How to finance the long-term success of your business

For the last three months, we have been (re)exploring the theme of financing the growth of your business (click here). Our exploration culminated in a fascinating discussion amongst some 30 business owners, advisors and investors, at our Compass Meeting on the 29 November 2012. The themes of the discussion are the content of this blog.

The Ostrich Complex

We are all familiar with the image of an Ostrich burying its head in the sand, avoiding the inevitable and difficult situation that it faces. Well, when it comes to financing growth of a business, it seems that many business owners share this trait.

Money is, at the same time, the simplest and the most complicated form with which to record the value of a transaction. The complication increases when the future value of that money, and its associated risk, is brought into question.  The transaction appears to work best when the parties involved have parity of information and when the exchange meets the expectations of both sides. It fails when these things are not in place – someone ends up feeling screwed.

Faced with a lack of time, an overwhelming number of options, a desire to stay in control and a self-confessed lack of understanding of deeper financial matters, many business owners shy away from a full and proper investigation into how finance should work for them. Instead, they prefer to wait until someone else suggests an approach, or a significant event forces their hand.

The conversation highlighted a need for business owners to become more curious: more curious about the full range of finance options; more curious about how each option really works; more curious about the process of obtaining and managing finance; more curious about the risks and benefits of each option; and more curious about the success and failures of others who have taken a well-trodden path.

Perhaps having satisfied these curiosities, business owners can do what they do best – “trust their gut”. But the most common piece of advice was “don’t wait until you need the money before you act”.

Multiple levels of why?

The importance of purpose, in each of the themes we explore, is striking but not surprising. If you are looking for long-term success, it is a fundamental touchstone. Yet the ability of business owners to develop clarity of purpose is often hampered by the maelstrom of activity and thoughts that come with running a business.

Those who find the most appropriate of financing arrangements take the time to understand and answer the question “why?” – at multiple levels.

  • Why do I really need finance?
  • Why has the need for finance arisen now?
  • Why are the people offering me finance the right people?
  • Why must the business have a long-term future and how does the finance enable it?
  • Why does the business really exist?

When you explore the answers to the first question, it becomes clear that most business owners talk about the need for working capital finance. In asking for this type of finance, one might easily accuse the business owner of thinking “I’m lazy. I can’t be bothered to manage my business properly. I don’t want to collect my debts on time. I can’t face the hassle of having conversations with my suppliers and my customers to ensure better terms.” However, business owners are certainly not lazy. There is a more fundamental issue at play.

The majority of business owners have not had the time to explore the issue at a much deeper and longer-term level. They lurch from one short-term solution to the next quick fix. There is a striking need to be clear on the purpose and long-term vision for the business, along with a strategy for delivering these.

When these things are clear, conversations about finance begin to explore growth and reducing working capital requirements simply become a good thing for business.

Are you sure you are sure?

On the surface, this seems to simply repeat the ostrich effect and the multiple levels of why. However, there is a subtle and distinct difference – absolute confidence.

A confidence that is partially derived from a real belief that it is the right thing to do for the long-term success of the business (the answers to multiple whys) and a deep understanding of the full range of finance options (obtained through curiosity). But, the main source of confidence comes from a personal belief that it can and will work – whatever it takes. Until a business owner has this confidence and belief, they will never find the right source of finance for the business.

Investors are relentless in their ability to sniff out risk. When they make an investment in an owner-managed business, they appear to attribute more than 50% of the investment decision in their belief in the business owner themselves. They have to trust this person, the information that the business owner provides and the judgement that the business owner displays. If there is the slightest doubt, they will sniff it out”. So you must be sure that finance is what you want:

  • If you had the money, would you back yourself and your business? Then, why are you not putting it in yourself?
  • Why should someone else back you and your business? Then, why are you not putting it in yourself?
  • How will you mitigate the risks concerned? Then, why are you not putting it in yourself?

What personality does the money have?

Money might be an inanimate object but the people with it have a personality – yes, even the bankers. Understanding the personality (the motivation and the values) is a critical element of understanding the money. Does the personality fit your business and does your business fit the personality?

When you are planning to raise finance you need to consider the personality that you want with it. When raising finance you need to tailor the pitch according to the personality of the money. When you’ve raised the money you need to manage the personality to get the best from it.

Like establishing any long-term relationship, you have to “kiss a few frogs to find a prince” (or princess depending on your preference); spend time courting to build mutual trust; make an appropriate romantic proposal; then keep investing in the relationship to ensure expectations and ambitions are continually aligned.

The only difference, but a major one, is that investors will want to guarantee their exit! And they will want to understand more about your exit too.

A curdling separation

What’s the difference between a professional investor, a serial entrepreneur and an ambitious business owner?

It sounds like a bad joke, but the answer has a massive impact on the punch line (your ability to realise the value that the initial investment was based upon). The answer relates to the degree of emotional connection that each person has with the business.

A professional investor may feel personally connected to the decision to invest but has the ability to separate themselves from the business itself. A serial entrepreneur has an emotional connection to the buzz of starting and running a business, but spreads the risk across a number of options. The ambitious business owner is “all in, boots ‘n all!”

In short, investors always want out, yet business owners often can’t see a way out.

When you bring in an investor, life is never the same. The boots are no longer just your boots. Whether you like it or not, you become accountable to your investors. Your role is different. The expectations are different. Things are just different. You’ll be forced to think about your exit. You’ll be required to make the business less dependent upon you.

Rail against it and disaster looms. Work with it and you can put in place the foundations for a long-standing business. However, the process of helping a business owner to separate their personal identity and role from the business is a difficult and challenging one. Bringing in external finance accelerates the process but doesn’t always make it easier or more effective.

If you genuinely want to build a business for the future that is less reliant upon you, bringing in external finance can be a good stepping stone. If you are looking for something to help fund your lifestyle, take out a personal loan!

In summary, having (re)explored this theme, and in light of the conversations that we have had, here are the questions we ask you to consider:

  • What don’t you know about the full range of finance options available?
  • How will external finance achieve your long-term goals better than going it alone?
  • What future heritage do you wish to ensure?
  • What are you willing to give up in order to get what you want?
  • What added value do you want with the money?
  • What do you really need the money for and how much do you really need?
  • How do you plan to pay it back? Over what time frame?
  • How do you plan to exit yourself?

The outputs from the meeting are attached (121204 Compass meeting #9 outputs).

About adampscampbell
Passionate about helping ambitious business owners to create sustainable success. For information on our work with our broader client base please feel free to look at the website www.telospartners.com To connect more with our work with ambitious business owners follow me @adampscampbell or connect at http://www.linkedin.com/profile/view?id=870168

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