?

 

Technorati Tags: growth capital,instiutional investment,management best practices,operating scale,happy ending

Comments

[Max Bouaya]

Great post!

[Shane Adams]

Starting a business is hard enough, but making it profitable is the great challenge. Many entrepreneurs simply quit when their business fails to meet their expectations. It is crucial to study articles like this in order to learn more about investments. Thanks for sharing.