At the opposite end of the spectrum from buyers who will be owner-operators are the investors looking for a safe place to park their money. Freedom and flexibility are irrelevant – risk is everything. If you’re interested in courting these potential buyers, your first step is to organize and document all of your accounting records – i.e., get your ducks in a row – and in a column, for that matter – investors don’t suffer fools lightly. Other factors to consider:
Investors don’t plan to spend any more time with your business than they do with their other investments so time dedicated to management must be minimal.
Along the same lines, the frequency and complexity of problems affecting the business must be extremely low. Investors don’t want or plan to become experts in your industry – established policies and procedures should provide solutions to 100% of any deviations from the norm. Think cruise control.
Yes, most small businesses generate returns that are substantially higher than income producing vehicles on Wall Street. Why aren’t investors stampeding to invest in small businesses?
Fungibility – you might ask what in the heck this means? (I would!) It’s a term you don’t hear very often – unless you hang around economists – it’s the exchangability of a resource in whole or in pieces. So, for example, you can easily exchange money for goods – or a share of MicroSoft on the New York Stock Exchange for money. Fungibility provides the following advantages:
• An easy entrance and exit strategy – in today’s environment – it can quite literally be executed with a click.
• Constant and current valuations of your investment as determined by the market.
• The ability to scale up or down – you can buy $100 worth or $1 million worth of an investment. This is a HUGE factor with investors – just how do you buy $1 million worth of small businesses? Even if a small business generates an astronomical return – if the initial investment is only $100,000, the buyer still needs to find 10 other businesses just like it to build a $1 million portfolio. The time spent in research, negotiations and oversight simply is not worth it.