What is it?
Equity investment is when an investor, either a high net worth individual or institutional fund, takes share capital in the business in return for extra funding to give the business either the ability to buy the fixed capital items that will generate new business areas or revenue, or sufficient capital to allow the management team to have time to turn the business around.
Who is it for?
- New market, products or diversification – It is for businesses that have identified new niches in which to grow profitable sales that are aligned to the businesses current niche skill sets, especially when additional investment is needed in equipment or personnel to develop those new markets.
- Fast-growth businesses – Equity Investment allows extra working capital, which in turn allows a faster growth cycle, even though the current shareholders percentage ownership may be reduced, the substantial increase in growth allows for a larger return on the reduced shareholding.
How can Chamberlain & Co help?
The company should instruct a professional adviser such as Chamberlain & Co to advise the directors on the most appropriate parties to approach, how to approach them and information to be provided.
- The current shareholders/management team will need to prepare a detailed business plan analysing the opportunities and threats, with a detailed cash flow and sales forecast concerning the opportunity.
- It will then be decided whether it is appropriate to take the opportunity to an individual high net worth investor, syndicate of business angels or a dedicated institutional turnaround fund.
- The relevant investor will undertake due diligence on the opportunity before commiting to the investment. However, the investors will be used to making these decisions within the compressed timescales often required in these scenarios.
- It allows companies to be rescued in situations where there are no other options, or take advantage of new opportunities, which would otherwise be unrealised.
- Often the investor will, either personally or through a third-party, will supplement the management structure or skills to help ensure the required outcomes are achieved.
- The current shareholders will have their current level of control diluted. In the case of a sole shareholder, adjustment will have to be made to the decision-making processes such that the other investor(s) has input in material business decisions.
- The equity investor will need to see an exit strategy from the business in their due course, which may cause further upheaval for the business in the future.