Whatever the source of business capital,
ensure that you have a written agreement with the creditor – nothing
complicated but clear. Why? Two reasons: the first is that you will most likely
not remember every detail of an oral agreement. Secondly, what is
documented is incontestable.
Investors will ask many questions pertinent to the current and proposed
health of your business. Be prepared with satisfactory answers to queries such
o ‘When will the
company make a profit?’
o ‘What level of sales is necessary to cover all costs?’
o ‘What is your Exit Strategy?’
This is because no one wants to be part of an
unending experiment. Before committing hard-earned money into your business,
investors need information on your proposed break-even point and your exit
strategy. An investment is only as good as its return.
Break-even Point [BeP] is the number of units of the product which must be sold for projected
revenue to equal the total business cost. Units sold above that level produce a profit
and make your enterprise financially viable. To calculate BeP, first identify your fixed and variable costs. Costs are of two
o Fixed – incurred
whether you sell one item or a thousand [e.g. rental, operational].
- Variable – depends on how
much you produce, to sell [raw materials].
To get BeP, calculate the difference between unit
selling price and variable costs, then divide the result by the fixed costs:
Point = Fixed Cost – [Sales Price per unit – Variable Cost per unit].
Good with figures or not, it makes sense to get an
accountant to work on this aspect of your business planning. You need to know
if your business is making a profit or losing money.
At some point in the growth of your business,
investors may want to take out their original investment, plus any appreciation
on it. They may seek to know the long-term plan for your business and ask about
the Exit Strategy.
If you have not already done so, start-up is
the time to decide if your business efforts are to promote an idea, or to
expand it and create lifetime, or generational wealth.
Here are long-term business life options to consider:
o Have the business acquired or merged with
o Sell it to other private investors.
o Sell it to the public via an Initial Public
o Keep it for yourself or buy another company to
expand your holdings.
Be cautious not to introduce the subject of an exit
strategy when meeting with potential investors for the first time. It need only
be broached in your business plan, or in response to investor enquiry, else
your commitment to the business may be questioned.