The value of any business or product is driven by the future cash the business or product will generate for the owners after expenses. Knowing your value means making realistic estimates of future sales and expenses. These estimates should be based on reasonable assumptions about the future and take into consideration past results. Deals get done because both sides have a mutual belief about future outcomes. Credibility is therefore crucial.
Every business is unique and each situation is different, but every business owner who wants to successfully raise capital must come into the CAGE knowing (at the tip of your fingers or top of your mind) past and future sales, past and future margins, and costs. Knowing how to easily explain what makes your future sales or margins great doesn’t hurt either. Finally, a concise explanation of what you plan to do with the invested capital is also important.
Many businesses fail because they don’t raise enough cash to survive the turbulent start-up phase. On the other hand, many deals don’t happen because too much cash is requested for too small a share of the business. The right balance between getting enough cash to run the business and the right price for both investors and entrepreneurs is what results in a successful deal. Remember, partnership is the cornerstone of success between investors and entrepreneurs.
Valuation is hard and messy, but it’s at the heart of every deal.
To properly answer this question substantial research must be made in understanding where your client base is.
Location: Firstly, you must find fertile ground: where are your clients? There’s no point in developing your business in Eastern Canada when your client base is in Western Canada; in doing so, you’re adding a complexity that you simply do not need, especially with a start-up. These complexities include additional costs when you need to physically see your client and operating hours across multiple time zones. The reach of the internet and social media would certainly help your efforts, but should not be your primary focus for sales. In short, nothing beats a face to face meeting if you want to improve your win rate. Furthermore, finding the right facility can be challenging based on having no previous history, having to negotiate the lease terms and making sure you have the right space for your business.
Through our own Aten Realty – which holds and invests in commercial real estate – we support our portfolio companies in acquiring the right facilities on a lease, or lease-to-own basis.
Sales Representative: Who is going to sell your product? If it’s you, what experience do you have in this field? Do not underestimate the challenge of sales, especially if your business is in a field in which you have no current business contacts. You’re going to be excited about your service or product (enough for you to want to start your own business), and that’s going to make it hard for you to understand when others aren’t as excited as you. Bearing the preceding in mind remember, nothing sells itself. Beware the mindset of simply finding a couple of sales reps to sell your products. In addition to the fact that high-performing, successful sales people are incredibly difficult to find, when you do find them, they’ll probably be working, and the chances of them willing to take a risk on a start-up may be very small. You may need to consider how you can entice strong sales people to buy into your business – a paycheque isn’t always enough.
Our in-house experts have more than 20 years of sales experience and leadership. Through our partnership, we will help guide your sales processes and assist in finding the right sales people.
Forecast: To be taken seriously, especially when you’re trying to raise capital, you need to demonstrate a good understanding of what you estimate your revenue to be at a minimum, 1 year ahead, ideally 2 years ahead, and optimally, 3 years ahead. You have already identified where your clients are and who you’re going to chase for sales; the hard part is trying to estimate how many clients will buy your product or services, how quickly, and what the growth rate will be. Doing so is based on visualizing the advancement.
For example: I have spoken to client ‘X’ who has told me (s)he is very interested and will try a sample, if it works, (s)he has an immediate need for five of product ‘Y,’ and from our conversation, I estimate the client will need five more per month for the next three months, increasing by an additional five per month as word spreads throughout the company (along with more aggressive sales). Try to be as realistic as possible; if you’re being overly optimistic, you are only hurting yourself and could end up in trouble. If you’re being overly pessimistic, it may be impossible to make the business plan look viable and this may stop your great business idea before you even start. Complete these steps for all your potential clients and you have a forecast!
Note: to greatly improve your forecast, you should speak to potential clients directly, under no circumstance should you base your forecasts purely on economic statistics, newspaper articles, graphs, and charts. Economical statistics can be helpful in determining your market share and a general feel of your industry, but that’s where it ends. Would you base your business on someone else’s opinion who may not even live in the same country, never mind province?
The safety net rule of thumb: You have proudly completed your first forecast. Now go back to the first year’s revenue and multiply by 0.25. In the second year, multiply by 0.5, and the third as predicted. For your costs, multiply by 2 for each year. If your business still looks sustainable, then you should do great! If it doesn’t, what can you do to raise revenue or reduce costs? You need to have some form of safety net for your business, especially if beyond your initial investment, you have no more available funds.
Our team has extensive experience and can help you to further develop and improve the accuracy of your sales forecasts.
When you start a business, cash is everything! If you run out of cash at this phase you’ll be out of business quickly. You should either have cash or unrestricted access to cash through a non-revocable line of credit with sufficient funds to keep your start-up alive for a minimum period of six months. And this is an absolute minimum. Why six months? It may sound like a long period of time, and you may expect that sales will start right away, but the truth is even if you do have sales right away, it will take you time to create and send invoices and then to collect the balances due on those invoices. You will be very busy, wearing many hats at the same time, and sending accurate invoices in a timely fashion rarely happens with any new company. Then your clients need to pay you. Be prepared to send reminder e-mails – they’re a certainty for every new business. Keep in mind that any dispute with your invoices will hold you back for at least additional 30 days. Here’s the math:
This already adds up to about four months, even if you make sales on the day you open for business!
Most banks won’t provide operating capital without collateral, whether that means your business or personal assets. We understand, and will back the right ideas with the capital needed to get things going.
Cash or access to cash for non-start-up business: You should always have cash or access to cash equal to or higher than two months of revenue. This will give you enough time to react in the event that you encounter any unexpected circumstances, and should give you enough reserves to fix the problem.
Cost: Keep accurate estimates of your costs, both fixed and variable, and then try to reduce them as much as you can. The “lean and mean” principle is a good rule for a start-up. Do you really need a fancy office with expensive furniture, fully loaded cars/trucks? Do you have to purchase equipment, or can you rent it during your initial business period? Make sure that you have no excess capacities, which cost you money and don’t bring you any benefits. You can purchase equipment and hire staff when you truly need to. Try not to get ahead of yourself.
Analyze your costs frequently, and always look for ways to reduce them. Keep cash in your pockets; you’re going to need it! If you don’t have much experience with cost estimates, count on costs being 50%-100% higher than estimated.
Finally, always align your costs with expected revenues. If you don’t have high revenues, you can’t have high costs. Don’t ever forget that you’re in business to make money, not to lose it!
Our in-house financial experts can look at ways to control and optimize your costs.
Bookkeeping and Accounting: You must have an accurate and reliable financial picture of your business at all times. Having accurate records is not only a legal requirement – it will help you to properly run your business. Unless you have an accounting background, you should find a reputable bookkeeper to help you with your financial records. This bookkeeper will be able to help you find and connect with an accountant to prepare your financial statements at the year end, which are required by the banks and also to determine your tax obligations. Although you may not be able to hire many staff in your early days of business, a bookkeeper will be an asset to your company. The time (and often dollars) they save you will make the initial investment seem absolutely priceless.
Marketing is essential to any business, and understanding what areas to focus on can be overwhelming for an entrepreneur already wearing so many hats. With countless avenues to market your company or products, it’s hard to know where you’ll receive the most return on investment. The first thing you need to understand is who your potential clients/customers are, where you can find them, and what messaging will resonate with them. This largely depends on the industry you’re in and the key demographics of your client base, but in marketing, there are generally two categories to consider: B2B (business to business) and B2C (business to consumer) marketing.
No matter what category your business falls under, you need a website. But simply creating a static website and hoping for sales is not a strategy. You must understand how to create a website that is easy to use, educational, fast, and able to act as a sales tool. With so much technology available and new technologies constantly emerging, staying on top – and ahead of the curve – requires strategy.
Beyond traditional marketing, social media marketing is an integral avenue for all businesses. Channels like Facebook, Instagram, and Snapchat tend to appeal to younger consumers and product-oriented businesses, whereas LinkedIn and industry association websites work better for B2B marketing. If you’re able to capitalize on these areas, it can mean significant business and growth with the best ROI on your time and money.
There are many other types of marketing strategies. Our in-house marketing team can help you with every facet of branding and marketing your business.
We have in-house experts in all the key areas of business, from financial, to sales and marketing, to operations and information technology. All of this support will be provided as part of our partnership with you, which differentiates us from typical private equity firms.
The business environment is full of agreements between businesses and individuals. While oral agreements are sometimes used, albeit rarely; a formal written contract is best when engaging in operations. Written contracts provide individuals and businesses with a legal document stating the expectations of both parties and how negative situations will be resolved. Written contracts should be used to as a tool that companies use to safeguard their resources, manage risks and document specifics of a deal to avoid conflicts.
Entering into a legal contract with a client or another individual or party helps provide legal protection, as well as a specific outline of the deal. When entering into a contract with another party, it should meet the five legal requirements before it can be considered a valid legal contract being Indemnities, liabilities, warranties, insurance and confidentialities.
If you are working without written contracts, you need to at a minimum have a lengthy written history of the negotiations. But even with that, without a formal contract, the risk of disagreements and messy battles goes up exponentially. Life as both a client and a service provider or manufacturer is significantly easier and better with a clear contract.
There are many types of contracts which can appear onerous to people who are not familiar with legal verbiage. Our in-house contracts management team can assist you in all phases of the contract process; from the contract negotiations to drafting the appropriate documentation to secure your agreement; the best contract is always a negotiated contract.