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How to Prepare for the Inevitable Ownership Event
Most business owners will sooner or later face a decision about the ownership of their business. This decision will of one of three kinds:
1. Obtaining more capital to end the vicious cycle of permanently scrambling for money
2. Selling the business
3. Disengaging from the business by putting management in place to run day-to-day operations, whether that management is found within or outside the owner’s family.
It makes sense to be prepared for such an event. How can you do that?
We think that the best preparation consists of building a business that will be attractive to investors and buyers. The following are the four key factors on which a potential investor or buyer will judge the health of the business:
1. Is this a good business, as measured by profit margins?Different businesses have different profits margins. Why would anybody invest in a business that, on top of being small, has a low margin? Nobody in his right mind would do that. Only very large businesses can work in a low margin environment.
2. Does the company have a scalable business model that will work? Scalable means that the business can go from one to ten to a hundred million using the same business model. If a business hasn’t figured out how to make the business scalable, no savvy investor will put money into it.
The whole point in buying a business that is currently small is to grow it many times fold. Private equity investors are thinking in terms of how they can grow to a size that will command higher multiples over earnings on much higher volume. That’s how they will be able to multiply their money and that’s what will make a business attractive to them.
A $1 million business cashflowing $200,000 will sell for 2 to 3 times that. A $20 million business cashflowing $2 million will sell for 5 to 10 times. This multiple game is what investors are playing when considering investing in small businesses.
3. Does the company have a sound, complete and professionally done business plan? A business plan is not just a story told in writing. It must contain a very specific description of what will be done, how it will be done and how the needed resources are going to be obtained. Many business plans are just letters to Santa Claus. That kind of plan will not attract any capital whatsoever.
4. Does the company management have the experience and the skills to execute their plan? Entrepreneurs and business owners need to be brutally honest with themselves on this point. No investor will part with his money if the company management doesn’t appear to be rock solid and proven.
If management has weak points, those weaknesses must be addressed in the business plan and eliminated as part of the process of obtaining a capital injection. In other words, capital and management enhancement can be brought simultaneously into a business if the other three conditions are met.
Ingenia Partners is the only private equity firm that will help businesses get ready to raise capital and then provide the capital for them. Venture capital and private equity firms in general are not interested in the preparation stage: they are looking for investment-ready opportunities. Consultants are not interested in or capable of investing in the businesses they help. Ingenia can also help prepare the business for sale or management transition.
Now it’s possible for you to obtain all the resources you need to build a great business in one single place. Ingenia Partners is the only company in Texas that will do that.
• We will buy a piece of your business and let you run it, with the added management skills and resources of our organization, which becomes an active partner/investor in your business. Ingenia Partners will invest its own funds or partner with investors to provide the financial resources you need to prosper and build the business of your dreams
• If you need to sharpen your management skills in addition to obtaining financial resources, we will help you achieve your goals through our Advisor Program. You can hire the skills you don’t have and begin to acquire them yourself in the process.
• If you need to find and retain the best people that will collaborate with your success Ingenia Partners can help you do just that with our Strategic HR Services which Ingenia provides through its subsidiary Employee Performance Tools, Inc.
No other company combines the ability to provide venture capital and business performance improvement services in the way that Ingenia Partners does. We put our money where our mouth is.
San Antonio, TX 78248
Main: (210) 822-2444
Cell: (210) 363-8916
Posted by Carlos Zubillaga on 15th October, 2012 | Comments | Trackbacks
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