The CEO’s Right Hand recently launched a podcast series discussing the growth challenges that small businesses face today, while offering fractional finance and accounting solutions in a CEO Studio Sit-Down. Here, William Lieberman, Founder and CEO discusses How to Go About Getting Investors.
Christa Lauri, Host -CL
William Lieberman, Guest Chief Executive Officer –WL
CL – So William our topic today is how you go about getting outside investors and obviously obtaining capital involves various considerations, so what in your opinion is the first question a small business owner should ask him or herself?
“How you’re going to use the funds is most critical.”
WL – I really think the most important thing is to think about what are the uses of funds. Are you paying off an existing debt? Are you looking to invest in a new product, marketing campaigns, and hiring people? Do you want to acquire, maybe you want to buy another business? So thinking about how are you going to actually use those funds is very important in terms of structuring the right type of investment and the right type of capital
CL – And what about the types of funds?
WL – There’s a variety as you can imagine in terms of debt or equity and when you think about you might even have funds available from the business itself, savings or cash flow that the business generates itself. Or you might need to go borrow money either from a bank or other facilities that are out there and you can also get equity investors to help fund the business.
CL – And so of course you do need to think about how much funding you need and also what assets you currently have.
WL – Yes, absolutely and in terms of thinking about what you need, you have to think about forecasting out maybe twelve months, eighteen months, twenty-four months, so you can think about this investment and how much cash is it actually going to take because it might be more than just something upfront. You might need ongoing cash, so you need to think about that as in terms of the use and then where is that capital coming from. Like you said you might have I have capital in the business, but you might need to go outside to help fund that shortfall as you turn that investment into revenues down the road.
CL – So now let’s talk about evaluating term for debt and terms for equity.
WL – So when you think those terms for debt there’s a variety of parameters that you have to think about. The length of the debt, so it could be short-term and even long-term, one year, three year or five year. The interest rate of course, what’s the interest that you are going to have to pay? Do you have to have security? Are you pledging your own assets or the assets of the business? If it’s a bank debt, what are the covenants? What are the parameters that they’re going to require you meet? So you need to have excess cash flow to make sure that you’re always managing those covenants and making sure that you have the debt coverage ratios and things like that that you need in order to fulfill the banks need to get repaid in a timely matter.
“When you think about what you need for your investment, forecast out 12, 18, 24 months, so you’re able to see if it is more than just the upfront costs.”
CL – And what about in terms of equity?
WL – In equity it’s a whole different ballgame, so then you’re looking at what’s the price? Everybody thinks about price. How much am I giving up? How much of my company am I actually selling, because somebody else is now going to be an owner of my business, so they think about price, but there are other things are even more important like control. Do I give a board seat? Or are there other control provisions that this investor is going to prevent me from doing, when I want to expand in a certain way or higher certain n person? Are they going to say, “No you can’t do that. That’s part of the deal.” And that is something you have to think about.
CL – William, you also are talking about investor fit, whether it’s financial or strategic. So can you expand on that?
WL – When somebody’s coming in, especially on the equity side, when somebody’s coming in as a financial investor, they’re looking to just to get their money out, with a return, in a certain time frame and so they have a formula and it’s going to be five years, I have to double my money or whatever it might be. As opposed to a strategic investor who will have a longer-term view of adding to your business and helping you with distribution or marketing, bringing their own skills to the table to add, so it’s a one plus one equals three situation. So it really makes a big difference whether or not you are getting a strategic investor or a financial investor.
“A strategic investor will have a longer-term view of adding to your business and helping you with distribution or marketing.”
CL – What are some of the most common mistakes people make when they’re going, you know, small business owners when they’re looking for outside investors?
WL – I think a few, one not being prepared and not understanding what all is involved in the process. And so lots of times people will get caught up in actually going out and finding the money and they don’t mind the store. So they spending so much time looking for money that the operations suffer.
CL – And how do you recommend William a small business owner managing that because the process of raising capital can be very time-consuming and they may not have a big team behind them?
WL – Absolutely, so using outside advisors, outside consultants to help you, coach you, help prepare the materials that are needed in terms of the financial projections and evaluating the terms that the investor or the bank is providing and even helping find those investors or finding the bank is something that is really helpful to an entrepreneur, an owner, founder because the team itself, you have been managing your team and your business at the same time. Now, as every entrepreneur knows it’s a 24-7 business anyway, so this is just more work for them to do, but if you can get the right outside help it makes it a lot easier.