Too Few Ventures Realize Their Harvest Potential

Remember the Christmas carol ‘Do you hear what I hear?’ There is a line which goes ‘Do you see what I see?’ I have been reminded of this frequently over the last few months as I have been asked to mentor some early stage ventures on the Gold Coast. Almost without exception, I have seen significant strategic value in these businesses which the entrepreneur hasn’t. While they appreciate the competitive advantage of their product or service, they only see the business in terms of its near term growth and are wholly focused on overcoming their growth constraints. With a little bit of luck they may be able to develop their venture to 5 or 10 or 20 employees over a 2 to 3 year period. What they fail to see is that a large global corporation would be willing to buy their business for millions of dollars to take their product or service to a global customer base and that there are investors who would be willing to fund such a process.

Most entrepreneurs I talk to are locked into a view of business value tied to generating revenue and profit growth and fail to appreciate that this view limits their ability to fully exploit their potential. Leaving aside the fact that early stage businesses have a high failure rate, the growth of the business will be limited by the knowledge, experience and finance of the entrepreneur. Developing a business to $2 million in revenue or 20 employees is achieved by less than 6% of all start-ups. Even after several years of growth, most businesses are worth less than $1 million. But in the hands or a larger enterprise, the same product or service could be worth many times that.

Your venture may be worth a lot more to someone else

However, even if the entrepreneur recognized the value of their product or service to a larger enterprise, they usually don’t have the knowledge or the capacity to develop their business to create the maximum value of sale. Few entrepreneurs understand the process of preparing a business for sale. Even if they were interested in doing so, the advice they would get from the vast majority of business brokers and advisors would be based on a conventional EBIT multiple valuation and a local sale. Few brokers and advisors would recognize the strategic acquisition potential or even understand how to set up a global trade sale. The entrepreneur is surrounded by advisors and colleagues who only see enterprise value in terms what the business itself has achieved not what a potential acquirer could do with the business.

Even if the entrepreneur could see the potential of a significant sale of the business, they usually don’t have the resources to prepare the business properly or to undertake the deal making activities to secure the best buyer. So even when they see a potential high value exit, they dismiss it because they don’t have the ability to execute it.

Angels can help you make it a reality

This situation is not uncommon and yet few advisors or entrepreneurs seek out funding to undertake an exit project. Perhaps it is because they don’t know that such facilities exist or it may be because they don’t know how such an investment proposal could be constructed. However, not only is such funding available but it can come with the knowledge and access to individuals you can execute the deal.

I have recently seen a number of small businesses with well established products or services which could be sold for millions of dollars which only need funding for a preparation and deal making project. The project is likely to take less than 18 months and the finance needed is often only a few hundred thousand dollars. Even if the entrepreneur gives up a large minority stake to undertake the project, the return to the investors and the entrepreneur are significant. This is very fertile ground for an Angel Group investment. Not only can they provide the funds but they can assist with developing the sale preparation process and can source the executive talent to set up and negotiate the deal.

You have to invest to prepare for sale

Preparing a business for sale at a premium is much more than cleaning up the accounts, producing an information memorandum and advertising the business for sale. A proactive approach to a trade sale identifies the potential buyers, sets up relationship with those corporations and then develops the business so that the buyer can exploit its potential. The business may be restructured prior to a sale, products may be modified and new trading relationship developed to better position the business for sale. A sale strategy developed in conjunction with an Angel Group would fund and resource that part of the strategy which the entrepreneur was unable to. Not only can the Angel Group find the investment funds, they can tap into their member experiences and networks to access the right resources and connect to the best buyers.

Where an entrepreneur has limited capability or capacity to develop the business and where the product or service has considerable market potential, selling out is a smart move. Tapping into the resources and connections of a local Angel Group to ensure that the best deal is secured is also a smart move. What is disappointing to me is that few entrepreneurs even know that this opportunity exists.