You’ve succeeded in what is probably the hardest part of creating business value – you’ve started your own company and reached profitability. The product or service you offer is selling, and your understanding of the market is growing along with your confidence and ambition. What you need now is additional capital so you can take advantage of the opportunity and build a larger company.

Many business owners want to raise capital, but don’t know how to go about it. Here are some guidelines that can help you get ready for that investor discussion:

It is critically important to come into your investor discussion with a solid understanding of your underlying business value “drivers” and of the value of the business itself. Data from the Institute of Business Appraisers Market Data database – which covers 34,000 private transactions – show that there is a remarkable divergence in company valuations within Industry segments, even when company profitability and revenue are similar to other peer businesses. In other words, companies with very similar characteristics in the same industry and settings often realize investment valuations that have dramatically different potential outcomes for both the company owner and investor.

I recently talked with the owner of a Denver-based architectural firm that took on an outside investment partner after agreeing to a company valuation of $1.2 million. I asked how that value was agreed upon, and the owner said: “We could have agreed to any valuation between $800,000 and $1.6 million. It just so happened that on that day we agreed to $1.2 million.”

Many business owners settle on investment valuations in similar ways. They suggest a value, get a counter, and then agree on a price for the company that is only loosely tied to the ability of the company to drive positive cash flows into the future. That negotiation is often based on “gut” feel for what the owner or private investor thinks – and that feel may or may not be related to the facts. So getting an independent view of your company’s value is critical going into the discussion.

In terms of understanding your business “drivers,” start with your Income Statement and look for areas that seem out of balance. What percentage of your revenue is your Cost-of-Goods Sold (COGS)? COGS is equal to what it costs your company to purchase or create the goods and services you sell. As the COGS percentage of revenue climbs above sixty percent, it’s an indication that the company won’t have much revenue left over to fund sales and company operations – and the weak value driver in that area is likely to affect investor perspective.

If COGS is at a reasonable level, but the earnings are low – say 6-12% of revenue – then that’s a sign that your sales model is expensive relative to the company ability to generate profits. In that case, your sales model may not be optimized and is a poor value driver for your company.

One other significant way to think about value creation in your business is to understand your Weighted Average Cost of Capital (WACC). Historically, this runs at about 12% and is made up of both debt and equity components. Savvy investors will want to understand how the capital they contribute will generate returns in excess of at least 12%. So, if you are raising money for a business model that produces returns of 10% for investors, there’s a good chance discussions won’t get far. You’ll end up destroying business value by taking investor money in that scenario because your projected returns are less than the cost of investment!

There are inexpensive, yet excellent on-line services that provide market comparables, valuation methods, and views on value drivers for businesses. This type of service is a great way to get perspective on value and value drivers as you prepare for investor discussion.

In summary, before you have that investor discussion, gain a clear perspective of your company’s valuation, understand your value drivers, and think hard about the amount of value you’ll create with investor money. You’re chance of finding an investor that responds to your situation will be greatly improved.

About the Author: Guy Cook is a Senior Partner at CreationWave, a consulting group focused on client growth and profitability results. He has held executive management positions at a number of high-tech, high-growth ventures, including CEO of SuperNet, which was sold to Qwest Communications for $24M. Mr. Cook thoroughly understands business valuation and currently consults with ValuSource.