What do equity investors want to see in a business plan?

The basic elements required in a business plan by providers of finance have been explored in a separate article 'How do I raise finance with my business plan?' This article looks at the specific requirements of equity investors.

There are many different types of equity finance from start-up/seed finance through growth capital to private equity for management buy-outs and management buy-ins. All equity providers are balancing risk against reward. They are looking for the potential for explosive growth in the business: this may be of the order of 40-60% pa (5-10 times return in 5 years) for an early stage business to 20% pa for a more established business. Clearly a 'lifestyle' business is unlikely to meet this requirement.

Risk is inherent in business. What an equity investor wants to assess is a) where the risks lie and b) that the management understand the risks. Don’t duck or trivialise the risks: any experienced investors will be able to assess them for themselves.

Opinions differ as to whether it makes sense to suggest a price for the equity, ie a valuation for the company, in the business plan. What is clear is that if you offer a valuation, it is likely to put a ceiling on what investors will offer. They are likely to try to negotiate the value down – it is rarely the other way around! As a general rule the approach will differ depending on how confident a business is of finding investors.

These are the headline requirements, but the crucial element for equity investors is 'the management'. A few CVs in the appendix of the plan does not fit the bill. Equity investors tend to make their decisions primarily on the quality of the management, and so their track record, suitability and gaps in the team should be prominently demonstrated.

Finally, all equity investors will be interested in how they extract money from the business. 'IPO or trade sale' is a glib and overused phrase. Illustrating a clear potential demand for the business from a third party is valuable. Demonstrating that the interests of all shareholders are aligned is crucial if you want to impress new investors.