While Gwinn espouses a hands-on approach to investing, he knows
it doesn't work in every situation. "If you're
autocratic or egocentric in nature," he says, "you
don't want the kind of investor who is going to challenge your
thinking on sensitive and critical areas."
In addition, Gwinn says that entrepreneurs who can afford the
price of outside assistance can also forego seeking out value-added
investors. "You can get all the expertise, guidance and
counsel you need from accountants, attorneys, marketing and
financing consultants," says Gwinn.
There's an important distinction between advice from
shareholders and consultants, however. "The consultant is
often passive, providing advice, which if followed, should generate
a successful result. The value-added investor, on the other hand,
will provide advice but has a vested interest in its successful
implementation."
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If all this sounds a little too touchy-feely, there is a more
concrete reason for considering what type of financial partner you
really want. In general, hands-on, value-added investors require
more equity in a company than strictly passive investors. Why? The
value-added investor is taking the same financial risk as the
passive investor but with the additional investment of his or her
time. This added investment generally translates into owning a
bigger piece of the company.
This was true in Powell's situation. Gwinn and his
co-investors offered a package that would give them about 18
percent of the company. The passive investor's deal would cost
Powell just 12 percent of his equity. Powell feels that 6 percent
difference may someday soon be worth $6 million. Knowing this, he
is reluctant to give it up unless absolutely necessary.
What's swaying Powell in the value-added direction, however,
is the other great elixir of wealth: time. "I can grow the
business," he says. "But if at the end of three years we
want to sell it, the company will not get the highest possible
price unless it's packaged properly right from the beginning,
which is what I hope a value-added investor would help us do."
In other words, getting the highest possible price on the back end
might be worth some sacrifice on the front end.
Though at press time Powell was undecided about which offer he
would take, he believes going with hands-on investors might pay big
dividends down the road. "All schooling requires
tuition," he says. "Mine might be 6 percent. But with the
knowledge I acquire, I'll make it up 10 times over my
lifetime."
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