If You're Hoping to Get Investment or Get Acquired This Year, Make Sure Your Business Is Ready Now
Closing a deal is one of the most nerve-racking experiences an entrepreneur can face. The stakes can be massive, with the future of the company -- for employees and investors alike -- on the line.
Making matters worse, today's deal opportunities can arise in the blink of an email and require backbreaking amounts of paperwork that take an average of nine months to close. Most of these tasks fall into the laps of the executive team, taking time and money away from their strategy and decision-making role needed to grow the business. In First Round Capital's annual State of Startups survey, more than half of founder respondents said that they spend over 10 percent of their time fundraising, with 22 percent saying they spend over a third of their time.
To win in today's brutally competitive market, companies need to be more aggressive in their deal making. But, even though many of these companies create innovative technology, very few are harnessing it to get their deals done fast (just 5 percent, according to one investor).
The key? From studying more than 20,000 deals amassing $2 trillion in value, I've found one surprising metric helps companies thrive: business readiness.
What it means to be business ready
Being business ready is not about having a disaster plan or enough coffee in the kitchen (though those are important, too). Rather, readiness is how fast and how well a company can express its value to an investor, financier or buyer. That's done through a set of structured information backed up with quality documentation that speaks the investor language. It preempts questions and concerns that are naturally part of due diligence and puts a company's best foot forward.
With the Olympics recently coming to a close, consider an analogy: Athletes like Lindsey Vonn are often in peak physical condition right after the Games are over, but she needs to be in the best shape of her life when her skis hit the snow. Deals are the same way. Success is built in the preparation stage, long before the deal actually arises. No athlete would show up to her biggest event unprepared, but it's amazing how many business owners do.
I've seen time and again that copious information demands of deals can serve as a forcing function to get companies into shape. Better late than never, right? In reality, a company is far more likely to come out ahead when it approaches a major event with its gaps addressed, strengths illuminated and materials assembled. Delays around deal preparation can also spark serious confidence questions from investors around leadership and business fundamentals.
Getting ready early also helps uncover and address all the risks that companies carry. This is incredibly important as we anticipate a stampede of unicorns heading to the IPO exit this year. From what we've seen in the data, up to 80 percent of companies have some sort of issue that could put off an investor. The financially ready private companies can expect to IPO in as little as three months with risks addressed, while unprepared companies can take up to a year with all sorts of financial skeletons falling out of the closet. Down the line, unnecessary delays (and perceived incompetence) will also hurt the valuation for a newly minted public company.
Being unprepared not only slows down deals, increases risk and hurts confidence, but it also costs more. I've seen unprepared companies pay up to 70 percent more for financial and legal advisors and expert "fixers," compared to companies that were prepared. The more out of shape a company is, the more it ends up paying to get fit.
Breaking it down
With so much at stake, here are a few tips on how companies can build an organization that's ready to react to changes and seize opportunities:
Report on financials more often. Most companies only report financial results quarterly or even annually, and often don't provide the complete picture. A KPMG survey on business reporting found that only 11 percent of reports come close to covering performance information on their six key areas of business health, signifying that typical business reporting is not done in a way that a future purchaser or investor wants to see.
Companies that move to monthly reporting, aligned to what investors want to see, get the right insights. This is critical for businesses to catch problem areas before they fester. And, like hitting the gym, reporting gets easier the more you do it.
Round up the missing metrics. Using metrics that align to the company's industry allows potential investors to instantly benchmark and assess the health and quality of the organization. The two metrics that we most often see missing are the lifetime value of a customer (LTV) and customer acquisition cost (CAC). We recommend going even deeper by splitting the CAC into the marketing acquisition cost (MAC) and sales acquisition cost (SAC) to get actionable insights.
Sign at the dotted line. It's hard to imagine, but midmarket advisors tell me, more than 50 percent of companies they meet can't locate key partner, customer or supplier agreements that have been lost to old email accounts, filing cabinets or the digital sands of time. In many cases, critical contracts are not even signed! It's a red flag if incomplete, and also means big issues and delays come deal time. Automation software like Docusign and PandaDocs can help.
Hire a chief readiness officer. Chief people officers and chief revenue officers have become mainstays in the past decade as companies have understood their value across the organization. If raising capital or exiting your businesses is critical to you, then maybe It's time to add a chief readiness officer to your ranks.
With the speed of business increasing, there is a greater premium being placed on business readiness and subsequently the knowledge and skills in the C-suite. A designated readiness leader can have all critical information at their fingertips and stay on top of key deals. They'll also deepen relationships with an ongoing team of advisors to achieve major milestones faster. They'll pay for themselves in cost savings while positioning the company for success.
Making readiness paramount
Understanding and acting on the health of your company through the lens of business readiness is vital for removing risks and growing wisely. Just as an Olympic skier never wants to be surprised on the slopes, make sure your business is always prepared for the course ahead.
Related Video: How to Find the Right Investors for Your Business