Bringing investors in to inject much-needed capital may seem like a wise business strategy, but whether to do so - and when - are strategically crucial decisions to factor in, according to a specialist SME lawyer.
Are you considering bringing an investor into your business? Are you unsure where to start and what the consequences will be for your business? When you bring in an investor into your business, you need to properly define the relationship and responsibilities of that investor.
You need to be clear about what they are receiving for their investment in your business, including their level of say or control of your business. Bringing in investors is not for every business owner. You need to determine, before you actually bring in an investor, if it is a good idea for you.
There are many advantages and disadvantages of bringing in investors to your business. I have developed the following lists as starting points for you to make your decision to bring in investors in your business.
Ultimately the decision rests with you as the business owner, but you should discuss the decision with your team of consultants as they will help guide you along the path.
- Injection of funds: you should not be taking on an investor without the injection of some funds to the business. Whether you need these to pay bills or to fund a new idea, the main benefit is additional funds in the business to meet a need.
- Advice and experience: depending on the investor, you should be able to use their unique knowledge and experience to obtain advice for your business. A suitable investor will usually be more than happy to provide some guidance and advice to help protect their investment.
- Prestige: the right investor can bring a lot of prestige into a business.
- Loss of equity: usually when you bring in an investor to your business, you will lose some equity in your business. They would not usually want to make the investment without obtaining some equity in your business.
- Loss of control: this goes together with loss of equity. When you transfer equity to another person, you lose some control of your business. Whether that be as a result of the agreement that you enter into or whether it is simply as a result of the loss of equity, you will lose some control of your business.
Who is investing in your business
While these are important advantages and disadvantages, the key point is to consider if you can work with the person as an investor in your business. Every investor is unique so you need to find the right one for you, your experience and your business. Knowing how to spot them is not an easy skill to learn.
With every investor you should sit down with your team of advisers and analyse the investor. You will also need to determine if the particular investor is right for you and your business.
Undertaking a SWOT analysis (strengths, weaknesses, opportunities and threats) in relation to the investor and the investment will help you gain clarity on the advantages and disadvantages. For example, a strength might be the capital injection but it may also be a threat if that investor is a potential competitor who mind find out your confidential information.
There are ways to mitigate these risks with well-considered advice and properly drafted documents, but you need to weigh up all of these and make the right decision for you and your business.
Jeremy Streten is a lawyer and author of The Business Legal Lifecycle.