Q: I'm speaking to several investors who are interested in partnering with me in my company. What are some of the things I should consider when screening them? What are some of the ways I can ensure that I still have control of the business after a transaction?
A: You should evaluate an investor in the same manner they are evaluating your firm as an investment. Due diligence is a two-way street, and you should make sure you are comfortable with the incremental value your new partner will bring to your company-whether you are seeking a financial partner or a strategic one. Here are some things to consider:
- Financial capabilities. Verify the financial capabilities of the investor, particularly if funding is the key resource they are bringing to the table. Ask for financial references, and make sure there is a clear understanding of the investor's role, as well as their expected return.
- Operational/strategic capabilities. This is an especially important issue if the partner will be active in your company. Do they have experience in your industry niche? If not, do they have applicable operational or strategic experience?
- Past record. Many investors have held ownership positions in firms before. Have these companies been successful? What value did the investor bring to these firms? Don't hesitate to ask for the names of past partners as references.
- Culture fit/integration. If the investment involves the active participation of the new investor, it is important to get a feel for their management style and culture fit with your organization. References may also be a good source for this information.
- Your weaknesses. The best partners are usually complementary in skill set. Does the investor bring resources to the table that offset your areas of weakness?
With regard to your issue of control, it is understandable that your success to date raises a concern about losing control of strategic decisions in the future. There are a number of ways you can address this issue, depending on your specific situation:
- Deal structure. If you are simply seeking a financial partner, consider a debt, rather than a stock, offering. This may be an appealing option to financial investors who are simply seeking a set investment return. In this manner, you can retain 100 percent stock ownership. Alternatively, a combination of stock and debt may be used to keep you in a controlling ownership position.
If the sale of equity is the only option, keep in mind that you may not receive full value for the shares if you are only selling a minority interest. For example, if 100 percent of the company's shares have an aggregate market value of $10 million, a 40 percent interest may not necessarily be worth $4 million. The value of the 40 percent ownership may be discounted due to the lack of control associated with a minority interest.
- Type of investor. Financial investors are banking on the ability of current management to take the company to the next level; therefore, you have a good chance of retaining operational control. However, they will likely want the right to influence operational decisions should the business experience a significant decline in performance.
Strategic investors generally become partners because they bring added value with their involvement. Therefore, conduct thorough due diligence and make sure you are comfortable working directly with them. Seek legal advice to make sure that the agreement covers key partnership issues ranging from the defining of responsibilities to dispute resolution methods.
Before you seek a partner, evaluate your options carefully. Make a list of the risk/return tradeoff between growing the business yourself and sharing ownership. Keep the big picture in mind-the main reason to bring a partner on board is to enhance the value of your business beyond where you can take it yourself.
Loraine MacDonald is director of advisory services at USBX, an investment banking firm specializing in the mergers and acquisitions of small to midsized businesses. She has been involved in the valuation and sale of privately-held businesses for over ten years.
The opinions expressed in this column are those of the author, not of Entrepreneur.com. All answers are intended to be general in nature, without regard to specific geographical areas or circumstances, and should only be relied upon after consulting an appropriate expert, such as an attorney or accountant.