Many start-up venture management teams believe that any money will do just to get the company up and running. While it is true that owning 100 percent of nothing is never as good as holding 30 percent of a great success, even start-ups should be particular with their funding sources.
Similarly, established companies, especially closely-held businesses, will need to evaluate their options in order to maintain their control, if that is what is important to them.
Business owners or managers should ask themselves several key questions.
Accept an equity partner or take on debt?
There are advantages and disadvantages to both, so determine what is most important to your company.
With equity investors, you will give up some control, but eliminate structured repayment terms. (As the investor grows in sophistication, there may be repayment terms or redemption clauses, but they typically occur down the road.)
With debt, you will retain all control that you previously had but will be subject to requirements such as repayment terms and debt covenants. Evaluate the costs and benefits of each to your particular needs.
If you decide to accept an equity partner, where do you find investors? Sources of equity abound, but there are pros and cons to each.
- Friends and family Either your biggest supporters or your biggest detractors
- Angel investor A wealthy individual who believes in your product, service or mission, but may not have much else to keep his or her attention other than the day-to-day management of your company
- Venture capitalist A knowledgeable, sophisticated and well-connected investor whose primary mission is to make money for the venture-capital firm’s investors
- Competitor Joining forces with an opponent in commerce can create a powerful alliance or just bring your company down.
- Customer Can provide for a captive market, but might also limit your growth potential
- Vendor Can provide for secured resources, but might also eliminate cost efficiencies gained by shopping around
Does the lender or investor know your business? Your lender or investor should understand business ups and downs from seasonality or selling cycles and be willing to stick with you when the cycles swing down.
Most important, your lender or investor should help your business beyond just dollars. A savvy lender or investor can also bring valuable introductions to professional advisers, customers and vendors, and work as a partner to meet your challenges.
Do you want to work with the lender or investor? A solid working relationship is critical.
You must trust and be able to communicate honestly with your lender and investor. Work with those who have high standards and value your company’s relationship.
The other side
Finally, you must understand what the other party is seeking. It is safe to say that your bargaining position with a lender or investor will be strengthened with three key assets.
- A seasoned management team. Inexperience can be supplemented with experienced advisers attorneys, accountants, consultants, etc.
- A thoughtful and sound business plan. It should cover the uses of cash, your market penetration strategy, etc.
- Passion for your business. No funding source will hand over cash to someone who does not believe in his or her company’s potential.
Karen Fortune (firstname.lastname@example.org) is a senior manager with Tauber & Balser P.C. in the Forensic Accounting & Litigation Services Group. Her experience is comprised of both public and private practice. She possesses extensive experience in financial reporting, auditing of both public and private companies, addressing complex accounting issues, and evaluating and designing internal controls. Reach her at (404) 814-4968.