During the crisis, the sale of a share for a number of companies became a lifeline that allowed, albeit at a high price, but to maintain a good name and return the future to the business. Those who got out of the shocks on their own see prospects for occupying new markets and absorbing competitors, and in their eyes the new co-owner looks like a partner in aggression. But every medicine is good at the right time and in the right amount.
Any debt financing has limits. One day, lenders may refuse to increase credit limits. And this can deprive the company of the opportunity to use a favorable market situation.
It is also not easy when rapidly developing competitors simply do not leave a chance for a strategy of gradual organic development.
It is even more difficult for newly formed companies without a credit history and acceptable assets for collateral.
In addition, borrowed money must be repaid regardless of the success of the plan, which makes lending a dangerous tool for financing high-risk projects.
And these are not all the reasons for the owner to think about the need to part with part of the property in order to continue developing the business.
Unlike a bank, which is more interested in the current financial situation of the borrower, its business plan and collateral opportunities, the investor is more interested in the potential of the market in which the company operates, the level of the management team, business transparency and prospects for its development.
In return, in case of mutual interest, a new partner, in addition to financial resources and a willingness to share risks, can offer some other important components of success:
obtaining access to advanced production and management technologies, know-how, unique equipment and other tangible and intangible assets (licenses, patents, successful practical experience and time-tested developments, etc.);
economies of scale, including supply, production, logistics, distribution, etc.;
reputation, brand and connections (and with them discounts, special conditions, bonuses and priorities, entry into closed communities and new professional and commercial connections, including lobbying opportunities, business preferences, etc.);
expanding the range through the release of new products and sales volumes through entering new markets;
an increase in the share of unsecured financing (including commodity loans and supplier installments) and a decrease in the effective lending rate;
assistance in the formation of a new corporate culture of the company, clarification and formulation of the roles of owners and management, clarification and development of proposals for the development of a development strategy;
facilitating the transition to accounting according to international standards and to new auditing standards;
assistance in the formation and implementation of a system of rewarding top managers to motivate them to achieve high final results of the company's work and increase its market value;
business protection (from hostile takeover, raiding, illegal actions of the authorities).
The most important change an investor expects from a business is to prioritize return on investment. And it benefits all owners.
However, the appearance of an investor rarely passes without certain difficulties:
preparation for attracting foreign investment usually takes significant administrative, time and financial resources;
with the arrival of an investor, shareholders get a new, much tougher and more demanding partner, tuned in to tough measures to reorganize processes to improve business efficiency;
due to the need to formalize and coordinate large projects, operational processes may experience significant bureaucratic pressure, especially when it is difficult to find compromises between owners;
most likely, in order to accelerate business development, the investor will insist on reinvesting the bulk of the profits received, thereby limiting the ability to divert funds for consumption;
Interested in establishing clear control over all financial flows of the company, investors usually insist on attracting a highly qualified and trusted specialist to the company for the position of financial director.
It is obvious that, as in any other project, the emergence of a new partner can both significantly accelerate the development of the company and significantly complicate the life of the former owners and top management.
If the potential pluses outweigh the potential minuses, the next step is to assess the readiness of the business for the arrival of an investor, which consists of two sections.
The first section answers the question: “Is the arrival of an investor really the optimal solution to our problems?” The second is entirely devoted to reflections on the topic: “Under what conditions will we get the maximum price for a share?”
Is the game worth the candle?
The relevance of attracting an investor means that all other options for achieving business goals are less effective.
efficient. No matter how trite it sounds, but this phrase implies at least the existence of such goals in a formalized form. The thought: “We need money for development, so let's find an investor!” - should be subjected to a tough detailed verification of truth with clarification of all important details. For example, how much money do you need? Can this money really not be found in any other way? Can we really develop exactly the way we want? And so on.
The decision to search for an investor should not turn out to be a random idea taken out of the context of current business tasks and economic realities. And in the answers to these questions there should be more worldly wisdom than complex mathematical calculations. In the process, it is necessary to touch on the prospects for the emergence of new competitors and the strengthening of existing ones, the potential for economies of scale and other opportunities associated with growth and development. It is believed that each company has two alternatives: either expansion through business expansion and absorption of competitors with the transformation into a market leader, or abandonment of leadership ambitions and development to a certain limit with absorption by the leader. Owners must clearly understand the prospects of the business and understand the role and place of the investor in possible scenarios (see Fig. 1).
At the same time, figures, forecasts and opinions must be substantiated and confirmed.
Thus, the pace of development should be adequate to the possibilities of the market. In other words, you first need to understand specific parameters in dynamics: sales growth rates, production growth rates, the calendar of investment needs and additional expenses, and so on. If growth is associated, for example, with the opening of new retail space, why not try to develop through franchising?
A system of exclusive contracts or franchising agreements can bind partners to your company to no less extent than owning their shares. If you plan to expand the range and increase sales, why not outsource production?
Finding an alternative
After making sure that the investor's money will come in handy, you need to make sure that they cannot be obtained from alternative sources.
This is another great reason to work on your assets (accounts receivable, commodity balances, non-performing fixed assets, etc.) and liabilities (bank loans, bill programs, etc.).
In the course of such an analysis, it may turn out that some equipment can be leased with a minimum initial payment, joint ventures can be created with some suppliers of technological lines (they will enter the equipment, you - sales), and for some programs you can get state and international subsidies, grants and other forms of financial support.
Suddenly, the arrival of an investor may not be such a non-alternative option.
All other arguments in favor of attracting a new partner should also be better than alternatives.
If a potential investor is interested in technology, why not get a license or franchise? Why not send your employees for training in specialized institutions or take the employees of a potential investor to your staff?
If you are concerned about corporate culture, business processes, or strategy formation, why not hire consultants to solve these very issues at a much lower cost?
If an investor is needed to create a certain image of an “international company”, why not become such an “investor” yourself by establishing a company with a big name in a convenient place, and then not selling it a certain share to use such a sale as a newsworthy occasion?
Each "advantage" of a potential investor should be worked out from the point of view of possible alternatives for achieving such advantages "with little bloodshed" (Fig. 2).
It must be understood that, in addition to the investors themselves, there may be other potential partners that can help achieve the goals set:
1) entrepreneurship support funds (soft loans);
2) business incubators (soft loans and services);
3) international funds/projects/programs (loans and grants);
4) state, regional or local budget (financing);
5) investment funds (financing);
6) commercial banks (loans);
7) manufacturing firms (investment of own funds);
8) leasing companies (equipment for leasing);
9) insurance companies (risk insurance);
10) social funds (financing);
11) Employment Fund (direct, non-repayable financing for the creation of jobs for the vulnerable and preferential for other categories).
If, as a result of answering all the questions posed to the business, it turns out that the investor is indeed the optimal solution, think about the main thing: are you really ready to give up complete control over your business, become obliged to coordinate your actions and seek compromises with a new partner? Don't do everything
parents are ready to see in their business only a machine for making money, sometimes a company is a kind of interest club, a kind of place for bringing together various people to do what they love.
If in the first scenario the place and role of a new partner can be determined quickly, then in the second scenario there is hardly a place for an investor.
The final result of the discussions should be concrete confirmed development figures and analyzed alternative options for its implementation. In any case, passing through this stage is beneficial for the business: you will both find hidden reserves and become more specific in negotiations with potential investors.
Looking for a price compromise
The stage of determining the conditions for obtaining the optimal price may not be any easier. The search for the optimum is akin to trying to be at the right time in the right state in the right place.
Many factors must be taken into account: macroeconomic indicators of the market (the cheaper the money, the more you can ask), and the preferences of a potential investor (if the investor is interested in you, the price will be higher), and various premiums from the market (for the size of the company and / or shares, for the first sale of a business share in an industry/region), and the degree of brand perception and many others.
An investor can see many specific assets in a business that are really worth money:
1) unique technologies, know-how and other intangible assets, including, for example, obtaining an environmental effect;
2) modern equipment, production facilities and other tangible assets;
3) trained personnel;
4) economies of scale, including logistics, distribution, etc.;
5) short payback period and high profitability of the project;
6) creation of new jobs;
7) availability of tax benefits, subsidies;
8) the possibility of exporting products and / or import substitution;
9) release of socially significant products (services);
10) availability of cheap raw materials and labor resources;
11) high image of the company;
12) introduction to a new market;
13) receiving part of the products for sale;
14) use of a trademark.
But much more important is the degree of readiness of the business for sale. Every investor seeks to find an undervalued but understandable company with significant growth potential.
The task of the company is to show potential, but not be underestimated.
To do this, it is necessary to conduct pre-sale preparation in order to minimize all possible discounts from the maximum possible price.
When analyzing a company, an investor will try to objectively assess its potential: the quality and range of products, the level of infrastructure and business processes, the possibilities of distribution channels and market share, competitive advantages and other important aspects. What is an investor willing to pay for?
business transparency and transparency (business processes, financial flows, planning and reporting), transparent efficient corporate structure and ownership structure (experienced and successful management, cooperative owners, absence of nominee directors and shareholders), developed corporate culture (fulfillment of these promises, knowledge of foreign languages, high professionalism and knowledge of business customs);
legal cleanliness of building a business (a simple and understandable structure without technical legal entities created only to optimize taxation and achieve other preferences), a protected legal status of the company (licenses, registrations, trademarks, etc.) and resistance to negative environmental influences ( for example, dedicated special companies - profit centers, asset holders and owners of the main business processes that do not allow raider attacks or lawsuits against one of the companies to paralyze the entire group), including the absence of crime or violations of tax and civil laws, positive PR and GR;
clearly formulated clear strategic goals of the company and the current owners, ambitious but achievable, resonating with the high marketing potential of the industry, the company and its individual products;
clear procedure for exiting the business.
Risk of loss
Insufficient attention to any factor carries the risk of loss of corporate rights or property, or loss of profit, which will give a potential investor a reason to significantly reduce the share price. Unfortunately, the mass dislike of domestic businessmen for formalism can give rise to many legal risks and make an outwardly attractive project, in fact, extremely unreliable. In the recent past, a business was often created for specific owners, taking into account their personal qualities and work style, without setting up to function in an independent mode.
But if up to a certain point this did not impede the development of the company, then with an increase in the number of internal and external transactions, an unordered and informal structure slowly but surely becomes an obstacle to growth.
It can be difficult to keep track of
Only companies have earned specific business units and products, and in some cases managers can use this opacity far from the interests of the owner.
The solution is to increase business transparency and formalize processes, which will allow us to go through the due diligence procedure without any problems in the future.
Transparency means publicity, legality and informational openness of the company to external users, its readiness to work effectively for each owner with a guarantee that his interests take precedence over the interests of managers. This is the formulation of strategic goals and the attitude to work seriously and for a long time, without behind-the-scenes games that can lead to losses for investors. In general terms, this requires the following steps:
disclosure of information about the share capital, the composition of the founders and members of the board of directors, as well as the openness of management (including to the media);
preparation of financial statements in accordance with IFRS with confirmation by an independent auditor with a good reputation and its publication in the media;
formation of a flexible but transparent tax policy;
raising corporate governance standards and using modern business technologies.
All of these items require money and time. The implementation of IFRS can take many months and will involve well-paid professionals. But an investor may require reporting according to international standards for 2-3 years, which will further delay the moment of potential contact.
Working with eminent auditors will also be an expensive pleasure. The reorganization of the corporate structure is also delayed for months and requires tens of thousands of dollars, not including potential risks resulting from unscheduled inspections of closed structural units.
Building internal procedures and processes of the company with the implementation of ISO 9000 quality standards will require no less investment.
And almost always, the transition to transparency means a decrease in the profitability of the company due to the increased costs of tax liabilities.
But the result of this work will be the construction of a completely new infrastructure that will be able to immediately support the planned growth.
"Muse" of business
Such difficult work should be inspired by numerous examples of companies that created effective corporate governance systems and achieved obvious success: their capitalization in the shortest possible time increased many times over, they entered foreign capital markets and began to attract managers with an international reputation.
However, even after being inspired, it is necessary to start work with planning an adequate budget, time and money for the tasks. Knowing some details can speed up the company's readiness for the initial dialogue with a potential investor.
Portrait of a potential investor
By offering the most liquid resource, money, to the market, investors have a wider choice of potential partners than any other company, and thus get the opportunity to set the rules by which they work with partners.
However, not all investors are the same in their demands for business transparency. And certainly a candidate for investment does not have to be fully disclosed to the entire market.
Moreover, it is simply unsafe: under the guise of an investor, raiders can come and, having gained access to confidential information (on the register of shareholders, major assets, financial schemes, key managers, possible labor conflicts, etc.), try to seize control of the business or key assets.
Therefore, it may be enough for a company to open only specific cards directly to a specific investor, to the extent that this will be enough to make a fundamental decision.
And for this, you first need to determine what kind of investment is required for the business, as well as which investors may be interested in the company.
Investors can belong to one of the following groups:
mass investors (result of IPO or SPO).
This is a company interested in funding business ideas with huge market potential or start-ups that have started to successfully bring these ideas to life.
They take on the maximum risk, expecting the maximum return, earning on the ability to identify the potential of the business and unleash this potential, accompanying them up to the sale to a strategic investor or through an IPO.
The company must be ready for the arrival of such an investor, having confirmed data on the basis of which the entire business development plan is built, and a team capable of implementing this plan.
Advantages of a venture investor:
helps in developing a strategy and making key decisions for business development;
is a source of medium-term capital for the enterprise;
does not require significant expenses for its attraction.
Cons of a venture investor:
is not an expert in the industry and therefore cannot be a source of technical knowledge and know-how;
what is the rate of return on investment;
usually sells shares in 1–3 years;
usually owns a significant share in the capital of the company and an option for even more of it.
This is a company interested in acquiring a controlling stake with participation in the management of the business or obtaining full control over it.
Typically, this role is played by a company that is a leader in its sector, one way or another connected with its activities with the asset being acquired, having practical experience in a particular sector and knowing its features, for example:
- a company in the same or related industry, seeking to expand its existing lines of business;
- a company operating in another industry seeking to make better use of its assets;
is a financial and industrial group that seeks to develop strategic ties.
Such an investor buys a company as part of the market, expanding his own marketing potential. Either it acquires effective technologies, simultaneously solving other strategic tasks: reducing production costs, reducing risks, obtaining certain preferences, and even eliminating actual or potential competitors.
Industry strategic investor
The sectoral strategic investor brings, in addition to investments, technological know-how, professional management and contributes to the expansion of sales markets.
However, in practice, such an investor, by his acquisition, seeks, first of all, to solve his own problems in a new market for himself, sometimes being interested only in certain technologies and assets: distribution channels, privileges and preferences, etc.
Therefore, a company may face attempts to invest only in the form of equipment or products of its own production with the explicit goal of expanding its own sales and minimizing precisely monetary transactions.
If a company aspires to become an independent market leader itself, then a strategic investor who himself works in the same area of business is unlikely to help.
The development of the acquired production is of interest to such an investor only in cases where it can reduce the costs of entering a new market, since situations where a jointly produced product is competitive in new markets and does not become a direct competitor to the "strategist's" products are rare.
A company may be ready to attract such an investor if it is successfully operating in a similar or related industry, and the owners have decided to sell control or majority shares with maximum control over the enterprise. Such an investor will fully implement its technologies and solutions, and if no compromise is found at the acquisition stage, its management staff.
Therefore, before selling a company, one should think not so much about its transparency, but about increasing its productivity, improving the level of management, strengthening control over financial flows and introducing a more effective system of staff motivation. The issue of financial transparency for such an investor is less relevant: he comes to the company already having an idea about it and understanding why and for what it is of interest to him.
Advantages of a strategic investor:
- can transfer best practices and know-how to the enterprise;
- is aimed at developing long-term cooperation with the enterprise;
- the enterprise can gain access to new markets and distribution channels;
- synergistic effect as a result of industrial integration;
- strategic investors are willing to pay a higher price for the company's shares than other investors.
Disadvantages of a strategic investor:
- the business must clearly understand and share the goals of a strategic investor, which often do not fully agree with the goals of management and other owners;
- a significant share in the equity capital of a strategic investor “dilutes” control and may lead to a change in top management;
- manifestations of differences in cultural and business traditions between the strategic investor and the management of the enterprise are possible;
- the search for an investor requires a significant investment of time and money.
Financial (portfolio) investor
A company interested in acquiring a highly profitable asset with its subsequent sale.
Such investors most often acquire a non-controlling stake in the investment object without participating in the formation of a development strategy and operational business management (but usually with representation on the board of directors in order to be able to exert sufficient influence on decisions made) and plan in advance to exit the company's capital by, for example , selling its part after a certain period of time to a strategic investor. Typically, this role is played by private equity funds.
His interest is the economic efficiency of the business is not worse than planned and the maximum return on capital. Such an investor cannot destroy the company as a potential competitor, because he does not have sufficient control
lem over business.
Like a lender, he assesses the risk of losing investments, but unlike him, he is ready for more risk and does not require collateral.
The most active portfolio investors can go into constant close cooperation with management in order to develop measures to increase the capitalization of the business, increase its transparency and transparency (the corporate structure and management system are improved and brought to international standards, financial flows are optimized, etc.).
They can bring their connections, experience and opportunities to bring enterprises to a qualitatively new level of development in business.
Portfolio investor interest
Such an investor makes a decision to buy a share based on the information received.
Therefore, a company that is ready to attract this investor must be at a stage of proven dynamic growth and have a strategic plan for further expansion and retention of market share.
Having significant investment experience, such a partner can help in its development, but the strategic vision itself should, first of all, be present in the current owners.
He is interested in companies with well-established production and business value growth prospects that meet the fund's minimum return criteria, but due to a lack of funds, they are not able to move to a qualitatively new level of development.
The company should use the resources received for its further development: the purchase of equipment and technologies, the construction of a sales network, the absorption of competitors, etc.
Often, the company's opportunities to become one of the leaders in its industry are additionally analyzed, as well as requirements are put forward for the presence of professional leadership, a clear development strategy, clear competitive advantages and a transparent ownership structure and the business itself.
Attract and don't miss out
By definition, an opaque business cannot attract an investor, and investors finance a company's promising activities quite calmly, without interfering in management processes.
This passivity disappears only if problems arise in the implementation of the intended strategy.
Important conditions for attracting a portfolio investor are adequate macroeconomic risks, guarantees of private property and real opportunities to resell the share.
To be ready for the arrival of such an investor, you will have to strictly comply with the conditions of transparency and understandability for the market and for the investor.
Advantages of a financial investor:
usually does not participate in the operational management of the enterprise;
is a source of medium-term capital for the enterprise;
usually owns a small share in the share capital of the company, which allows its management to maintain control over the enterprise.
Cons of a financial investor:
is not a specialist in the field and therefore cannot be a source of technical knowledge and know-how;
requires a high rate of return on investment;
usually sells shares after 3–5 years;
investment is accompanied by a long preparatory stage, during which the assessment of the investment proposal and the quality of management, due diligence, analysis of financial statements, the market and the company's products, etc., are carried out, while the costs at the initial stage of finding such an investor have to be borne by the enterprise itself.
This is, in fact, the sale of business to portfolio investors at retail.
To be sold to such investors, the business must be mature, resilient, and have a marketable reputation. The offer of one's shares to an unlimited number of investors contains both the possibility of exiting the company and fixing the profit received from the rapid growth in the stages preceding the placement.
In addition, the circulation of shares on the stock exchange significantly increases liquidity, allowing further disposal of small shares of ownership without attracting the attention of other shareholders or issuing new issues.
Pros of an IPO:
investors do not participate in the operational management of the enterprise;
the instrument is a source of long-term capital for the enterprise;
creates the most positive image of an open public company;
does not require a specific rate of return on investment.
Cons of an IPO:
usually brings nothing but money;
emergence of greenmail risk;
high costs of maintaining publicity (audit, registers, PR, IR, etc.).
At different stages of development, the company is interested in attracting different investors. The closer the project is to the beginning, the more likely it is to interest only a venture investor. At the stage of active development, you can prepare for the arrival of the portfolio.
At the stage when a new impetus for promotion is required, a strategic investor is relevant. If the business is stable, you can arrange an IPO.
At the same time, ceteris paribus, IPO investors will pay the most, strategic investors will pay a little less, portfolio investors will pay even less, and venture investors will pay the least. Inversely proportional to the expected risk.
In order to present a company profitably, one must understand for what purposes an investor may be interested in entering its capital.
tal, study information about potential partners, including information about their strategic plans, current operational tasks, investment priorities and goals, market behavior strategies.
The type of investor can be determined by the goals that he sets for himself:
marketing goals (acquisition of assets that complement the investor's business, strengthening the position in the market, getting rid of competitors by purchasing their assets) - a strategic investor;
investment goals (placement of free funds, participation in a profitable business, buying up of undervalued assets, acquisition of portfolio-balancing assets) - a portfolio or IPO investor;
information purposes (gaining access to information about technologies, suppliers, consumers) - a strategic or venture investor;
protectionist goals (establishing barriers to entry into the market of potential competitors, maintaining stability and market capacity) - a strategic or venture investor;
preferential goals (obtaining tax and other benefits, facilitating access to new opportunities) - a strategic, venture or portfolio investor.
But whatever the investors' goals, a minimum business readiness must be ensured through a clearly articulated company development strategy, transparency of processes, corporate structure and ownership structure, as well as a verifiable assessment of the assets, liabilities and financial results of the company. And, of course, a team capable of defending the interests of the company in front of the investor.
Everything will be sold. The question is the price
Attracting an investor can be interesting for almost every company at any of the life cycles of its development. Investors are of the greatest interest at the stage of formation of a company or project, when it is planned to share the risks and opportunities of undertaking with a partner, or at the stage of rapid growth, when underfunding is fraught with financial losses. The success of attracting an investor largely depends on the formation of a team responsible for the pre-sale preparation of the business: lawyers, auditors, consultants, etc. The readiness of a business to sell a share forms positive answers to a whole group of questions:
moral component: are the owners ready to part with part of the control over the company, and if so, what can this part be?
strategic component: does the appearance of an investor fit into the existing strategy, and if so, which one?
marketing component: will the arrival of an investor increase the marketing potential of the business?
technological component: will the arrival of an investor improve the technological level of the company: will there be new licenses, patents, technologies, know-how, etc.?
economic component: will the arrival of an investor increase the economic efficiency of the business (assessment of possible additional income in comparison with the initial costs of preparing the business for sale and subsequent costs of maintaining the required level of transparency)?
legal aspect: are all rights reserved?
bureaucratic component: are you ready for the complication and slowdown of approval procedures and the emergence of the right of veto on various projects?
HR component: how will HR processes change with the arrival of the investor and what HR risks will you face?
PR-component: are the owners, top management and business as a whole ready to change external communications with all interested parties, taking into account the requirements to increase transparency?
Since potential investors do not advertise their activities, they must learn about the readiness of the business for sale from reliable sources that have formal confirmation of the owners' interest in the arrival of a new partner.
The process of such informing requires the preparation of a whole block of relations - IR (investor relations).
Change of philosophy
Such relationships, first of all, change the very philosophy of the strategic management of the company: the emerging business plans should become a real tool for achieving goals and be regularly updated. Reporting must be formed on time and confirmed by a reputable auditor - and so every year throughout the entire period of the existence of a new, more transparent and public business.
However, some companies are initially created and developed in order to become attractive to a portfolio or strategic investor and, as a result, be sold at the peak of capitalization.
There are even businessmen whose careers are entirely devoted to such projects. Some of them have successfully learned to “pull up” the right indicators to the right moment to get the maximum benefit.
Assessment of one's own readiness to attract an investor, as well as its search and formation of information documentation, is a process that depends on many factors and usually requires the involvement of professional intermediaries.
It is their task to acquaint a potential partner with the proposed enterprise, the competitive environment and the company's position in the market, business processes, product line, management scheme, assets and functions.financial condition so that the submitted documents convince the investor that everything declared is attractive and corresponds to reality. But you can try to do the initial readiness assessment and, last but not least, the initial pre-sales activities yourself. It is likely that the result of such work will be a real increase in the efficiency of the business, the discovery of hidden reserves and the refusal to sell the share.