In a follow-up to our previous blog post, 'Four signs that your business is ready for equity finance', we take another look at using equity to grow your business.
Business owners can sometimes be reluctant to take equity due to the idea that it means ‘giving away’ shares in your business. But the reality is that you are selling them in return for growth and value creation. As a way of raising capital without having to make repayments, equity finance can be the best way to scale your business quickly. But how do you know if it’s the right option for you?
Chris Griffiths, Technical Investment Director at the Development Bank of Wales, talks about the five key questions you need to ask yourself when considering equity.
1.) Are you and your management team seeking ambitious growth?
Any equity investor is looking to enhance the value of their shareholding over time. This usually means that they will be looking for a compelling plan of accelerated growth. If you and your team are genuine about your desire to grow, an equity investor could help you achieve this. With valuable experience and sector expertise, they can work with you on strategy and decision-making, and provide dedicated support.
2.) Do you have a clear end game in mind?
As a business owner, it is important that you are clear about your personal objectives and how you intend to ultimately realise value from your business. Is this likely to be a trade sale, a management buyout and what is the likely timing of this? Will there perhaps be future funding rounds or a listing that will consolidate value? These considerations will inform the investor’s likely exit route and determine a clear course of action in driving growth and creating value.
3.) Does your business have a clear differentiator which makes it attractive?
In seeking investment you need to think what separates you “from the crowd”. Why will people be more interested in investing in your business rather than a competitor’s? Having a clear differentiator will also help in attracting potential exit options in the future so it’s important that you give this due consideration.
For earlier stage businesses this may be developing a new product or service that is truly “disruptive”. Typically for established businesses the differentiator will come down to the way you do business – perhaps through service standards or competitive pricing. Ultimately the question you are looking to answer is, why would clients or customers choose you over the competition?
4.) Do you buy in to the idea of “having a smaller piece of a bigger pie”?
Accepting equity investment reduces the level of your shareholding. As a result, you need to be clear how the effect of investment will deliver growth and enhance business value. This idea is frequently referred to as “having a smaller piece of a bigger pie”. An investor will want to see their shareholding increase in value and consequently the business overall should be worth significantly more in the future - making your share of the business far more valuable.
5.) Have you hit the growth “glass ceiling”?
As businesses grow, they can typically hit a glass ceiling where the systems and processes that helped deliver the growth, start to become a hindrance. How do you know if this is you? Looking around your business you will see the indicators. Do people spend a lot of time “fighting fires”? Do staff feel there are not enough hours in the day? Is business information difficult to access as it is kept on too many spreadsheets?
If the answer to any of these questions is yes, you need to consider whether investment is required in systems and infrastructure. At this stage, you may well have a level of debt from loans in the business and need to consider alternative sources of funding to make the investment to improve productivity and profit. Equity finance can be a great option in these circumstances. All of the capital is deployed on investment rather than having to service debt repayments which accelerates payback and enhances business value.
The Development Bank of Wales is a top 5 UK equity investor, providing ongoing support to businesses as they grow. We can also work alongside our wide network of other investors and business advisers to secure the best deal for your business. Contact us today if you want to know more.