Due Diligence and the Pitch
You're ready to seek financing for your start-up, acquisition, or rehab project, but are you ready from a private lender's and underwriter's perspective?
There are several "ingredients" necessary for the initial pitch or submission, and whether you pitch in person or you submit your project via email or digital means, presentation and preparation are essential initially, and especially in the follow up documentation.
You may look sharp in person, and your presentation may be flawless, but the success (or the fortune) is in the follow through, as in any endeavor in life. The paperwork you submit and the manner in which you respond to due diligence request(s) is critical, and it shows the lender that you are willing to do what it takes to get the project funded. Here are some excellent pointers to make sure you are prepared to do business with a professional, private lender, angel investor, or equity partner.
First, put yourself in their position. This is critical.
If you were going to lend $10M to $500M for a project, what would you want to see in the applicant's background and in the project details. Would you take the risk on your project if you were presenting to yourself? Some entrepreneurs throw mud at the wall to see if it sticks, and where this might accomplish some limited success, the better quality your project is, the more likely your future success will be with the particular investor.
Begin with the end in mind. If possible, have at least 3 very viable exit strategies. If you are unable to plan 3 viable exit strategies, hire a consultant or find a mentor who is successful in the same area of business in which you are pursuing. In fact, starting with a mentor who is far more successful in your endeavor can not only springboard your success more quickly and accurately, but it can save years of mistakes, frustrations, and potential lawsuits.
2 Parts for Success
There are many moving parts to a start-up, acquisition or improvement project, but they will fall in 2 essential categories, your management team and the project itself. Ensuring that your management team and your business plan / project is bulletproof will help you seal the deal for your success and the future of your business.
Your management team.
Many people apply for financing for a major project, and have no experience in that endeavor. Think about it from the lender's perspective. . . If you were lending to an individual entrepreneur or an executive team, would you have enough proof to put millions of dollars in confidence in their experience, history and passion (and passion is important)?
If your resumes in your Executive Summary are out-dated, update them always. Keep them current, and highlight or emphasize the relevant experience that will make the investor's job easier.
Summarizing the important decisive content up front will also help your investor's team work much more quickly and efficiently on your project. If your project documentation is difficult to sift through, it might just find it's way to the back burner!
The investor's time is very valuable. . .
Show them you value their time by being very organized and highlighting the strengths and any future threats to your business plan or past failures and obstacles, including any obstacles to obtaining funding in the past. Most investors have a deep understanding of failure, because they have had to face major challenges and failures to learn valuable lessons in order to get where they are today.
A very, very successful investor and business owner once said, "It's not what happens to you, but how you handle it." You can often take a bad experience from your past, and use it to show your investors that you were able to persist and overcome, and that you are able to overcome adversity regardless of circumstances. Remember, they are not only investing in the project, but in the people who are going to run, own and manage the project. Let them know they can be confident in you by being one of the most valuable assets of the project.
Don't hide the skeletons, necessarily.
If you have had any upsets, hurdles, or even skeletons in your past experience (as long as it is relevant to your project), often the private lender can offer some insight and can even appreciate your disclosure, building more trust. Remember, investors are people with private, hard-earned money in most cases, and when any 2 projects are identical and pass risk modeling, insurance, and other due-diligence check-points, this trust building can mean the difference between them offering a term sheet or LOI (letter of intent / or engagement) to your project versus another project sitting on their desk.
Don't let yourself be the deal-breaker by showing unprofessionalism, impatience or lack of persistence in helping your lending team acquire everything they need to underwrite your project in a timely manner.
If your management team lacks experience, get out there and establish a relationship with a new team member who has the experience and fills in those gaps to make your Executive team complete. Do your own due diligence on your executive team and be sure all management and success gaps are filled and secure.
In one specific project, whereby one of our investors financed a $60M+ hotel acquisition, the applicant had no experience and his credit was not well established, because he was a young entrepreneur in his early 20s. However, he was sharp enough to secure an all star management company and executive team to operate the hotel, and their experience sealed the deal.
Be willing to give up some equity, or show your resourcefulness in being willing to work to obtain initial fees, especially in 100% financed projects. Although many private investors can and will perform 100% financing, they almost always require due diligence fees or underwriting fees. Show some initiative and resourcefulness by showing you can do what it takes to secure those fees to get the project done.
Back up your pitch and be organized.
Whatever it takes to supply the documentation showing that your project is solid, provide it! Get organized and have everything ready to go, making sure your documentation is current, accurate, easy to follow and professionally presented.
If your organization is sloppy and hard to follow, it makes the underwriter, analyst and/or investor work overtime and can bring discomfort and doubt to the relationship. If you make their job much easier, chances are, they will have more favor toward you and your project and will make your project a priority over more sloppy project presentations.
As-is appraisals, post remodeling valuations, recent proformas and use of funds, executive summary, updated photos, a well organized and accurate business plan. . . all of these are essentials.
Your personal credit, PFS (personal finance statement) and other information on the executive team, and any partner who will participate in 20% ownership or more must show detailed documents for the investor's (or the due diligence team's) review. Having all of this in order before hand will reduce the follow up questions, back and forth punch-lists, and other activity that can delay the letter of intent or term sheet, thereby delaying the due diligence process.
Having your business side documents and your executive side documents professionally organized, presented and ready to go will help you and your project stand out above many of the other pitched projects that are sitting in your investor's lap, and will give yours a competitive edge over the other prospective projects vying for their funds.
Ask your 5th Avenue professional how you can be best organized and prepared for a successful private financing application, and a successful project submission. Whether your project qualifies for a 144a Bond Fund, Private Equity, or other methods of private financing, our partners at 5th Avenue are experienced to serve you with the best possible options.