Mr. Promoter - Getting It Right

Ionce met a company promoter who had hit a road block while seeking for new investors into his expanding business. He believed he had a good brand and a relatively attractive corporate governance structure, having invited experienced technocrats to serve on the company board. When control was in the hands of this businessman and his family members, they had adhered to accounting principles with finances being adequately managed. The company had entered into franchise agreements with some of the world famous brands within its industry. The concern had little or no debt and everything seemed good, but investors kept rejecting the offers being made. After knocking on a few doors, one investment adviser explained to him that, he needed more than a good brand. He sought the view of a few professionals, and was advised that he needed a well-articulated IM. What is an IM, he thought aloud?

Definition of an Information Memorandum

IM is an acronym for the term Information Memorandum. In a nutshell, an information memorandum is some kind of prospectus. It is essentially a thorough Business Plan addressed to prospective investors. It is a legal document that a company presents to potential investors, to explain the objectives, risks, and investment terms surrounding a funding round. This includes financial statements, detailed projections, management biographies and their strengths, company capital structure, summary of industry, structure of the deal and events relating to it. This document is confidential and should be marked as such. The Business Model disclosure should indicate the factors that drive revenue and determine profitability, the assets and liabilities required to enhance performance and the competitive advantage enjoyed by a business. From the investor’s viewpoint, the dividend policy and funding strategy must be tabled. The capital model will have a bearing on the ploughing back of profit. In drafting the document, one needs to put himself in the shoes of the investor. Most keen investors do not have the luxury of time. They are usually busy and often multi-task because they have their fingers in too many pies. They are not going to sit down with a glass of wine and read it cover to cover, but may refer to it when a question pops in their head or when they need their memory jogged about something of particular interest.

Put Your House in Order In looking out for investors, the business owner must put his house in order. This means that the outfit must be registered as a legal entity and the capital structure must be clearly stated cum structured to accommodate outsiders. All relevant compliance and regulatory requirements must be known and taken care of. Prospecting for investors is similar to searching for a spouse! The pitch or opportunity to meet with the investor, is a date of some sort and affords both parties the opportunity to decide whether a successful business relationship can be kickstarted. The two players are expected to have some criteria, which should serve as the foundation for the relationship.

Different Types of Investors Entrepreneurs should understand that there are various types of investors, including Angel Investors, Venture Capitalists & Private Equity Investors, Banks (Commercial, Investment and Specialised), as well as High Net Worth Individuals. Angel investors are hardly known in these parts, because very few people are prepared to take risks with start-ups. They are described as affluent individuals who provide capital for a start-up business, usually in exchange for convertible debt or ownership equity.

As the investor sizes up the business promoter, so also should the entrepreneur know what he wants out of the opportunity.

Generally, promoters should watch out for and if possible, avoid investment sharks, litigation-ready investors, coaching Investors, as well as fee earning investors. Shark Investors tend to take advantage of an entrepreneur’s lack of financial experience and often want to take over the business. Big-dreaming and enthusiastic entrepreneurs eagerly take money from them, without carefully going through the terms of the deal. They simply want their returns and control over the company.

It is best to steer clear of litigious investors, who try to exploit entrepreneurs by intimidation, threats and lawsuits. They know that start-up firms usually lack the financial muscle to fight them, and hence, threaten to institute actions at the flimsiest excuse. It is advisable to check the track record of investors before approaching them.

Coaching investors also act like they know all the ropes of the business, and seek to take over the day to day running of the enterprise. Though it is helpful for businesses to benefit from professional advice, it is equally important to maintain a reasonable distance from them.

Elements that Investors Look For Investors always expect a good return on investment. They watch out for businesses with a structured board, competent management team, financial track record, good employee relationships. Accountability and corporate governance are prioritised, because no one is interested in dealing with a businessman who will buy a luxury car or go on a world cruise, when capital is pumped in. The reputation of an establishment lies in the hands of employees. Investors may do well to interview members of staff. Record keeping is essential, particularly when inviting outsiders. The role of financial and legal advisers in the investment process cannot be over-emphasised.

The entrepreneur I spoke about, soon realised this, and consulted these professionals in his bid to raise new capital, having made a few mistakes.

"GENERALLY, PROMOTERS SHOULD WATCH OUT FOR AND IF POSSIBLE, AVOID INVESTMENT SHARKS, LITIGATION-READY INVESTORS, COACHING INVESTORS, AS WELL AS FEE EARNING INVESTORS. SHARK INVESTORS TEND TO TAKE ADVANTAGE OF AN ENTREPRENEUR’S LACK OF FINANCIAL EXPERIENCE AND OFTEN WANT TO TAKE OVER THE BUSINESS"