Seven Situations to Consider Bringing in an Outside Investor

By: Patrick Ungashick

Seven Situation to Consider in an Outside Investor

You believe your business would grow faster, if you had more cash.

Or, perhaps you’d buy out that partner who’s not in sync with the company’s direction, if you had more cash.

Or, perhaps you’d take some cash home to diversify your wealth and sleep better at night—if only you had more cash.

Whatever your specific need, perhaps you’d do it—if you had more cash. That’s just the thing though. How do you get more cash to accomplish your business needs, without giving up too much in return, or taking on more risk than you should? Most business owners, at some point, will struggle with this question.

If a need for additional capital is identified, often owners automatically turn to debt to meet the need. Debt avoids dilution. In many cases securing outside debt is easier—one phone call to your commercial banker, and shortly thereafter you have a term sheet in your hand. Finally, owners know that with debt they are not sharing leadership and decision-making control with outsiders.

Yet, there are situations where investigating bringing in outside equity, either as an alternative to debt or as part of combined debt and equity approach, may make sense. We see seven common situations where raising outside equity may be a good fit to meet the needs of the business and its owners:

  1. You can bring in outside equity without giving up control. It’s more myth than fact that if you bring in outside investors, you must give up control over your business. While some investors want control, many will consider minority investment situations, and some even prefer it. Most investors will require certain protections, often called “super-majority rights,” that require unanimous consent for the most critical decisions, such as selling the entire company, raising additional debt, or bringing in other investors. But the day-to-day operations and decisions can remain yours entirely in many situations.
  2. You have a proven business model with no serious limitations to scalability. If this is accurate, then the more fuel into your company engine, the faster and farther it may go.
  3. You have one or more co-owners who are not on the same page with regards to your company’s plans and direction, and buying them out will remove this obstacle and source of friction. With outside capital, you may be able to put cash on the table and buy them out quickly and at an attractive price.
  4. You are racing against the competition, and speed to market and/or rapid gain of market share will define success or failure. If this is the case, then you may need to secure sufficient cash to win the race.
  5. Your equity partners bring more than just cash to the table. If your investors can bring you market experience, leadership skills, transaction knowledge, industry contacts, or growth opportunities, then you may be getting a bargain. For example, many investors will require a certain number of seats on the Board of Directors. You cannot underestimate the value of having a formal board to help with financing, recruiting, financial and market analysis, project feasibility analysis, legal issues, and exit timing.
  6. You desire to “take some chips off the table,” and outside money will allow you to diversify your personal net worth and gain liquidity outside the company. Many owners spend years and sometimes decades highly illiquid. Eventually, this causes most owners personal stress and anxiety—for a good reason. Bringing in outside investors may create personal liquidity, which not only reduces risk but for some owners infuses them with new excitement about taking the company to the next level, given their improved financial security. Bringing in outside investors often eliminates the need for personal guarantees, further reducing the owners’ risk.
  7. You have a strong leadership or management team, some of whom want an equity stake in the company. Usually, these leaders and managers lack personal capital to buy into the business. Outside investors can help the management team to buy in, again without requiring taking control. Often we see this done with the current owner maintaining some ownership in the business, allowing him or her to gain liquidity while remaining involved in the company going forward.

There can be additional benefits to bringing in outside equity. One is the potential of increased credibility at your exit. If, after raising outside equity, you later decide to sell the entire company, many buyers have a perception that the business is more “buttoned-up” because outside equity investors have been involved.

While there are other reasons to consider bringing in outside equity, these seven are perhaps the most common situations where outside equity could be a game-changer for you and your company. If you face any of these situations, take an objective, comprehensive review of your company’s capital needs, and then determine the most effective capital strategy—including outside equity when advantageous.

To learn more, watch this webinar on how to “Cash Out Without Walking Out” or contact us with your questions.

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