Normally equity investors are concerned with sustainable longer term operating profit growth. Although they're concerned about the risk of not getting capital back, they're willing to take a higher risk if the future profitability is handsome.
BUT, this doesn't mean they won't scrutinise your financial statements.
Equity investors will look for these red flags if you're looking for funding
The Practical Accountancy Loose Leaf gives you the five red flags they'll look at:
Red flag #1: Hockey stick forecasts
Many companies prepare forecasts that take the shape of a hockey stick when graphed. That's significant losses in the first couple of years and then 'knockout' profits in future years. If the business has been recording losses with forecast profits, this would be a red flag for investors.
Red flag #2: High price relative to the net value of the business
This would be indicated by a very high price earnings ratio, a very low internal rate of return and a negative net present value.
Red flag #3: Liquidity and solvency of your business
Since equity investors are the last in the chain of claims if your business went under, he'd be very concerned that your business could go bankrupt.
High debt compared to the assets of the business and high short-term debts compared to the short-term assets of the business are an immediate red flag to investors.
Red flag #4: Sustainability of cash flows
Equity investors are concerned with the sustainability of your business. If your business has ad hoc or non-recurring income, this generally is a red flag to equity investors.
Major customer or supplier contracts that are about to end would be a concern. Equity investors prefer annuity based income.
Red flag #5: Limited voting rights with no exit
This happens when a minority (i.e. less than 50%) shareholding is available and there's no exit mechanism for the equity investor to make a profit.
Now that you know the five red flags equity investors look for, make sure address these issues to increase your chances of getting the funds you require for your business.
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