Once a business decides to raise money, management is left to figure out how to make it happen. Strong advisors help, but there are some steps that any business can take to make it easier to raise funds. Collecting information to give to investors is a good place to start.
Regardless of who invests, the information that investors will want to see will be pretty much the same, and the business can get this ready ahead of time. The information should be readily available to the business.
Managers can be surprised at the amount of information they need to provide. When a business takes money from an investor, it gives something back – an interest in the business. What the business gives back – whether it's called "stock," "partnership interests," "LLC interests," "notes," or some other name – is often a security. When the business gives a security to the investor for their money, the investor is protected by securities laws. One of the protections provided by securities laws is that, before the investor decides to invest, the business has to tell its investors everything material about itself – that is, it has to make a "full disclosure."
Many managers see full disclosure as the opposite of marketing. Sure, full disclosure includes the good parts about the business. But investors will need to know all of the bad things too, as well as all of the indifferent but important things about the business. To some managers, it seems that after convincing the investor that buying into the business is a great idea, the manager then needs to tell the investor all of the reasons that they should not invest. Although this can be contrary to a sales mentality, investors should be left with a complete picture of the business – the good, the bad and the material.
The way you end up raising the money will impact how the information about the business is presented. But the basic content that a business must provide will largely stay the same. Time invested collecting this information early is well spent, and will save time later. At minimum, any business looking to raise money should be sure to have the following available:
Financial Statements: These are the basic financial statements for the business. Investors will typically want to look back up to five years (if the business has been around that long). If the financial statements are audited, investors will want to see the audit reports as well.
Organizational documents: These are the official documents that govern how the business exists and will vary depending on what kind of business it is. For example, if the business is a corporation, they would be the articles of incorporation, bylaws, amendments, board minutes and resolutions, shareholder minutes and resolutions, etc. If the business is a limited liability company, they would be the articles of organization, operating agreement, amendments, minutes and resolutions, etc. These are often compiled in a "minute book" for the business. Many businesses operate with multiple companies – subsidiaries, holding companies, etc. If this is the case, you should keep one set of organizational documents for each subsidiary. Investors will want to review these documents, as they are important to the kinds of investments that can be made.
Tax information: This includes tax returns, tax registrations, tax ID numbers, listings of taxes for which the business has registered, etc. Many businesses have tax advisors; if yours does, the advisor should be able to help compile and present them. Investors will probably want to look back three to seven years.
Information about legal proceedings: Investors will want to see if the business is in the middle of any lawsuits or if it has been threatened with a suit. Lawsuits involving major owners and managers could be important as well. The lawyer representing the business can help prepare the information that most investors would seek. Working with the lawyer to put it together is usually advisable to protect against losing attorney-client privilege or disclosing things against the business's interests.
Information about real estate: Investors will want to see a listing of all of the properties where the business has an interest. Does it own the land? Is it leased? This will include all leases, deeds, mortgages, etc. on the properties.
Material contracts: Investors will want to understand the business's important contracts. Examples can include employee contracts, contracts with key customers and suppliers, leases, licenses, and other arrangements that are important for the business. You probably do not need to include the office copier lease.
Regulatory issues: Investors want to confirm that the business has the right authority to do its business. It is helpful to prepare a listing of all of its applications, licenses and permits that the business has. This can cover anything from investment advisor registrations to elevator permits.
Intellectual property (IP): As IP continues to be critical in the economy, investors are sensitive to it. It is helpful to have a list of any patents, trademarks, copyrights, licenses and any other registrations and applications that the business keeps. It is also important to include any contracts that let the business use someone else's IP.
Insurance: Prepare a listing of all insurance policies the business has of any kind. It is also helpful to get a current insurance certificate for each of the business's policies as well.
Employee benefits: Prepare a list of the business's employee benefit plans, including health plans, retirement plans, 401(k)s, employee discounts, etc. and get copies of all of the plan documents (contracts, summaries, etc.).
These are general rules that can help any kind of business get ready to work with its investors. Every business is different, so not all businesses will have all of the information discussed above. Others will need much more detail about some or all of these categories. So the listing above is not a checklist but rather a guide to start reviewing your own business. By preparing and collecting these materials ahead of time, businesses can better balance the burdens of raising funds, save time later in the process and reduce professional fees to collect these items.