Do your homework before taking on an investor/partner.
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You should evaluate an investor in the same manner they
are evaluating your firm as an investment. Due diligence
is a two-way street and you should make sure you are
comfortable with the incremental value your new partner
will bring to your company – whether you are seeking
a financial partner or a strategic one. Here are some
things to consider:
1. Financial capabilities:
Verify the financial capabilities of the investor, particularly
if funding is the key resource they are bringing to
the table. Ask for financial references, and make sure
there is a clear understanding of the investor’s
role, as well as their expected return.
2. Operational/Strategic capabilities:
This is an especially important issue if the partner
will be active in your company. Do they have experience
in your industry niche? If not, do they have applicable
operational or strategic experience?
3. Past record:
Many investors have held ownership positions
in firms before. Have these companies been successful?
What value did the investor bring to these firms? Don’t
hesitate to ask for the names of past partners as references.
4. Culture fit/integration: If
the investment involves the active participation of
the new investor, it is important to get a feel for
their management style and culture fit with your organization.
References may also be a good source for this information.
5. Your weaknesses:
The best partners are usually complementary in skill
set. Does the investor bring resources to the table
that offset your areas of weakness?
With regard to the issue of control, it is understandable
to have concerns about losing control of strategic decisions
in the future. There are a number of ways you can address
this issue, depending upon your specific situation:
1. Deal structure:
If you are simply seeking a financial partner, consider
a debt, rather than a stock offering. This may be an
appealing option to financial investors who are simply
seeking a set investment return. In this manner, you
can retain 100% stock ownership. Alternatively, a combination
of stock and debt may be used to keep you in a controlling
ownership position.
If the sale of equity is the only option, keep in mind
that you may not receive full value for the shares if
you are only selling a minority interest. For example,
if 100% of the company’s shares have an aggregate
market value of $100million, a 40% interest may not
necessarily be worth $40 million. The value of the 40%
ownership may be discounted due to the lack of control
associated with a minority interest.
1. Type of investor:
Financial investors are usually banking on the ability
of current management to take the company to the next
level; therefore, you have a good chance of retaining
operational control. They will likely want the right
to influence operational decisions, however, should
the business experience a significant decline in performance.
Strategic investors generally become partners because
they bring added value with their involvement. Therefore,
conduct thorough due diligence and make sure you are
comfortable working directly with them. Seek legal advice
to make sure that the agreement covers key partnership
issues ranging from the defining of responsibilities
to dispute resolution methods.
Before you seek a partner, evaluate your options carefully.
Make a list of the risk/return tradeoff between growing
the business yourself and sharing ownership. Keep the
big picture in mind – the main reason to bring
a partner on board is to enhance the value of your business
beyond where you can take it yourself.
