Attracting private equity

LAST week we discussed private equity investments in the well-managed, profitable SMEs in our communities. This generated questions from SME owners who wanted to know how to prepare their businesses for private equity investors. This column is a personal finance column however, I would make an exception this week to discuss business management.

A business demonstrates its investment worth through its records. Every good business has detailed records of production/service, manpower, finances, equipment and materials. Through these records, potential investors would make their judgements and decisions, so they must be comprehensive, up-to-date and accurate. Transparency is key.

How Alaafin contributed to my emergence as governor ― Makinde

The next document investors are interested in is your strategic/ business plan showing corporate goals, resources required and identified markets. A business plan is not only essential for funding purposes. It helps the business owner define where she wants to be in medium term, the route to reaching that destination and the resources required. It keeps one focused and reduces distractions and dissipation of resources following latest business fads. The goals in the business plan must be SMART – specific, measurable, achievable, realistic and time-bound.

After being convinced by your documents, the investor would look at issues surrounding your corporate governance framework. Let’s look at this through the 5 Cs we discussed last week – character, capital, capacity, conditions and collateral. Character – what is the reputation of the business and the business owner. Are you reliable? Are you extravagant and a lavish spender? Do you live above your means? Do you pay suppliers on time or are you a chronic debtor? Does your product/ service deliver on the quality, quantity and time it promises clients? Do you cut corners? Are your staff personable? Capital – how much of your own personal resources have you invested in the business – money and material? How much time do you give to management? Have you been ploughing profits back into the business so it can grow? What percentage of your personal wealth is in this business? Capacity – are you technically competent to run this business? Is your team qualified and experienced? Have you trained yourself and your staff in leadership, time management, customer service, marketing, and so on.? How good are you at assessing and managing business risks? Does your personality engender confidence? Conditions – what is your corporate governance like? Are there standard operating manuals in place to guide staff activities and ensure uniformity of processes and quality? How good is your internal control system? Have you or your staff fallen victim of external fraudsters? Is staff turnover high? How well do you manage staff welfare,health and safety? Collateral – which other assurances can you give to investors to convince them that their money is safe with you? Corporate governance is the reason why most businesses fail to attract funding, whether credit or equity. Ensure you excel in corporate governance.

After you have prepared your company, you need to value it appropriately. It’s best to use professional valuers because they would assess both the present networth and future prospects of the business in arriving at its true valuation. It is only after that you can determine what you are selling. That is, if you do not know what your company is worth, how would you know what percentage an investment of two million naira can buy? Avoid selling more than 49% of your business so you can retain 51% control. The story of Apple and how the investors that the founder Steve Jobs invited kicked him out of his company is instructive, luckily, they had to go back to beg him when they got stuck with the technical aspects of the business.

You can woo investors who are reluctant to commit to equity investment with transaction investments. Encourage them to invest in a transaction and share profits (e.g. if you need money to produce for Christmas sales, encourage them to finance you for Christmas production). Once they are impressed with the way you handle the transaction professionally and the profits you return to them promptly, it would be easier to convince them to commit to long term equity investment.

Ensure you get a good lawyer always to advise you in all your dealings with investors. The lawyer must have rich experience in corporate law, shareholders agreements and other relevant matters. Exercise thorough due diligence whilst choosing the lawyer.

Do not be afraid to welcome equity investors. Dangote became the richest man in Africa only after he sold a part of his companies on the Nigerian stock exchange.