There are numerous lenders and financial investors to meet different sized businesses, and the good news is that UK debt market is very much open and private equity have bundles of capital to deploy, even after the recent lockdown and economic hit from the pandemic.
How do you go about choosing the right investment partner?
This depends on what you are seeking to achieve, your business and sector, and how you feel about the issue of control.
Taking the issue of control first, you have a number of options. Offering a majority or a minority investment in your business, with the larger the share sold the greater loss of control. A majority stake is typically preferred by private equity, but there are plenty that will take minority positions. Alternatively, if you want to maintain absolute control then debt funding will be the way to go.
Selling equity in your business is more expensive than debt funding, as any value created will be shared between the new equity investor, whereas if purely funded by debt, any gain in value achieved is solely for the existing shareholders. However, it should be appreciated that an equity investor is also sharing risk, so a loss in business value will effects them equally.
Although debt funding has the benefit of maintaining control and not giving away shareholder value, it is still dependent on your business continuing to hit the targets that you’re set by the lender and that you don't breach any covenants. If the business does not perform, then the lender can step-in and take control, whereas in the situation with private equity, they may decide to put further cash-in to support the business, especially if it is a short term crisis or blip, such as might have occurred in the pandemic.
What adjustments are required and what are the trade-offs?
Whether you go for debt or equity you are still selecting a business partner, and adjustment will be required especially on the quality of business reporting. An equity investor is also likely to require a presence on the board, and therefore certain challenges on strategy and other matters may occur which can be very different to when you were your own boss and had no one to answer to apart from yourself.
However, there is a trade-off, challenge in board meetings can be a very positive and an equity investor can bring other benefits, specialist knowledge and experience of developing other businesses, existing relationships and contacts that can be leveraged for your business.
This may not necessarily the case for debt lenders, whose main concern is to ensure they are going to receive the full funds lent to your business back. Nonetheless knowing you have their support to access greater capital should you need it, and having an interested lender that you have a relationship with can be advantageous especially if they can be flexible and adopt an approach that supports your needs when required at short notice.
There are some financial investors that provide both debt and equity, which can work well for both parties, as the investor meets its required return from a blended approach and the amount of share value sold is less compared to what it would have been with an equivalent equity only transaction.
What are some of the key things you should consider when selecting a business partner?
As with many things in business, the options available to you and your company will depend on the circumstances such as the market conditions, particular investor and lender criteria. Therefore only a certain number of potential investors and lenders will be a fit your business profile and need, but for those that do there are a few key things to consider:
- Do you get on with them? – this is important as tensions can run high during periods of a business partnership.
- What controls and conditions do they require? – these should be reasonable and fit the business situation now and going forward.
- What specifically can each offer you beyond the obvious injection of funds? – additional benefits other than funding can add significant value and accelerate growth.
Ideally, your priorities should be fully aligned with your business partner to prevent misunderstanding.
If you are unsure of what route is the best for you then you can explore different funding options simultaneously and decide what would be the right path to take once the offers have been put on the table.
The next step
For further advice, please contact Rob Starr on r.starr@uhy-uk.com, get in touch with your local UHY adviser or visit our corporate finance page for further information on how we can help in finding the right business partner for growth.
