Businesses often reach that point in their existence that they are mature enough to expand, this is often led by the ambition of the business owner, or strategic insight from a board of directors that foresee the potential of gaining market capitalization by gaining access to equity and expertise.
Although an exercise that holds potential rewards, finding the right equity partner is often a challenging endeavour for most South African business owners. They quickly realise that, just like they had to find ‘product-market fit’ for their business’ goods or services, they also have to find an ‘equity-partner fit’.
Finding the right equity partner is dependent on a few factors, (1) Expertise (2) Ownership (3) Finances
In order to find the right equity partner, a business owner has to look beyond just the search for finance. Bringing an investor into your business that brings together expertise that will aide the business in a support role, or as part of the board of directors, is essential when looking to grow your business. Many businesses look at venture capitalists as alternatives to traditional funding institutions, like banks. Some might argue that they are better alternatives to banks. Chief Financial Officer of Capitis Equities, Emceé Nell, believes that
“while funding might come in the form of loans and grants, they do not often arrive with the necessary skillsets, advisors and personnel you need to support your growth. In business, throwing money at something is not a solution – it is merely a quick-fix tactic that often leads to negative results”,
a sentiment shared by many South African business owners.
As the old business adage goes, “Better 10% of something, then 100% of nothing.” – that is often the nature of seeking equity capital. Often business owners will be in a position, where relinquishing a certain level of control, is necessary to allow for more expertise to enter the business. Diluting one’s shares is not easy, especially for business owners who started the business from nothing. It is then important to have a consultant on hand to help you negotiate the terms of the agreement you enter into with a potential equity partner.
Ownership need not be an obstacle if the business owner considers the business objectives. Clear business objectives and a growth mindset means the business owner is willing to forego their hold on the business in order to create the desired results.
Finding an equity partner that is willing to meet your financial expectations is probably the hardest of the aforementioned factors. Often business owners value their businesses more than an investor is willing to pay, and that is another negotiation. Find a partner that is willing to invest their money, and lend their expertise to your business is a huge benefit.
It is important to understand that growth often comes at the expense of various managerial functions. An equity partner might agree to provide their expertise and financial assets, in exchange, they would expect of you to relinquish certain powers or voting rights. Being cognizant of such expectations is important.
As a partner to various businesses, Probity Advisory has continuously aided businesses going through mergers and acquisitions, company restructures, and prides itself on developing an understanding of clients’ needs, but also for providing bespoke solutions for our clients.
– Ilze Mynhardt, Director Trusts & Outsourced Management