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Until recently the prospect of economic downturn was little more than speculation. GDP rose last quarter and employment continues to grow. But looking forward, the outlook is worsening: figures from the International Monetary Fund do not predict a recession, but its UK economic growth forecast of 1.9 per cent for 2008 and 2009 is the lowest since the early ‘90s. In light of such gloom, growth-hungry business owners might wonder what the future holds, and so might investors.

Anticipation of tougher times ahead could spur businesses into seeking investment sooner rather than later. They may feel pressured into securing investment deals before the tide goes out, or anxious to secure finance to weather potentially turbulent times ahead. Credit problems - making it more difficult and costly to borrow - may also lead more businesses towards considering investment finance as a viable option. In the face of a more competitive landscape, businesses might find themselves working much harder to find and negotiate satisfactory investment deals.

Reduced confidence in the wider economic climate does not necessarily equate to less confidence - or less money - from investors. Low-value sources of finance such as friends and family funding may dwindle as individuals shy away from high-risk investments. But managed sources of finance - such as Business Angels and Venture Capital - are less likely to be deterred by economic downturns. Just like any other business they aim to make money, whatever the climate. If anything, an economic downturn could to play to investors’ advantage. They may need to pick and choose more wisely, seeking investments in ‘recession-proof’ markets, or work harder to negotiate better deals. But investors know how to secure good investments in good businesses, so turbulent times may represent less of headache and more of an opportunity to grab a bargain.

At what cost businesses find finance is therefore a crucial question. Just because they can, investors will question business models, critique business plans and more than ever make businesses work harder for investment deals. When seeking investment finance, evaluating current and projected business performance and value are crucial tasks for business owners, even more so during uncertain economic times. Businesses must be sure of their own value - being realistic but confident. It may be easier to settle for less during uneasy and competitive times, but a sense of realism and confidence in current and projected value ensures a strong negotiating point for businesses looking to broker strong deals.

The marketplace a business operates in - and its business model - are two additional factors affecting the perceived value of a company during uncertain economic conditions. Some marketplaces are less susceptible to economic turbulence, such as reductions in consumer spending or rising operating costs. Recession vulnerable business will clearly struggle in times of economic certainty - but businesses operating in ‘recession-proof’ markets could actually become more compelling investments.

Talking about specific markets and business models at a recent Business Link jointly-sponsored event entitled ‘Access to Media Finance’, several investors commented on how a recession could impact investment decisions. Investors reiterated the feeling that valuations might need to be reconsidered, but that ‘more disruptive’ business models are likely to remain strong despite economic fears. The general feeling was that:

“Disruptive businesses are recession proof. Something that’s really going to change the way markets work; the velocity may be a little slower, it may be a little harder to get the cash upfront, but if you’re literally changing the way business is done, it will work in a recession as well as in a big time.”
Alex Hoye, Go-Industry and Seedcamp

So, what could an economic downturn really mean for investors and business owners seeking investment? Investors are likely to seize on the opportunity to challenge company valuations and focus on securing investments in so-called ‘recession-proof’ businesses. They will work a more competitive environment to their advantage, ensuring investment deals are sound and future-proof. As a result, business owners will need to work and fight harder for good investment deals; work harder to justify their value and potential, and fight to ensure that they don’t under-sell themselves because of negative economic conditions.

But remember: investors - whatever the economic climate - are looking for good entrepreneurs with good business models. Even though more disruptive or recession-proof businesses may be more desirable, it does not mean that those falling outside that picture will be left in the cold:

“When the tide goes out, it thins the ranks and really focusses on good entrepreneurs with good business models.”
Alex Hoye, Go-Industry and Seedcamp

Fundamentally, talk of an economic slowdown does nothing more than make this observation more true. Good people running good businesses are going to survive less than favourable economic conditions - and they are going to find the investment they need. The landscape may be more competitive, but that just means business owners will need to fight harder for investment. Confidence (not arrogance) is key: being sure about valuations and performance metrics is vital. Even more so than usual.

The process of getting ‘investment ready’ is more important now than ever. The marketplace for investment finance is still there, but with uncertain economic times ahead, it is likely to become lean and mean - it’s up to you to lay the groundwork that ensures that your business, your proposition, and your potential are so strong that they don’t get left in the cold. The tide may go out, but as one investor put it: that just serves to indicate who remembered to wear their swimmers. In other words, be prepared.

More info - Getting investment ready

More info - Top 3 investor wants

Attracting investment finance and managing your investment journey are important and unique undertakings that require adequate and precise preparation. Here are a few tips and questions to get you started…

Know yourself

Investors are primarily concerned with profiting in the growth and success of your business. If growth and profit are also your key objectives, how do you feel about the prospect of sharing your hard earned rewards? Remember: businesses often grow organically without outside investment; it may be a slower journey, but you’ll remain in control of your business, and its profits too.

• Given that an investor will own a part of your business, are you satisfied that a smaller share of a potentially larger/faster growing business is what you really want?
• Are you prepared to be accountable for your actions and results to a board of directors?
• Are you prepared to lose some independence?

Questions courtesy of: SWAIN Investment Ready Guide

At a recent Business Link jointly-sponsored event talking about investment finance, the investor relationship was described as “marriage without the possibility of divorce” and “easy when it works”. If you are absolutely sure that an investment relationship is right for your business, the next step is to make sure your marriage is as easy as it is everlasting…

Know your potential investor

Knowing your potential investor is a crucial precursor to finding the right one. And it’s vital for opening up effective, constructive dialogue from the word go.

To get started, make a shortlist of ‘ideal’ investors. Take a look at their websites and try to gauge their likely level of interest in your marketplace and proposition. Evaluate their motives, their previous investments, track record, the quality of their people, the deepness of their pockets, or simply peruse any other information you can find. Investors may also volunteer a wealth of information on their websites about what they expect from businesses approaching them for investment, so take note.

Profiling investors is an invaluable process which could help tailor your business plan, presentations, pitches, and overall approach to meetings and negotiations. It could also offer a more strategic insight to assist your own selection and evaluation process. Remember: the process of knowing your investor is as much about vetting them for suitability and compatibility with you, as it is about moulding yourself into the perfect fit for them.

• Have you established what characteristics, attributes and skills you require from an investor?
• How experienced at investing in SME’s is the investor?
• How will you orchestrate interest from more than one investor?
• How will you evaluate any investment offers you receive?
• Have you calculated the IRR, which will be available to an investor?
• What controls are you proposing (at all levels)?
• Have you considered that the investor might require a seat on the Board?

Questions courtesy of: SWAIN Investment Ready Guide

Evaluate your attractiveness

Your attractiveness for investment will be assessed based on factors such as: your business’s past and current performance, unique selling point, projections for future growth and profitability, the strength of your management team, the nature of your business model, your market opportunity, and where you sit competitively within that marketplace.

How many of the following qualities apply to you?

• The management team is strong and experienced
• The company enjoys defendable strategic assets
• There is a strong USP
• The company is selling into a growth sector
• The business is scalable, commercial and realistic
• Market demand is well researched and demonstrable
• The business is already generating revenues
• The business model produces high profitability and strong cash generation
• The shareholding directors are committed to a well researched and credible exit strategy
• A strong value proposition is available to customers

Questions courtesy of: SWAIN Investment Ready Guide

Write a relevant business plan

The most critical step in getting investment ready is the preparation of a suitable business plan. It emphasises the strength of your opportunity, it outlines your past, current and projected business performance, and emphasises the value of your business, its products, services, and people.

The business plan sits at the heart of your entire investment proposition. Make sure it’s tailored to include the information investors expect to see (you can find sample formats online  or by seeking further advice). Above all: make sure its ‘whole’ paints a clear and compelling vision of your business, its plans and opportunities.

A. Have you completed your business plan?

B. Have you based the plan on a recommended layout?

C. Does it have the following qualities?

• Not more than 20-25 pages long
• Includes clear financial projections, with monthly profit and loss, cash flow and balance sheets for the first two years
• Contains an executive summary of not more than two pages

D. Is the plan clear on the following key areas?

• The description of what the business does
• How much finance is needed and for what purpose
• The ‘value proposition’ to customers
• The route to market
• The market demand (supported by market research)
• How competitive advantage will be maintained

Questions courtesy of: SWAIN Investment Ready Guide

Time it right

Here’s a quick sound-bite from someone who’s been through the investment journey before:

“Raise cash when you don’t need it. It’s a lot more difficult when you’re desperate.”

Ryan Notz, buildersite.com

This comment makes two pertinent observations. First and foremost, it points out that businesses should raise investment in advance of their actual need. Investors are likely to spot desperation, significantly weakening your bargaining position. Second, it supports the argument for effective planning of your investment journey. Take the right steps towards getting investment ready, and you are less likely to find yourself in a rush to find investment.

But remember: don’t let your eagerness not to appear desperate make you feel, well, desperate. Revisit the tips and questions raised in this guide. Know yourself, know your investor, know your worth, and know your business plan. These things should help you determine when the time is right.

Don’t do it alone

You may feel swamped by the magnitude of the task, especially when you begin to negotiate deals and face complex legal or tax issues.

Don’t do it alone: use the framework of colleagues, peers, advisers and professionals that exist around you to get the right kind of help - to make sure you get it right.

More info

For more information on the investment ready process, read the SWAIN Investment Ready Guide or contact Business Link on 0845 600 9966.