Business Insights

In perspective


Seven key points an investor looks for in a business

August 19, 2016

There are no limits for how much a family business can grow: Walmart, Ford and America Movil are cases in point.

 

Whichever the size of the business, being successful means that the family members have known how to communicate between them and focus on a common goal for a long time.

 

As time goes by, however, the family dynamics tend to change, and in consequence, the business dynamics transforms too.

 

Thus, the time comes for the company's founder or their successors to evaluate its sale to open for family members new paths to invest in new businesses or pursue other personal goals.


Experts in optimization

 

In this cases, the best solution is turn to a specialized fund of institutional investors which, either through investment in talent in order to improve the company or a direct stock purchase, delivers an increase in the original value of the company in the short term, and helps to connect the business with prospective buyers. 

 

This fund will try to set up the firm so it can be sold in the best condition possible by reviewing, and optimizing when needed, the organizational, commercial, legal, tax and financial aspects of the company.

 

These institutional investors' task is to define the value indicators requiring adjustments and intervene to increase the family business' appeal in the national and international markets.


Dealing factors

 

The final transaction can be very profitable for the selling part if the company includes these factors:

 

1. Clear value proposition. In order to get the attention of prospective buyers, a company must offer very clear differentiators and competitive advantages.

 

2. Market. The prospective buyers must have full information about the company's demand and competitors, and the trends in its industry.

 

3. Liquidity. This is not only about the cash flows, but also about ensuring that the corporate finances are in order and there will not be any fiscal or labor contingencies.

 

If the company belongs to a dynamic, highly demanded industry, it bestows another kind of liquidity.

 

4. Management. In order to make a business attractive, it has to work in a perfect way, even in the absence of its CEO. That's why prospective buyers need to know how the management team is formed, and verify that the functions and responsibilities among the employees are well defined. 

 

5. Financial profitability. The greater the profitability, the more prospective buyers will be interested in acquiring the company. The return on investment (ROI) is the economic benefit stockholders get in exchange of their capital. 

 

6. Investment scheme. From the beginning, it's important to decide if a direct investment will be necessary to improve the business model, or only a short-term human resources intervention.

 

7. Clear transactional exit. A careful exit plan is going to be worked out, which includes strategies to meet feasible financial goals and a proposed term for the deal closing, ideally 12 months. Also it will define the steps that would be taken in case some goals aren’t reached to the established deadline.

 

These seven factors complement each other, and the lack of any of them doesn't mean that a deal can't be reached. Instead, as mentioned, the purpose of an initial diagnosis of the company is to identify the possible deficiencies in order to fix them.


Personalized strategy

 

Each case has its own unique features, so it's crucial that, during the evaluation process, an effective communication exists between the business' management and the institutional investors in charge of the company's optimization, since the most profitable solution will come from that analysis.


A precise diagnosis of the business' situation and its future perspectives can transform a family business, as well as provide it with a renewed chance of growth under a different administration.