The Pros and Cons of External Investment

What should you do if you’re approached out of the blue by a company that has pinpointed your business as an enticing prospect? Here are the Pros and Cons of external investment.

As we slowly emerge from lockdown it won’t be long before business is booming again…

As a nation of entrepreneurs and innovators, UK PLC has kept going throughout the pandemic with some remarkable results and now, opportunities for investment have never looked so enticing. Companies and philanthropists, as well as the Government, are poised to support businesses coming out of the pandemic and beyond.

So, what happens if you’re approached out of the blue by a company that has pinpointed your business as an enticing prospect?

Firstly, think long and hard about why they might have approached you.

Have you recently made the news because of your product’s performance? Does your reputation for problem solving stretch way out in front of you? Or perhaps your business has become known as an expert in its field? Whatever the reason, it’s very flattering to find someone interested in your business and it’s easy to start dreaming of what you could do with an unexpected cash injection.

But there are many pros and cons when considering external investment:

The Pros

You could bring forward the plans and objectives you’ve been putting off whilst building your capital.

You could super charge your growth and be where you want to be, five or ten years earlier.

You could gain the support of another business owner with your company’s interests at heart, so you’re not doing it all alone.

It could give you the opportunity to acquire a local competitor and increase your market share.

In fact, the opportunities are endless…

The Cons

You may not get enough to fulfil all your plans and objectives, so you could need more funding in a few months’ time.

You may not share the same vision for your company, resulting in split decision-making and wrangling over priorities.

You may have to give away more of your company than you want to, which may not look great to future investors.

You’ll always need to know how you’ll buy this investor out if and when they decide to exit.

What you must consider

Whatever your initial attitude to an approach, here’s some important things to consider before going further with an interested business investor:

• How much cash are they willing to put in and why?

• What percentage of your business do they expect in return?

• Often businesses are valued by multiplying their EBITDA with the industry multiple, but how do you know what your multiple is?

• Do you both have the same understanding of where your business is headed, and do you have common goals, values and beliefs?

• How much input do they want in the day to day running of your business?

• If they want to be involved, how will you reach a conclusion if you disagree?

• If they don’t, how much support do you want from them?

• How will they exit your business?

• What expectation do they have for the return on their investment?

Even if you decide investment is the way forward, you may not want to jump at the first opportunity that comes your way. There are a number of different ways for growing businesses to get funding and it’s always worth seeking a second opinion to understand the most appropriate form of investment for your situation.

Start by considering exactly how much money you require to fulfil all of your current objectives, then consider approaching a professional investment company to find investors on your behalf.

If you’ve been approached by someone wanting to invest in your business and you need some advice, get in touch for a chat. We could help you sort the wood from the chaff.