Be Prepared When Business Investors Look Beyond Your Business Plan

You have spent considerable time pulling your business plan together, contacting potential business investors, making management presentations and pitching your business plan to prospective business investors. Now you finally have a serious investor who wants to conduct "due diligence" before investing real cash into your business.

Great! What's "due diligence?

Due diligence is a thorough examination of available facts, references, books, records, etc. of your business and business plan.

And, what exactly should you expect during due diligence?

Skepticism...

Business investors want to be sure there are no skeletons in the closet and that your venture is not the next Madison Priest "black box technology" -- a revolutionary technology that claimed to allow ordinary phone lines to transmit data into people's homes at rates faster than fiber optics. By staging impressive demonstrations, Priest convinced private business investors and seasoned companies, such as Blockbuster and Intel, to invest money in his venture. In the end, Priest's 'magic box' was nothing but a high-tech hoax.

In addition to a detailed analysis of your financial statements, business investors will hone in on four key areas: finance, management, manufacturing, and marketing. Specific concerns in each area are as follows:

Finance

Cash. Cash is king. It's the lifeblood of all businesses - start-up or on-going businesses. Business investors know this. They will spend the time understanding your cash flow assumptions and, if you're an existing business, they'll analyze your cash management practices. Poor cash management or shaky cash flow projections are immediate red flags.

Profitability. Expect investors to compare your actual or projected gross margins from year to year. This provides a quick indicator of your historical or projected manufacturing efficiencies and pricing environment. It can also highlight potential control issues, excessive overhead, or under pricing strategies to capture market share.

Bank problems. Out of compliance financial ratios, scrutiny from banks, or suspect bank relations - personal or business - are all red flags to business investors about how you manage your financial affairs.

Outdated financials. The lack of monthly financial statements or detailed cash flow projections or, for an on-going business, statements that are not prepared on time are all indications of a loosely run operation or a lack of planning.

Management

Continual crisis. Business investors watch closely for signs of weakness in you or your management team. Constant interruptions by emergency phone calls and demands for immediate decisions are signs of disorganization and lack of management.

Substantial changes in key personal. Unusual turnover in key management positions can be viewed as a lack of leadership.

No changes in senior management for many years. An established company with little or no changes in the management team can indicate a stagnant business, not current in new methods or processes, or a very autocratic management style.

Lack of pride or enthusiasm. Seasoned business investors can just sense the true tempo and spirit of an operation and its management team. Ask them how they do it and they'll tell you it's a sixth sense or gut feel. Nonetheless, it is something they are looking for and expect to see and feel.

Manufacturing

Outdate methods and processes. Your manufacturing and service methods and processes provide a quick indication of your ability to compete in the markets you serve and shift gears if the business doesn't go as planned. Even if you're a start-up, business investors will want to know the methods and processes you plan to use to manufacture your product or provide the services you plan to offer.

Rejects. If you are already in production, investors expect you to know your reject rates, the problems causing them, and the quality controls you have in place. How you handle rejects is an important issue to business investors. Remember, rejects are not limited to only production rejects. They also include missed service calls, late deliveries, and other process failures.

Just in time (JIT). Inventory is often the first place business owners and entrepreneurs get into trouble. Too much of it and you can quickly run out of cash; too little and you'll quickly start missing deliveries and losing customers. How well you manage inventory and understand it is a key strength business investors are looking for in the management team.

Sales per employee. The measure of overall productivity is a good, simple benchmark investors can use to measure your historical or projected performance against other companies in your industry. Questions like: What is it that you plan to do differently than your competitors to allow you to use the number of employees you use or plan to use? Why do you think you can earn more or less per employee than the average for your industry?

Marketing

Market share. Be ready to compare your expected market share or changes in it to your competitors. Remember to only measure the relevant markets you serve. Also, avoid justifying your market share by taking small percentages of extremely large markets. "Our projections only assume we get 1% of this billion dollar market" is one of the most meaningless statements a business owner or entrepreneur can say.

Trade shows. Investors will be interested in the activity and interest your company's booth generates at trade shows compared to your competition. Some may even want to attend and observe the next trade show you attend. Be sure to take pictures, videos and conduct customer surveys to demonstrate and support the interest and activity surrounding your booth.

New products. What is the percentage of new products or services that generate future sales? How often will new products or services need to be introduced to maintain your market position? What is your success rate with new products and services?

Business investors are constantly trying to sniff out symptoms of trouble. It's important that you never mislead or deceive them. Most investors have extensive business experience and regularly see or have seen many different businesses and industries. The questions they ask often stem from their real world experiences. That's why it is important not to get defensive by their questioning.

Be prepared when potential investors want to get behind your business plan. Use this list to conduct your own review of your business. Then, like many successful business owners and entrepreneurs, take the time to tap into the knowledge and questioning business investors have to offer to improve your business and prepare for future investor meetings.

Mike Elia is a chief financial officer and an advisor to venture capitalists and leverage buyout specialists. His business plan ebook Business Plan Secrets Revealed shows how to make your business the most appealing investment choice to venture capitalist, bankers, and other business investors. For his free business plan guide click here.

---

Small Business Success Tip: Learn Something New Everyday

Your grandfather probably told you to "learn something new everyday".... Read More

Electronic Franchise Disclosure and E-Signature Future for Investors

It has been discussed allowing Franchising companies to electronically disclose... Read More

Dynamics of Daylight Savings Time on Service Businesses in the United States

The Dynamics of Daylight Savings Time changes the way we... Read More

Tell Me The Reasons Why I Should Believe You?

Have you ever heard the phrase, 'PREPONDERANCE OF PROOF'?I recently... Read More

Going Public: Now that You Have Successfully Made the Transition, What Do You Do?

Ok, you have successfully accomplished your dream of being the... Read More

Are You Using a Chess or Checkers Small Business Marketing Strategy?

Until the day I learned to play chess I loved... Read More

Finding the PERFECT Alliance Partner

Where do you look for the appropriate alliance?One of the... Read More

Franchising 101- What You Absolutely Need to Know

Franchising has made the world look really small. The well... Read More

The Joy and Hazards Of Finding Your First Office

Q: I have outgrown my home office and need to... Read More

Uncover Free Veins Of Gold By Prospecting Online Guru Newsletters (Part 1 of 2)

Incredible as it sounds, you have a goldmine of free... Read More

A Business Tail: Veterinarian Foams at Mouth, Chases Tail, Learns New Tricks--Case Study

Many self employed professionals find themselves overwhelmed, frustrated, and confused... Read More

5 Small Business Management Questions to Help Choose Marketing Programs

As small business managers, we juggle limited resources in a... Read More

Start a Resume Writing Service for Profit

The resume writing service serves an important role in the... Read More

How to Write a Credit Policy for Your Business

The book, "Become the Squeaky Wheel," by New Hampshire author... Read More

Starting a Pressure Washing Business

Are you thinking of starting a small pressure washer business... Read More

Bogus Investor and Consumer Complaints and Consumer Misrepresentation

Like most regulatory bodies in the United States, the Federal... Read More

Window Cleaning Business Case Study

How do window cleaning franchise businesses start? It is a... Read More

S Corporation ? What Is It?

For many small businesses, the "S" corporation is the business... Read More

How to Profile a Client

At first glance, this topic may seem a little repetitive,... Read More

Dispute Resolution of Territory for Mobile Franchised Companies

Franchisors of home based and mobile businesses need to carefully... Read More

Small Business Failures in America - Cash Flow Issues

We are noticing an increase in the length of time... Read More

So You Don?t Believe in Outsourcing

Entrepreneurs are hardy stock. But sometimes hardiness can get you... Read More

Going Public: The Process for Small and Mid-size Companies to Go Public

It's the dream of every person who starts a business... Read More

The Types of Skip Trace Accounts

First, we need to define the different kinds of skip... Read More

Your Babys Ugly..and Youve Got Bad Breath

I've got good news and bad news. The good news... Read More

Become The Squeaky Wheel and Watch Your Business Skyrocket!

Providing high quality customer service is a must for any... Read More

Small Business - Is The Accounting Profession Ripping Them Off?

My 16 year-old daughter said, "Gee Dad! You look just... Read More

Why Clean Mobile Homes for a Business?

Manufactured and Mobile Home owners know that the weather this... Read More

Hosted PBX, Is It Right For You?

"Order Now!" "Your Business Will Fail If You Don't Have... Read More

Reduce Stress, Increase Profits By Incorporating Strategic Systems In Your Small Business Success

Whether you are an Entrepreneur or Business Professional there are... Read More

Does Your Company Have a Business Image Manual

Every business regardless of size needs a "Business Image Manual"... Read More

Setting Prices - Pricing Your Consulting Services

THE PSYCHOLOGY OF PRICINGIn case you hadn't noticed, people can... Read More

How To Plant Seeds of Success With Small Business Ideas

Think of all of your business ideas as tiny seeds... Read More