FEATURE ARTICLE: "what do investors look for in a business venture?"
What do Investors look for in a Business Plan?
Having a great
business idea and the skills onboard to make the business thrive is only half
the battle leaving the all mighty dollar as the other part of the equation in
funding the business venture. For most
Entrepreneurs the financial support part of the equation leads often to
partnerships with 3rd party Investors and/or Financial Lending
Institutions.
Understanding what Investors and Financial Lenders look for in a business plan helps Entrepreneurs spend their time wisely on researching and building their business plan to address the right questions and concerns.
So how do we sell the value to an Investor or Lending Institution? To answer this question it’s important to understand basic underlying motivators for an Investor or Lender to accept the risk in supporting a Business Owner with their business start-up vs safer and more credible investing alternatives. The answer to this simple question starts with a simple answer and that is “to make even more money.” That said an Investor is a calculated risk taker and not a gambler driven by chance.
In order to speak the language of a “risk taker” the Entrepreneur needs to understand the risks most commonly put on the table when Investors review a business plan. Such as;
1. Most Investors and Lenders alike will gauge the business risk based on industry statistics specific to the industry the new business poises to enter.
a. Is the business operating in and Industry with an upward or downward performance in the marketplace? Are competing businesses seeing increased
revenues or trending in loss of revenues on average from year to year?
b. How saturated is the market? How many businesses started up vs how many have closed?
2. Investment protection and shared risk. How much personal investment does the owner have in their business venture? What collateral will be available to minimize
an Investor or Financial Lenders loss? A common expectation is a 3 to 1 asset to debt ratio.
3. Business confidence in the Entrepreneur operating the establishment. 2 out of 3 businesses fail due to poor management of the business. As such be sure to
demonstrate key strengths that the Business Owner brings to the table and a plan on how weaknesses will be addressed (ex. Hire professional services to assist
business).
4. Due diligence and applied common sense. A business plan that sets out to promise large returns in a short turnaround will produce a red flag for Investors. The old
adage, “It’s too good to be true” comes to mind here. Investors and Lenders alike will expect that it will take time to generate sales and establish a customer base and
a nominal to no payback in initial 1-2 year period allowing investment back into the business.
Another common consideration here is in determining what business an Entrepreneur will have the least barriers to overcome and to find a niche to make the chosen business stand out from the competition. It’s important to note that in fact most Investors and Financial Lenders consider the following business types to be higher financial risk with traditionally more barriers;
· Restaurants
· Hotels
· Trucking/Hauling
Most importantly remember that an Investor is looking for a business strategy with a long-term direction. A crucial component of the business plan as such involves showing how the business will stabilize and then grow through expansion and/or diversification over a 3-5 year term.
· Be prepared to demonstrate a strong knowledge of the risks that will be faced over the years.
· Express awareness to understanding the importance of change management. The pace of change driven by technology is forcing businesses to re-create
themselves and an Entrepreneur needs to recognize and demonstrate a plan to prepare for the future.
· An exit strategy. For example, Government invested venture programs in a business will often fund a business for a set period of time and require Business Owner to
have an exit strategy that allows for an Investor to withdraw investment from the business at the end of an agreed investment term.
Financial Investors and Lenders alike are banking on the business becoming a success and allowing them to earn off the business to gain a return on their investment within 3-5 years. Keep the business plan focused towards demonstrating a healthy growth over 3-5 years and remember to present a strong plan to address business and financial risks.
Author: Greg Milne, PMP
11/05/13
Understanding what Investors and Financial Lenders look for in a business plan helps Entrepreneurs spend their time wisely on researching and building their business plan to address the right questions and concerns.
So how do we sell the value to an Investor or Lending Institution? To answer this question it’s important to understand basic underlying motivators for an Investor or Lender to accept the risk in supporting a Business Owner with their business start-up vs safer and more credible investing alternatives. The answer to this simple question starts with a simple answer and that is “to make even more money.” That said an Investor is a calculated risk taker and not a gambler driven by chance.
In order to speak the language of a “risk taker” the Entrepreneur needs to understand the risks most commonly put on the table when Investors review a business plan. Such as;
1. Most Investors and Lenders alike will gauge the business risk based on industry statistics specific to the industry the new business poises to enter.
a. Is the business operating in and Industry with an upward or downward performance in the marketplace? Are competing businesses seeing increased
revenues or trending in loss of revenues on average from year to year?
b. How saturated is the market? How many businesses started up vs how many have closed?
2. Investment protection and shared risk. How much personal investment does the owner have in their business venture? What collateral will be available to minimize
an Investor or Financial Lenders loss? A common expectation is a 3 to 1 asset to debt ratio.
3. Business confidence in the Entrepreneur operating the establishment. 2 out of 3 businesses fail due to poor management of the business. As such be sure to
demonstrate key strengths that the Business Owner brings to the table and a plan on how weaknesses will be addressed (ex. Hire professional services to assist
business).
4. Due diligence and applied common sense. A business plan that sets out to promise large returns in a short turnaround will produce a red flag for Investors. The old
adage, “It’s too good to be true” comes to mind here. Investors and Lenders alike will expect that it will take time to generate sales and establish a customer base and
a nominal to no payback in initial 1-2 year period allowing investment back into the business.
Another common consideration here is in determining what business an Entrepreneur will have the least barriers to overcome and to find a niche to make the chosen business stand out from the competition. It’s important to note that in fact most Investors and Financial Lenders consider the following business types to be higher financial risk with traditionally more barriers;
· Restaurants
· Hotels
· Trucking/Hauling
Most importantly remember that an Investor is looking for a business strategy with a long-term direction. A crucial component of the business plan as such involves showing how the business will stabilize and then grow through expansion and/or diversification over a 3-5 year term.
· Be prepared to demonstrate a strong knowledge of the risks that will be faced over the years.
· Express awareness to understanding the importance of change management. The pace of change driven by technology is forcing businesses to re-create
themselves and an Entrepreneur needs to recognize and demonstrate a plan to prepare for the future.
· An exit strategy. For example, Government invested venture programs in a business will often fund a business for a set period of time and require Business Owner to
have an exit strategy that allows for an Investor to withdraw investment from the business at the end of an agreed investment term.
Financial Investors and Lenders alike are banking on the business becoming a success and allowing them to earn off the business to gain a return on their investment within 3-5 years. Keep the business plan focused towards demonstrating a healthy growth over 3-5 years and remember to present a strong plan to address business and financial risks.
Author: Greg Milne, PMP
11/05/13