HomeHome SearchSearch MenuMenu Our productsOur products

Revealed: Five red flags that equity investors look for

by , 11 December 2013
If you're looking for financing for your business, it's important to be aware of what potential debt funders will look at in your financial statements when determining if you can repay the debt or generate returns on the investment. Read on to discover the five red flags that equity investors look for.

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.

Enjoyed this article? Subscribe to receive these free articles in your inbox daily.


Related articles

Related articles

Related Products

Recommended for You 

  Quick Tax Solutions for Busy Taxpayers – 35 tax answers at a glance

Here are all the most interesting, thought-provoking and common tax questions
asked by our subscribers over the last tax year – everything from A to Z!

To download Quick Tax Solutions for Busy Taxpayers – 35 tax answers at a glance click here now >>>
  Employees always sick? How to stop it today

Make sure you develop a leave policy to regulate sick leave in your company.

BONUS! You'll find an example of the leave policy and procedure in this report.

To download Employees always sick? How to stop it today click here now >>>
  Absenteeism: Little known ways to reduce absenteeism

This FREE e-report will tell you how you can reduce absenteeism in your workplace while avoiding the CCMA and without infringing your employees' labour rights.

To download Absenteeism: Little known ways to reduce absenteeism click here now >>>
  7 Health & safety strategies to save you thousands

Don't let a health and safety incident cost you one more cent. Implement these seven
strategies in your company today.

To download 7 Health & safety strategies to save you thousands click here now >>>