Why would someone invest in your business? Or why wouldn’t they?

Posted on February 24, 2011 by Laura Humphreys

I’m currently looking at my investment portfolio and deciding how much of my wealth I want tied up in businesses… my own and others. Investing in business is a high risk strategy as so much depends on the people running the business and their understanding of what business really is. I’m always on my soap box about small business owner operators needing to grasp the basics of what makes their business valuable. I know what I think, but I wanted to see if other business experts think the same. So I googled.. “why would you invest in a business?” and found a similar thread running throughout. Venture capitalists, ‘angel’ investors… it seems the critieria for a good business are much the same. But here’s the criteria for NOT investing in a business from Michael Blakeyof private equity firm Avonmore Development… it hammers home some very clear fundamentals for business owners, and of course ends with my favourite soap box topic… having an exit strategy. Enjoy….

When not to invest in a business…

1. Failing to describe what your business does

It may come as a surprise, but many entrepreneurs struggle succinctly to describe what their business has been set up to do and why it differs from the competition. The old idea of the elevator pitch really holds true for most angels and you need to get to the point in a minute or less. Experienced angels can assess an opportunity quite accurately in the opening minutes of a presentation – we see so many ideas, so it’s essential to focus on the key points. So work hard on that opening presentation, it’s absolutely vital.

2. Entrepreneurs who over-value their businesses

Early-stage entrepreneurs are frequently unrealistic about what their businesses are worth when they first talk to us, and what they will be worth over the period of the investment. They see the headlines about massive valuations for the likes of Google, Facebook and Twitter but fail to appreciate that these are the exceptions rather than the rule. They also often apply the “hockey stick” approach to sales forecasting, where their expectations of massive growth determine their overall valuation – often without real justification.

Valuation issues aren’t reserved for “naive companies”; 90 per cent of the businesses which excite us still fail to receive investment due to valuation issues. It’s important to be brutally honest and realistic about valuation – aggressive and ambitious numbers are great news, but only if you have the evidence to support them. As a rule of thumb we are looking to achieve at least a ten times return on our investments.

3. Entrepreneurs who don’t research what investors need

It is not unusual for businesses to seek investment without doing any research about the potential partners they are pitching to. There is little point in pitching a business idea to an angel who has no interest in the entrepreneur’s market segment. Similarly, most VCs are not going to be interested in an investment of a few hundred thousand pounds and most angels are not going to look at multi-million pound funding rounds (although of course there are sometimes exceptions to this rule).

4. Large founder salaries, large debts

Angels worry if the business owners looking for investment plan on paying themselves a large salary. What’s the objective? Is it just a lifestyle business or is everyone involved going to earn a real return? Equally, a business looking for investment when it already has large debts may be looking to survive rather than excel.

5. Bad funding models

Growing businesses needs their management team working on what makes them a success, not constantly raising finance. So, a business which plans to raise one tranche of money and then more again in six months can quite easily be held back by the sheer effort this process required. As investors, we want to see the company raise sufficient capital to ensure that they have a realistic chance to reach critical value milestone – at least 12 months cash on prudent financial forecasts is a good figures to go for.

6. No clear exit strategy

It can be difficult to imagine exiting from a business when you’re still on the road to success. Entrepreneurs will often at best have only a rough idea but it’s a vital consideration for us – who are the likely buyers? When will our investment mature? What strategy will get us all to the point when we can meet the objective of the exercise, which is to make a profitable investment?

Business owners who can effectively address all these issues early in their relationship with any potential angel investor have a much greater chance of success – not just in securing financial backing, but in realising the ambition which has brought them to us in the first place.

How do I decrease my clients’ dependence on me?

Posted on February 23, 2011 by Laura Humphreys

Your clients believe that you are the only one they want because you have created that perception. Read that sentence again. Your clients believe that you are the only one they want because you have created that perception. Why have you created that perception? Because YOU believe no-one can do what you do as well as you do. This is the fundamental reason why small business owner operators fail to grow their business… they won’t let go. I have talked to an osteopath who believes that his particular method is unique and he has to be there. I have talked to a graphic designer who believes her unique style is what her clients come to her for. I have talked to a landscape gardener who is convinced that her clients would leave if he wasn’t working directly with them. And I’ve talked to an interior designer who believes that her clients love HER more than the technique she has. Do you see a pattern here? If you believe that your business cannot exist with you, you will never create leverage. You will never create systems that set you free and you will never employ talented people you could train to be better than you. So the answer to the question ‘how can I wean my clients off their dependence on me?’ is firstly to check in with your ego and challenge your own belief system about what your clients really want. Do they want YOU or do they want the end benefit your talent brings them? When you are willing to let your clients love your business more than they love you, you are ready to learn how to create a leveraged business and the liber8yourbusiness online programme can show you how.

When is the right time to hire an admin person?

Posted on February 10, 2011 by Laura Humphreys

Here’s a question I get asked a lot when I’m working with small business/owner-operators. When is the right time to get help with the admin side of my business? My answer is always ‘NOW!’ Even if you can’t afford it. If you paid someone $20 per hour to do the stuff that you are spending say 10 hours a week on, that’s $200 per week or approximately $800 per month. If you also disciplined yourself to spend those 10 spare hours you now have on sales, making sales calls, writing sales emails and letters, thinking of new and creative ways to grow your business… you will find (I promise) that within 6 months you will be bringing in WAY more than $800 per month in additional business.

Generalised principle of business… business owners should NOT spend their income generating time during the day on ADMIN! If you have to do it, do it at night and spend your days selling. Even better, hire someone else to do it and spend your evenings living the life you hoped your business would bring you!

3 reasons to start your own business

Posted on February 1, 2011 by Laura Humphreys

Why do people get into business for themselves? When I present to business groups I often ask people why they decided to start a business. The answers are always the same. To be my own boss/to be free to choose how I work/I’m good at what I do… so why should I line someone else’s pockets/I’ve got a great idea, I know it will work…

The reality of owning your own business is that it is hard work, it is high risk, it takes its toll on your time, your pocket and your energy. In the early years you have to put more in than you get out. Most business owners work harder than they did when they were employed, they pay themselves less and take on more stress. This is especially true of first time business owners. If you work out how to do it successfully the first time and go on to create other businesess, it typically gets easier as you have more experience and more capital to invest. When you know how to plan and how to grow a business, the ride can be less bumpy and less risky for sure.

I’ve owned or part-owned 5 businesses now. The first I bought off someone knowing nothing about business and passed it on to someone else two years later having made no money and lost my initial investment. The second I started with a partner and left after 6 months because I didn’t share the same ethics (they went on to be mega successful but I still don’t regret that decision). The third I built and sold, becoming financially independent. The fourth and fifth I still own and am on track to further grow my future wealth from them. I expect to be involved in more businesses before I put myself out to pasture too!

Having failed, then succeeded and now teaching others how to fast track the success and hopefully avoid the failure, I can conclude that there are really only three reasons to go into business for yourself:

1. To build wealth. Make no mistake a business is a wealth creation vehicle. Put bluntly, if you don’t have a plan to build a business that will one day contribute to your passive income, you have not built a business, you’ve created a job.

2. To make a difference. A business that sets out to change something for the better generally succeeds. Whether its a change in an industry or a beneficial change to people and/or communities… with a higher purpose, a business has focus and a clear reason for people to support it.

3. To feed your soul. A new business can suck you dry. In the early years you have to work hard, invest your money, energy and time. You take on stress and a level of commitment no employee really experiences. So you need to be sure that your passion for the first two reasons list above is clearly in place. If you are passionate about creating future wealth and you are passionate about making a difference, you will find that your business excites you and feeds you an energy hard to find in a job.