Posts Tagged ‘equity capital’
Equity Financing Exit Strategy
September 27th, 2010
“Equity Financing Considerations Are Similar To Marriage With Some Added Twists”
When business owners are looking to raise capital through equity financing, they are planning to sell off a portion of the ownership of their business to someone else in exchange for a cash payment. This sale of ownership can be of a controlling or non controlling nature, but unlike debt financing where you pay back the money borrowed, ownership can have very long term connotations.
That’s one of the reasons why many people equate equity investing to marriage in that you’ve got to plan whether you want to be in the relationship for an extended period of time and under what conditions.
And while marriage agreements can be made going into the relationship in the form of prenuptial agreements, business financing scenarios involving equity capital should go one step further and have both an entry and exit agreement in place.
Especially for small businesses, it makes very little sense to take on an equity partner with no clear exit strategy for either partner. Many businesses get trapped in a situation where either a owner wants to leave the ownership group or the owners can’t get along anymore and someone needs to buy out the other.
Without an upfront agreement as to how an owner can exit, the process can be grueling to complete and financially damaging to both parties, but particular to the trusting and naive that get taken advantage of by the remaining owner or owners.
While any equity investment will clearly outline what you get for the cash you’re paying, it also should have its own form of prenuptial agreement and states exactly how things ARE going to end. There is no misconception here that everyone’s in it until death do us part, and even if that was the case, what happens to the ownership shares on passing? Failure to plan out the end right at the beginning is a bad idea in virtually any situation I’ve come across.
But in the hast to secure financing and the excitement of getting going or getting things back on track, the exit strategy is many times over looked or over simplified.
And the exit strategy you’re prepared to consider will also better align you with sources of financing that are better fits for what you’re looking for. For instance, there are many equity investors out there that want to double their money in three to five years and then get all their money back along with the required gain. This speaks to a very specific exit strategy that has to work for both sides at the outset of discussing the deal.
For investors that want to ride the wave of opportunity there should still be an exit plan to really protect both sides as the longer the relationship goes on the more likely something is going to happen with respect to ownership and ownership objectives.
The other part to keep in mind is that the more sophisticated the investor or investor group, the more the exit plan is going to be stacked in their favor, taking advantage of the entrepreneurs financial ignorance or sheer desperation.
So, yes equity financing is very much like marriage, but with a contract going in and one going out with the divorce or funnel preplanned.
Click Here To Speak With Business Financing Specialist Brent Finlay
Business FinancingCourting Equity Capital
December 22nd, 2009
Things To Consider When Courting Equity Capital
Its been written many times over that selling shares in your business and taking on equity capital in return is many ways like marriage… long term potential commitment, relationship challenges, the difficulties in breaking up, and so on.
I’m not going to recycle this analogy. Instead, I want to focus on the preamble and courtship that comes prior to the union and I want to look at it from both sides of the courtship.
From the point of view of the business owner seeking capital, the process can be many times drawn out and rather grueling. Any interest that does surface can easily be mistaken as love at first sight due to the stressed out and/or desperate nature of the those seeking capital.
Like any courtship, there should be a dating process whereby several meetings take place over a period of time to see if there is a worthwhile relationship to develop or not. Those seeking capital can develop tunnel vision over the physical (money) attributes and overlook other characteristics and flaws that should be evaluated as well.
Regardless of how tired or desperate your search for capital has become, a proper courtship should still be undertaken before jumping into bed with a potential investor. Every investor has a history, a past, a lending portfolio and strategy that one would be well advised to learn about before cashing any checks.
From the investor side that provides equity capital for an interest in a business, the same need for courtship also applies.
Investors, for the most part, are more courtship oriented, especially those that have previous investments notched in their belt and have likely seen a lot of what can happen when there is a Las Vegas type wedding ceremony between the parties soon after meeting.
An investor is far better served by playing a bit hard to get and being prepared at the outset for an old fashioned courtship. As mentioned previously, the business seeking capital is too often in a hurry and wants to get funding in place as soon as possible. These capital seekers can provide well polished presentations and convincing arguments why they should be the ones chosen to receive equity capital.
The interesting thing about courtship is that many times the applicant for capital can’t provide any great level of substance after the flurry of the initial presentation and first few dates. If an investor can find an opportunity with some real staying power over several meetings as well as being able to hold up to some background checks and story verifications, then there may be a serious relationship in the making.
While both sides can feel the pressure of outside competition competing for the others affections, in the end, goodness of fit is more of a courting process than an intense weekend fling.
For those couples that take the time to put each other through their paces, the resulting opportunities will be far more rewarding if further pursued and far less regrettable if the process of courting equity capital reveals significant blemishes and warts lurking beneath the surface that otherwise would have been overlooked or gone unnoticed until after the wedding.
Business FinancingEquity Financing Comes In All Shapes And Sizes
October 19th, 2009
There Are Many Equity Financing Sources Out There.. Which One’s Best For Your Business?
First off, lets focus our discussion around equity financing objectives, not the exact form whether it be angel, or venture capital group, or institutional fund, or whatever.
Regardless of the form of equity financing source, what’s more important is the investor requirements or intents.
Too often small and medium sized business owners or entrepreneurs start seeking equity financing for a business venture because they either realize that they can’t borrow enough debt financing, or they need more equity in the business to leverage more debt financing.
So, effectively they’re backing into the need for equity financing in the first place, out of necessity. And because most types of business financing capital hunts are unplanned, the business ownership group is usually in a rush due to some time pressure, perhaps even in an early stage panic mode.
As a result, the business owners are not perhaps as selective as they should be, or they don’t start the equity financing process with their objectives clearly outlined.
This is where all the different shapes and sizes of equity capital come in.
Like the business owner trying to secure capital, the investor is trying to place capital. Each investor is going to have their own profile of industries they like, returns they expect, level of risk, business stages their interested in, and so on.
My question to the business owners looking for money is are they presenting an investment opportunity for investors they want or don’t want?
If you’re in a rush, which most entrepreneurs are, many will answer that they don’t care about the profile or reputation of the investor, they just want the money.
While this mind set and approach can create the desired results, its unlikely that the results will be optimal for the initial business owners that were trying to get equity funding, but its much more likely that things worked out just fine for the investor, especially if they are a well seasoned equity capital provider.
Let me explain.
The more of a rush you’re in and the less thought through your strategy and implementation plan are, the more likely you’re going to attract very opportunistic investors that understand their superior bargaining position and will take full advantage. If they inject money, they will likely command a large ownership stake, likely a large controlling interest, board control, and every other kind of control their lawyers can think up.
But again, there are all sorts of variations around this theme. The key point is, unless you know what you want and are in a good bargaining position to get it, you’re likely to see very one sided investor offers that may very well give you the money you’re looking for, but ask for close to your soul in return.
When a business ownership group or individual is seeking equity financing, they need to consider two questions before starting their courtship with potential investors.
Question 1: How much of the company (and in what ownership form and conditions) am I prepared to offer for the capital I seek?
Question 2: Am I looking to sell off an interest in the business for the long term or for the short term only?
Question 1 has a lot to do with your bargaining power which will relate to what business stage you’re at (pure start up, pre-commercial, early stage, growth, etc.), what types of assets you own and their ability to appreciate in value and generate cash flow, your management team and their related experience to what you’re trying to do, how much capital you’ve put into the business, the related time line for making use of the capital to be invested and the payback period, and so on.
Question 2 is critical to your ability to build out your business over time according to your vision and strategy. For example, a business ownership group or individual may be prepared to relinquish a large portion ownership, perhaps even a controlling interest, if the original group or owner has the ability to buy back the interest at some predetermined time in the future for some predetermined price or price calculating formula.
Without this sort of objective, the equity capital you raise can very well get into the be careful what you wise for category. For example, its not at all uncommon for very opportunistic investors to aggressively buy into a company with great potential with the underlying goal of getting rid of all the original owners and managers within a few years in order to take complete control of the venture.
There are also investor financing groups who are only looking for short term investing opportunities which in many cases are no more than 5 years in length. They typically will require a certain amount of minimal return with some upside potential based on the performance of the business.
The key here is to clearly understand what you have to negotiate with and what you’re prepared to live with before seeking equity financing.
That way you’re more likely to get something that can work for both sides and if you have to compromise, at least you’re doing it with you eyes wide open.
Business Financing