In my last blog post I said that you should identify your exit strategy early because it's important to decide what you intend to do with your business so you can share this information with investors and employees. The exit strategies we talked about were:
- Inheritance Bequest
- Sell to a Larger Corporation
- Initial Public Offering (IPO)
In this blog we are going to talk about financial strategies.
Why have a financial strategy?
The purpose of a financial strategy is to provide the business with the appropriate financial structure and funds to achieve its overall objectives. In addition it examines the financial implications of options and identifies the best financial course of action. Financial strategy attempts to maximize the financial value of the business.
Financial strategies include:
- Professional investors
- Local investors “angels”
- Friends, family, customers and suppliers
- Initial Public Offering (IPO)
Professional Investors are Venture Capital and Banks. Venture Capital is a viable financial strategy when the business can realistically achieve $25 million revenues annually within 3 to 5 years, the business has future revenue potential to create stockholder equity, and a huge return on the original investment. Venture Capital expectations are 40% return on their investment, 5-100 times their investment at 5 years, anticipated revenues over $50 million, all with managed risk.
Bank financing as a strategy is applicable when the business can repay principle and interest from cash flow in addition to its normal operating expenses, when there are adequate assets that can be pledged as security for any loans, and in most situations personal guarantees are required from all significant owners. Banks need very low risk.
Local Investors "Angels" ( High Net Worth Individuals). Financing comes form Angels as funds for equity, funds as debt, and equity from active participation in the business as executive or manager. This strategy is applicable when can realistically achieve $2 million to $25 million revenues annually within 3 to 5 years. Angels expectations are 40% per year return on their investment, and at 5 years they expect 5 times their investment (ex. $500 thousand investment must make at least $2.5 million in 5 years), all at low risk.
Bootstrap is using your personal cash, running up your credit cards, mortgaging your home and other assets to finance the business. This strategy is applicable when your business will never achieve more than $2 million annual revenues and until you can repay principle and interest on any debt plus typical and normal operating expenses from cash flow. It is usually applicable and preferred if annual revenues are between $2 million and$10 million. Bootstrapping is always the way to go early on in your business because in order to use any other financing strategy there must be some operating history.
Friends, Family, Customers and Suppliers. Friends and Family become employees as reduced or no salary, customers pre-pay for products or services, and suppliers/vendors negotiate lower price or longer pay period. Consider leasing equipment instead of purchasing.
Initial Public Offering (IPO). This strategy is applicable when you want to raise a large amount of money for expansion, now products, etc., and to put cash into the founders, local investors, and venture capital investors, and to establish a value for the business in the marketplace.
Determine the financial strategy applicable to your business. Keep your eye on the exit strategy we discussed in the last blog and execute your financial strategy but also keep this question in mind "When do I give up" because nobody will ask you to stop, and the bills will keep coming long after you stop. Pick your end point now so that you will still have cash to pay your personal bills for a while and survive until you find a job or an investor for your next venture.