How to Prepare Your Business for Investment
Raising investment can be a significant milestone for a growing business.
Whether you're looking to raise £100,000 to accelerate growth or several million pounds to expand into new markets, investors will want to understand one thing above all:
Why should they invest their money in your business?
A strong idea is important.
A growing customer base is important.
A good management team is important.
But investors will also want to see clear, accurate and credible financial information.
If your accounts are disorganised, your forecasts aren't credible or you can't explain where your money is going, you may create unnecessary questions during the investment process.
Preparing your business for investment therefore isn't something you should start when you decide to approach investors.
Ideally, you should start preparing months before you need the money.
Here's what you need to consider.
What Does It Mean to Be Investment Ready?
Being "investment ready" means having the information, systems and plans in place to allow a potential investor to properly assess your business.
An investor will typically want to understand:
What does the business do?
How does it make money?
How quickly is it growing?
How profitable is it?
What are the margins?
How much cash does it have?
What are its liabilities?
What are the growth opportunities?
What are the risks?
How much investment is required?
What will the investment be used for?
What could the business potentially be worth in the future?
You should be able to answer these questions clearly and support your answers with reliable financial information.
Get Your Accounts in Order
The first place to start is your financial records.
If your bookkeeping is incomplete or inaccurate, it becomes difficult to demonstrate the true financial performance of your business.
Before approaching investors, make sure your accounts are:
Accurate
Your transactions should be correctly recorded and categorised.
Up to date
Your management information shouldn't be several months behind.
Reconciled
Bank accounts, debtors, creditors and other balance sheet accounts should be properly reconciled.
Consistent
Your accounting policies and reporting should be consistent from month to month.
Easy to understand
Investors shouldn't have to spend hours trying to work out what your accounts mean.
Good financial records don't just help your accountant.
They help demonstrate that you understand your own business.
Have Monthly Management Accounts
If you're approaching investors with only your annual statutory accounts, you may not have enough information to demonstrate what's happening in the business today.
Monthly management accounts can provide a much clearer picture.
These might include:
Profit and loss
Balance sheet
Revenue
Gross profit
Gross margin
Operating expenses
EBITDA
Net profit
Debtors
Creditors
Cash position
Key performance indicators
The exact information will depend on your business.
The important thing is that you can demonstrate how the business is performing now, rather than relying solely on historic year-end accounts.
Understand Your Numbers
It's not enough to hand an investor a set of accounts.
You need to understand them yourself.
You should be able to explain:
Why did revenue increase?
Why did margins change?
Why did costs increase?
Why is cash lower than profit?
Which customers generate the most revenue?
Which customers are most profitable?
What is your break-even point?
What are your biggest monthly costs?
How much cash does the business need to operate?
Investors may ask difficult questions about your financial performance.
Being able to answer them confidently and accurately is an important part of being investment ready.
Know Your Gross Margin
Revenue is an important measure of business growth.
But investors will also want to understand how profitable your revenue is.
Your gross profit margin shows how much money the business retains after its direct costs.
For example, if your business generates £1 million of revenue and has £600,000 of direct costs, your gross profit is £400,000.
That gives you a gross margin of 40%.
Understanding your gross margin can help investors assess the underlying economics of your business.
You should also understand whether your margin is:
Increasing
Decreasing
Stable
Different across products
Different across customers
If you're growing rapidly but margins are falling, you should understand why.
Understand Your EBITDA
Another financial metric investors may consider is EBITDA.
EBITDA stands for:
Earnings Before Interest, Tax, Depreciation and Amortisation.
It is commonly used to assess the underlying operating performance of a business.
If your business generates £2 million of revenue and £300,000 of EBITDA, your EBITDA margin is 15%.
Investors may be interested in:
Current EBITDA
EBITDA margin
EBITDA growth
Adjusted EBITDA
Factors affecting profitability
Expected future EBITDA
You should also be prepared to explain any adjustments you make to EBITDA.
If you describe £50,000 of costs as "one-off", be prepared to explain why.
Prepare a Financial Forecast
One of the biggest mistakes businesses make when seeking investment is focusing too heavily on what has already happened.
Investors are also interested in what happens next.
You should have a financial forecast covering the period ahead.
This might include:
Revenue forecasts
Gross margins
Operating expenses
EBITDA
Cash flow
Capital expenditure
Recruitment
Working capital
Funding requirements
Your forecast should clearly show what you expect to happen with the investment.
Show Investors What Their Money Will Achieve
This is arguably one of the most important parts of your investment case.
Investors don't simply want to know:
"We need £500,000."
They want to know:
"What will the £500,000 achieve?"
For example, perhaps the investment will allow you to:
Hire a sales team
Develop a new product
Enter a new geographical market
Increase production capacity
Invest in technology
Increase marketing
Acquire another business
Build additional stock
Your financial forecast should connect the investment to these plans.
For example:
£200,000 → recruitment
£100,000 → marketing
£100,000 → product development
£100,000 → working capital
The exact allocation will depend on your business, but investors should be able to understand where their money is going and why.
Build a Credible Growth Forecast
It can be tempting to make your forecasts look as exciting as possible.
But overly optimistic forecasts can create problems.
Imagine your current revenue is £1 million.
You forecast:
£2m next year
£4m the year after
£8m the year after that
It might look impressive.
But investors will want to know why that growth is achievable.
Your forecast should ideally be supported by evidence such as:
Existing customer growth
Recurring revenue
Sales pipeline
Conversion rates
Historical growth
Market opportunity
New products
New locations
Additional sales capacity
A forecast doesn't need to be conservative.
It needs to be credible and explainable.
Understand Your Cash Requirements
Profit and cash are not the same thing.
This becomes particularly important when raising investment.
A business may be profitable but still require significant funding to support growth.
For example, rapid growth could require:
More stock
More employees
Larger premises
Additional equipment
Longer working capital cycles
Increased marketing expenditure
Your cash flow forecast should demonstrate how much funding the business requires and when it will be required.
Investors will want to understand whether the amount you're raising is sufficient to achieve the objectives you've outlined.
Clean Up Your Balance Sheet
Your balance sheet can reveal a lot about your business.
Before seeking investment, review:
Debtors
Creditors
Stock
Loans
Director loans
Accruals
Prepayments
Fixed assets
Tax liabilities
Other liabilities
Make sure everything is accurate and properly supported.
Particular attention should be paid to director loan accounts and any transactions between the company and its directors or shareholders.
These areas can receive additional scrutiny during due diligence.
Review Your Debtors
Outstanding customer invoices can have a significant impact on your business.
If your accounts show £300,000 of trade debtors, investors may want to understand:
Who owes the money?
How old are the invoices?
Are they likely to be collected?
Are any debts disputed?
How quickly do customers normally pay?
This is another reason why good credit control matters.
A business with strong revenue but poor collection processes can have a very different cash position from one that collects invoices promptly.
Review Your Contracts and Customers
Your financial information is only part of the investment process.
Investors will also want to understand your customer base.
Consider:
How many customers do you have?
How much revenue comes from your largest customer?
Do customers sign contracts?
How long do contracts last?
Are revenues recurring?
What are your customer retention rates?
Are there any major customers at risk?
If one customer represents 50% of your revenue, for example, that concentration is likely to be relevant to an investor's assessment of the business.
Understanding these risks before entering discussions allows you to address them openly.
Make Sure Your Business Isn't Too Dependent on You
This is particularly important for owner-managed businesses.
Investors are investing in the business, not simply the owner's ability to work incredibly hard.
Ask yourself:
Could the business continue operating if I wasn't there every day?
Consider:
Who manages the team?
Who manages customers?
Who makes key decisions?
Who handles sales?
Who understands the finances?
Who manages operations?
If everything depends on the founder, investors may see additional risk.
Building a strong management structure can therefore be an important part of preparing for investment.
Prepare for Due Diligence
Once an investor becomes seriously interested, you'll probably encounter due diligence.
This is where the investor examines the business in much greater detail.
They may request information relating to:
Statutory accounts
Management accounts
Bank statements
Tax returns
VAT
Payroll
Customer contracts
Supplier contracts
Employees
Intellectual property
Loans
Legal matters
Insurance
Assets
Liabilities
The exact process will vary depending on the size and nature of the investment.
The better organised your information is, the easier this process can be.
Create a Financial Information Pack
Rather than scrambling to find documents whenever an investor asks for them, consider creating a central financial information pack.
This could contain:
Latest statutory accounts
Latest management accounts
Current balance sheet
Cash flow forecast
Business forecast
Debtor report
Creditor report
Tax information
Debt schedule
Key financial KPIs
Historical financial performance
Keeping this information up to date can also make future fundraising or due diligence significantly easier.
Think About Your Valuation
Before approaching investors, you should have a reasonable understanding of how your business might be valued.
The valuation will depend on the nature of the business and the investment structure.
Factors can include:
Revenue
Profitability
EBITDA
Growth rate
Recurring revenue
Market opportunity
Customer concentration
Intellectual property
Management team
Competitive position
Future growth potential
It's important to distinguish between what you believe your business is worth and what an investor is prepared to invest at.
The investment process will ultimately involve negotiation between the parties.
Understand How Much Equity You're Giving Away
If you're raising equity investment, you're exchanging part of your ownership for capital.
For example, suppose your business is valued at £2 million before investment and you raise £500,000.
The post-investment valuation would be £2.5 million if the agreed transaction uses those figures.
The investor would own 20% of the company in that simplified example.
But investment structures can become considerably more complicated.
There may be different share classes, preferences, options, shareholder agreements and other terms.
Don't focus solely on the amount of money being invested.
Understand the complete deal.
Have a Clear Investment Story
Investors aren't only investing in historic financial performance.
They are investing in the future potential of the business.
You therefore need to be able to explain:
What problem does your business solve?
Why is the market attractive?
Why are customers choosing you?
What makes your business different?
What has the business achieved so far?
What will investment allow you to do?
What could the business look like in three to five years?
Your financial information should support this story rather than contradict it.
Don't Hide Problems
No business is perfect.
There will inevitably be challenges.
Perhaps one customer represents a large proportion of revenue.
Perhaps margins fell last year.
Perhaps you've lost a major contract.
Perhaps cash flow has been tight.
Perhaps a product hasn't performed as expected.
Trying to hide these issues can create bigger problems later.
Instead, understand the issue, quantify it and explain what you're doing about it.
Investors are likely to conduct their own due diligence.
It's better to understand your weaknesses before they do.
Start Preparing Before You Need the Money
One of the biggest mistakes a business owner can make is waiting until they need investment before getting their finances in order.
If you suddenly need £500,000 because your business has a major growth opportunity, you don't want to discover that:
Your management accounts are six months behind
Your bookkeeping isn't reconciled
Your cash flow forecast doesn't exist
You can't explain your margins
Your customer data is incomplete
Your forecasts aren't supported by evidence
Investment preparation should ideally be an ongoing process.
A business that maintains good financial information throughout the year will be in a much better position when an opportunity arises.
How Welf Accountants Can Help
At Welf Accountants, we work with growing businesses that need more from their finance function than simply producing year-end accounts.
Our outsourced finance services can include:
Bookkeeping
Monthly management accounts
Cash flow forecasting
Financial reporting
Profitability analysis
Credit control
Payroll
Budgeting and forecasting
Strategic financial support
If you're considering raising investment, having accurate and timely financial information can help you understand your business before an investor starts asking questions.
Because being investment ready isn't just about having a good pitch.
It's about being able to demonstrate that the numbers behind the pitch stand up to scrutiny.
Thinking about raising investment?
Speak to Welf Accountants about getting your finance function investment ready.