How to create an information memorandum that impresses investors

Stephen J. Hunt is one of Australia’s most successful hotel publicans, with seven pubs worth more than $100 millions. But his empire all began with the purchase of one pub — a purchase that nearly sent him bankrupt before he’d even begun.

It was a hell of a start to a business journey, and one that taught him many lessons along the way: including how to get investors on board with a stand-out information memorandum (IM).

In this edited extract from Hunt’s book Find Build Sell, he shares what you need to put in your IM when selling a business or sourcing investors in order to increase your chances of success.

The IM should have seven main components

Your history as a businessperson
A summary of your team
A description of your asset(s)
Financials and projections
Structure
Risks
Application form

1. Your history as a businessperson

While all investors are not the same, what they have in common is they want to know who’s running the business. (That’s you, by the way.) You’re the leader here, even if it’s just you (and your cat). If the business has no track record, sales, clients or history, then they’ll be very keen to know more about you since that’s who they’ll be investing in. They’ll want to know about your passion for the product, your experience in the industry and why you love working in that sector. They’ll also want to know about your past experiences: your successes, failures, the risks you’ve taken, the challenges you’ve faced and the strategies you’ve applied to deal with those challenges.

If investors are nervous investing with you, or they don’t know you well enough to trust you, you can use your past success stories to flag how you’ll deal with future challenges. They need some form of comfort to get them over the line, and showcasing how you’ve dealt with problems in the past can be the ticket to success. Have your stories ready to go as you’ll never know when you need to tell them.

Be enthusiastic

Whether you’re pitching for investor funds or interviewing for a role, show some passion. Don’t be afraid to show enthusiasm. I’ve often interviewed staff for a new role and while internally they’re keen to win it, the enthusiasm hasn’t reached their face. As a result, they come across as too cool for school, ambivalent about their desire to work with us and almost nonchalant as to whether they get the job or not. While no one expects you to be doing somersaults to showcase your passion for the job, we do want to see enthusiasm, interest, passion and energy for the job we’re offering. It’s the same when you’re pitching for investors. They want to know you’re excited to have them on board, that they matter and that you will work hard for them.

Failure is your friend

As counterintuitive as this may seem, don’t be afraid to talk about past failures because most sophisticated investors know that success is often born from failure. Having said that, don’t go bragging about your failures because that won’t impress anyone. But if you get asked about the failures you’ve had, don’t say ‘none’ because it’s probably not true, and if it is, it won’t win you any kudos from the investors as they’ll think you’re too green to manage their money.

If you do need to talk about your failures, frame them positively as a learning experience and be clear about how you’ll bring those lessons to this new endeavour. Some investors will only invest in business owners who have already failed. A famous Australian entrepreneur, the founder of a billion-dollar tech firm, spectacularly lost $20 million of investors’ money on one of his earlier forays. His future investors were happy with that result (mainly because it wasn’t their money) because they knew they’d benefit from that $20 million ‘education’.

2. A summary of your team

In addition to knowing about you, investors will also want to know who’s in your team. They’ll want to invest in a strong management team with a good track record in their industry. If you have a team, this is what they’ll want to know:

Who are they and what role will they play?
Who have they worked for in the past?
Who reports to whom? (You can insert an organisational chart to showcase this.)
Who is the second in command (2IC) and what succession plan have you put in place?
What are your growth plans?
What markets or new products will you expand into?
What is the time frame for that expansion?
What will you spend the investors’ money on?
How long do you expect the business to last?
What are your exit strategies?

3. Description of your asset(s)

This is where you describe the physical asset of what you’re offering. For us, this is where we describe the actual hotel or pub we’re buying or renovating. Our investors need to know the location, the physical size of the property, how many people it seats, the number of bars, accommodation rooms, gaming machines, what local infrastructure is nearby (shopping centres, movie theatres, football stadiums, schools, etc.), the car park capacity, and so on. We’ll also discuss the developments in the area, such as new housing developments, road constructions and freeway extensions.

If you’re fundraising to finance a renovation or refurbishment, describe the plans you have and, if possible, include any drawings or renderings from the architect as this will make it easier to sell your proposition. You should also include a set of financials that detail the extra sales, revenue and profit that the renovation will generate.

4. Financials and projections

This part of the plan is where you list all your financials, such as your profit and loss statements, balance sheets and also projections. They’ll want to know the detail behind your sales projections, revenue, expected returns and the time frames for these returns. You would have done some projections with your accountant on what the business will make and from this you will work out what you can comfortably pay investors.

While it’s tempting to get ahead of yourself and get excited about the potential, it’s always best to under-promise and over-perform. Investors like to know what they’re getting into and it’s easier to manage an investor who has received the return they expected than to justify why you didn’t reach the expectation you promised. Be conservative.

If you aren’t already acquainted with your profit and loss statement and balance sheet, ask your accountant to take you through it — or even better, enrol in a short course at TAFE or with the local council and learn the basics of how to read your financial statements. It’ll be money well spent.

Plan for contingencies

A word from the wise: factor into your plan any contingency that could impact the plan so that if it does happen, you’re prepared. A leaky roof, litigation, floods or fire can all have a massive impact on your cashflow, disrupt trade and reduce your ability to meet your financial goals and upend your projections. The cash flow required to get through these events needs to be factored into your financials. Yes, you hope they don’t happen, and on balance, they won’t, but what we want and what actually happens are two different things.

If you want to sleep easy at night, keep your investors happy and minimise surprises, nominate the contingencies, cost them out, factor them in so you can put them out of your mind and put your energy into focusing on growing the business.

5. Structure

There are many ways to structure your business. This must be done with the input of your accountant as they can see the benefits, costs and risks of the various structures. The structure you decide on will be determined by the stage of growth you’re at.

For example, if your business is expanding rapidly and you generate more than $2 million within a 12-month period, this may trigger certain corporate laws and may mean you need a trustee. If you have more than 20 investors, you may also need a trustee, so make sure you engage an accountant and a lawyer who can give you the best advice for your situation.

6. Risks

Investors don’t like surprises. Any. Ever. Especially when they impact their return on investment. That’s why it’s vital that you outline any and all risks that they may face if they invest with you at the start. It could be legislative changes, increased competition in the area, a new tax or even a pandemic! (Who saw that coming?)

One of the fastest ways to work out what might go wrong is to focus on the riskiest assumptions. These are the factors that could send you reeling. We use our pre-mortems to identify them and then work backwards to see how we can mitigate this risk. Here are a few events we cover off when conducting our pre-mortems:

What if an investor wants to exit?
What if a cashed-up competitor sets up a rival pub in our area?
What if a key employee gets poached by a competitor?
What if the government changes the legislation?

It’s worth documenting the risks your business faces. You’ll need to account for them in an investor pitch at some point so you may as well get brainstorming now. A lot of my mates work in the startup sector and have to deal with these kinds of riskiest assumptions:

What if our whiz-bang chief technology officer, who developed our code, leaves and takes the source code to a competitor?
What if the celebrity we’ve hired to spruik our company has a fall from grace— or worse, gets arrested for breaking the law?
What if our preferred social media platform ‘cancels’ us and deletes all our followers?
What if our biggest client walks away?
What if our data gets hacked?
What if interest rates go up?
What if our key client doesn’t pay their invoice?

These are just a few of the scenarios worth planning for so you can put your best foot forward, secure those investors with confidence and have the highest chance of succeeding.

Some investors will want to know how you dealt with COVID-19. Have your stories prepared. Few industries have suffered more than hospitality and events. But now that we’re living with it, I work hard to share with my investors how we’re managing it. They’re worried about how their investment will be impacted so we need to keep them fully informed of what we’re doing now, and what we plan to do moving forward. We can’t change the fact we have COVID-19 in our midst, but what we can do is be on the front foot to ensure they know what we’re doing to protect their investment.

7. Application form

This is the document that seals the deal. If the investor is keen to proceed, this is the document they complete to indicate their intent to invest, how much they want to invest, how they can transfer the funds, the key dates they need to be aware of, contact details for us and our team — and much more. Once the funds have been received, you will need to send the investor a Share Certificate that summarises how many shares they have bought and a timeline for completion of the transaction.

Take note of Murphy’s law here and know that this process will take longer than you think, cost more than you think and be more complicated than you think, so give yourself plenty of time to make it all come together.

This is an edited extract from Stephen Hunt’s book, Find Build Sell, available now at Booktopia.