Preparing Documents For Investors

[renrew]

Hi,

I would like to know what investors typically would want to know about the business before investing in it.
Im not just talking baout the business model, the USP, the income streams, marketing and so forth.
What im trying to get to is what type of format can i use to present to investors and what are the main elements i need to provide in order to "sell" my idea.

To give you some more information I am registering a Pty Ltd, where there will be 2000 shares available to sell to my investors. Any advice would be greatly appreciated.

[Blurock]

This one is not so easy to answer due to different scenarios.

To start, what would you require from me before you will give me money? Banks and investors receive hundreds of requests for funding every day. Every applicant professes to have the magic solution to hit the jackpot, if only they can get the first million or so to get started.

Some of the questions I would ask;
Is your business sustainable? A business does not just happen, it is built over time. Reputation, quality of product/service and many other factors will determine if you will make it in the jungle.

Which industry sector will you operate in? Who is your target market? How will you reach this target? What are your goals? Are they realistic and achievable? Have you done any research and does the numbers tie up?

What do you know about this industry? What skills do you have in this industry? Who are the major players? What makes you think that you will be able to beat them at their own game? What differentiates you from your competitors?

As you can see, I have not touched on finances yet. Money is only the fuel that makes the business vehicle move forward. You must build that business vehicle first. One of the biggest mistakes that entrepreneurs make is to focus on securing funding in stead of getting their business off the ground. Read Richard Branson's story and also about other entrepreneurs to see how they did it.

Once you have a small, but viable little business having achieved some (small) success, it will be easier to convince investors to back you.

[Justloadit]

There are 5 points that make up a business

1. Technology
2. Product performance/quality
3. Marketing
4. Finances
5. Management team

Stick the above into a spread sheet, and next to each one, rate the point from 0 to 10.
At the end add all the numbers, and this will give you a damn good indicator of what you are looking at.
If any point is '0' or has low points,it will affect the overall index, and could flag a bad business, or requiring restructuring to pull the points up.

[AndyD]

Investors would be looking at the value of the business, the commitment of people running the business, the security of their investment, what return they'll get (and when). A good business plan goes a long way and the past financials would need to be available for scrutiny.

[wynn]

Mark Corke has this type of thing down to a fine art.
Check out his site at

http://www.prepareyourbusinessforsale.co.za/

[Blurock]

I think the thread was started with a start up business in mind, but the post by Wynn is very valid.

Preparing your business for sale does not only apply to someone getting out of business, but also to us staying in business. You sell your business on a daily basis to your customers (product & reputation), to your suppliers (credit & supply chain) and to your bank manager (cash flow and funding).

This is almost like an ongoing business plan that will also highlight your strengths and weaknesses which you can work at to improve performance and returns.

[Citizen X]

If the investor is a bank, they require a business plan, 10% deposit on the amount you want, and a cear itc report. We have just recently added services to our business. We now also have bcom students, graduates and both bcom grads doing their articles as well as law grads doing their articles. That said, we now offer a service of profesional business plans that include all financials and narrative.

[Blurock]

If the investor is a bank, they require a business plan, 10% deposit on the amount you want, and a cear itc report.

Are you referring to the Khula Guarantee scheme Vinny?

[Citizen X]

Hi Blurock,

No, Khula is part of the DTI and helps start up businesses to get finance. They do so by carrying part of the risk of the loan and the Bank is generally more willing to grant financing if Khula is involved. They actually will allocate a mentor to you to assist with a business plan.
I am talking about the requirements of banks to grant a loan for start up businesses. The applicant must provide:-
1. A business plan;
2. 10% deposit of the loan amount i.e. if you applying for R10000, then you provide R1000 from your own pocket;
3. Clear ITC

In many cases it is wise to let a consultant do the actual business plan for you.

[Blurock]

The requirements that you refer to generally applies to the Khula scheme. Banks normally do not want to get involved in start - up businesses and that is why Khula was introduced. A 10 % deposit is not a standard practice otherwise. Even a 50% deposit will not ensure you a start-up loan.

Banks will only provide finance for start up businesses if they are fully secured or if there are other guarantees such as a buy back agreement with a proven franchisor, strong personal sureties etc.
Banks also want to know more about the risks and competition in that industry sector and the operator's technical and operational expertise and management skills.

That is why most businesses start small with loans from friends and family. Once established with a proven track record, it is a little bit easier to obtain finance for expansion. By that time a bank loan may not be the only option. Suppliers may start extending 30 day terms and the business may be able to give settlement discounts to encourage debtors to pay sooner. (This will improve cash flow). Other forms of finance may also be considered.

[wynn]

Banks will only provide finance for start up businesses if they are fully secured

In other words banks will only lend money to people that have enough assets to pay the loan back, eg. your house, they will see your family on the street first.

[Justloadit]

If I was a bank, and with statistics at over 90% failure of new businesses with in the first 5 years, it is no wonder that they take this as a very high risk, and to minimize the loss, go for surety on fixed assets or solid investments.

So we making the bank as the bad boys is actually not quite right, when we do use our homes as collateral, we are telling the bank that I am 100% sure that I am going to make it, and that is why I know I am not going to put my family out in the street

[Blurock]

In other words banks will only lend money to people that have enough assets to pay the loan back, eg. your house, they will see your family on the street first.

I do not think any bank will risk their reputation by taking security for a loan, knowing that the business will be a failure. It is not the intention of the bank to put your family out on the street.

I just think that with all their good intentions the banks do not have enough trained staff to be able to assess a business loan properly. There are some good ones, but there are some really bad ones too.

[Citizen X]

Hi Guys,

I would like to take this oppotunity to clear up any misconceptions regarding business loans from a bank for a start up business. In order to do so, I attach an official absa letterhead sent to one of my clients concerning the requirements for a start up business. Please see attached. The basic requirements include a business lan, 10% deposit of loan amount and clear credit hsitory. I have also phoned standard bank and got the same response.

[Dave A]

I didn't see the bit about a 10% deposit, but I did notice this:

Personal Assets & Liabilities of all involved parties

Any guesses as to why they're interested in that?

To make sure they're 200% + covered in sureties perhaps?