Thursday, October 30, 2014

"So What's the Risk?"-- In Consumer Product Good Deals

"So What's the Risk?"--  In Consumer Product Good Deals

The entrepreneur looks at the opportunity.  The investor looks at the risk.

So what's the risk in a deal?

While some risks are universal to all deals such as ability to execute and having the right team.  There are sector specific risks the investor should know.

In the consumer product goods space, one can make and sell just about anything but for those seeking to raise equity investment what's the risk to the investor?

The short-term risk is you won't have enough margin to make a profit.  Without a healthy  profit you can't grow the company from sales alone.  The category growth rate of the product makes a big difference in the company's ability to grow organically.

The long-term risk is you won't be able to raise more funding.  Most consumer product good companies need to raise funding every 24 months to continue a healthy growth rate as you have to fund the inventory increases that come with opening new distribution channels. To raise private equity funding you need sales north of $10M.  To sell the business for a decent return you need sales north of $20M.

The risk in the deal is failing to reach those levels on organic sales growth or earlier stage funding and not be able to raise more funding to grow the business to the $20M+ exit point.

Best regards,
Hall T.

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