Is Equity Finance For Me?
If you are willing to sell a share in your business equity finance is a viable option over bank finance. Key to the deal is the valuation of your business and the risk and return for any potential investor.
Equity finance may be particularly suitable when the nature of your business deters debt providers. A common reason for this is when the business is not generating enough cash to pay loan interest because it is needed to fund key activities or growth. Another common case is when a business is rich in intellectual property but has few tangible assets such as a media business.
The main difference between equity investors and lenders is that, unlike lenders, equity investors are not paid interest and they do not have the right to have their capital repaid by a certain date. Instead, their return is paid in dividends and capital growth, which of course depends on the growth and profitability of your business. If the business succeeds all well and good but as equity investors run a greater downside risk, they expect a higher potential return than debt providers (c.25% over the long term). Despite no end date to their investment it is usual to offer an exit for the equity provider even if they have no plans to realise the investment by any particular date. The most common exit is by a trade sale.
Depending on the size of your business and track record there are a number of sources of equity finance. Smaller businesses and start ups may initially turn to family and friends or Business Angels that offer valuable support, advice and contacts as well as capital investment. More established businesses may look towards Venture Capital or Private Equity firms for equity support.
However, before seeking any form of equity finance there are a number of questions you need to consider:
How much funding you require?
For what purpose?
What level of control do you wish to retain?
For how long are the funds required?
What other skills your business needs?
How you are going to achieve your goal?
Why an investor should invest in you?
Answers to these questions will be key to your investment proposal but they must be backed up by:
→ Historic financial data and analysis of performance to date.
→ Realistic financial projections with sensitivities.