In a recent post I asked my connections for business-related questions that I, or my LinkedIn network, might be able to help with. I was really excited to receive another message a few days ago, with a great issue to get into:
I’m at a possibly very exciting crossroads with my business! A fantastic commercial property has come up to buy as a new premises, but it is well out of my price range, but at the same time I was approached by a client wanting to invest in the business. Serendipity!? I have absolutely no idea what this would look like for my business! If I gave away equity/shares in my business, how/what/when would an investor benefit!??? Thanks so much for your help 😃🙏
Firstly, thanks for asking, and congratulations on the exciting opportunities in your business! Secondly, this is a brilliant question to raise, because it is a question that arose, in various forms, many times over my years as a business coach. It also sparks so many different thoughts that might be worth thinking about – so it should be interesting to a wide range of people. Here goes:
1) What’s the business case for buying the new-build property? Is the attraction extra space, purpose-built accommodation, controlling your own environment or avoiding the cost of renting premises in the long term? Or a combination of all of those? Are there sound business reasons for pursuing this path? Just because an opportunity arises, it doesn’t mean it is the right opportunity for you.
2) How have you decided that the new-build is out of your price range? Have you spoken to your business banker, or any sources of business finance, to be sure that you are unable to raise the finance without seeking external investment? It could be that a mortgage is a better way of financing this project than selling equity or taking direct investment.
3) How does a new building and a new investor fit with your overall long-term strategy for the business? Assuming that you have a 5-year plan, and a longer-term vision or life plan, ask yourself whether you are staying aligned to those ideas, or whether the new opportunity was never foreseen and this situation merits a revised strategy or plan. Just because the potential investor has raised the topic, it doesn’t mean that external investment, or this investor, is right for you. Just because they offered, it doesn’t mean you have to accept.
4) Be careful of your language. You’re not giving away equity in your business. You are (if you choose to) selling some part of the business in return for the investment. If you are framing it in your head as giving it away, or of the investor giving you the money, you may think and act differently than if you remain aware that your equity has equal value to the money they are investing (if you are selling at a fair price).
5) As with any business deal, it is important to be clear on the motives and desires of all parties before going ahead. Is the investor looking for a steady return on their investment, or a sudden rise in value and a total sale in order to capture that higher value? Are they looking for equity, or would they be happy with a loan and then interest repayments? Different motives and desires by any party might point to a particular vehicle for getting the deal done. As before, whatever vehicle you consider should be consistent with your own long-term strategy and life plan. If you can’t have an open and honest discussion with your potential investor, are they really someone you want to embark on a major business relationship with?
6) As you can see, there are several ways in which your potential investor could be rewarded for their investment:
a. They could receive ongoing interest payments and capital repayments (like a mortgage) in return for a loan – so they would have relatively predictable income over a period of time, at a rate that would be better than they could get by depositing the cash elsewhere.
b. They could buy the building themselves and then lease the building to your business – meaning they will be providing means for you to grow into the new building, but wouldn’t directly benefit from any growth.
c. They could receive dividends as a shareholder paid from your profits – which would provide a return on their capital investment (and your profits might be buoyed if you buy a premises and reduce rental costs, or if you are able to expand your service provision in a new building). These profits could go up even more over time, but of course they could also go down if the business makes less money in the future.
d. They could realise a return on their investment if the business achieves an increased capital valuation through improved profits, growth or changing market conditions. Sometimes this can only be realised through a change in ownership – so an investor could become an advocate for selling the whole business. This may not fit with your own strategy and life plan.
7) The investment offer, and the property opportunity may mean that the partnership between you and the investor could simply involve the property – and then the business becomes a long-term tenant. This may raise more problems than it solves, but is another vehicle to achieving the new property.
8) Get professional advice. Talk to your accountant and your solicitor. If you don’t have one talk to Terry Wright or Tony Hobbs (both accountants) or to Rachael Maunder (solicitor). Never enter a business relationship without a professionally-prepared legal contract and proper tax planning. I’ve seen it go wrong too many times…
9) Talk to a business coach to make sure you have properly established that these opportunities align with your strategy and life plan. You might benefit from talking with Celia Champion, Mike Foster or Graham Ballantyne in this situation.
10) Trust your gut. If anything about this seems slightly of or fishy, or anything about the discussions with the investor makes you feel unsure, listen to that feeling. Large business transactions can be hard/expensive to unravel, so be sure this is someone you want a long-term professional relationship with.
My desire for neatness is telling me to stop at 10 points, but if I could have an 11th it would be “Tell us how it goes!” I wish you every success, whichever path you adopt, and it would be great to hear how things develop for you. I love LinkedIn because it allows me to enjoy the various successes of hundreds of people in business – I’d love to enjoy seeing you be successful too!