Have you ever wondered… is there is a better way to Finance my business? Or, who would be the best Buyer of my business?
As a background, raising Equity Capital generally has 3 purposes:
(1st) to fund Growth: It’s needed in the early stage of a startup. And, also when a Fast-growing Company doesn’t have sufficient Debt capacity to cover its Working Capital needs and Investing needs. Perhaps, the company needs to invest in a significant Capital Expenditure.
(2nd) to finance a Turnaround: If your company has variability in Earnings (i.e. Operating Losses), Debt may not be available. I’ve often joked that Lenders sell Parasols and not Umbrellas. Meaning that Loans are made only when it’s Sunny.
(3rd) to provide Liquidity to Owners: Selling existing ownership essentially unlocks the value trapped inside your business. The purpose may be a full “exit” to finance Retirement, or simply a partial Sale to “take some chips off the table”. Selling provides an Owner with Diversification of their Wealth and liquidity.
The broadest 2 types of Equity Investors are (a) Strategic, and (b) Financial.
Strategic is typically a Peer or Competing company, but it can also be a Supplier or a Customer. Financial is often a Private Equity Group or, increasingly, a Family Office.
Some hybrid combinations do exist, and the lines are increasingly blurry as most Financial Sponsors strive to provide value beyond just money. A hybrid example is when a Strategic company is owned by a Private Equity Group, which can create an ideal Platform to make acquisitions.
As in many areas of life, over-generalizing can be dangerous. It’s too simplistic to label a type of Capital as being “good” or “bad”. We have learned that it’s best to keep an open mind and trust a well-constructed Process to find the right Fit. If you found this topic interesting, please comment below. We seek your feedback and encourage you to contact us for any reason.