This article are provided for information purposes only, and are not intended as legal advice.


Business strategies – when do you look for an equity partner?

April 8th, 2009

Your business is in difficulty, your clients are paying slower, your cash flow needs keep growing and growing, your gross profit margin decreasing and you are out of cash.  Do you keep struggling or do you bring in an investor as an equity partner.  Some people are too proud and think that they can do it themselves, others realize that they need help in getting the business to the next level.  Recently, I was told of a case where the owner worked in a business, then bought the business from his boss, ran it for 10 years and was struggling.  Family kept putting money into the business but it was not making profits for years.  Instead of salvaging the company, they let it go into receivership.  They thought that one person would buy the company out of receivership.  They were surprised that 10 companies bid for the assets of the business.

 

This proved that if the owner looked for equity earlier, he would have been able to get help, additional financing for the business and maintain an equity stake in the company.  Today, he is an employee at a reduced salary level.  Was this pride in not looking for a partner?  He had partners in the past and they did not work.  Because of a bad experience, he decided that losing the business was better than having another partner?  I am not sure that everyone would agree, to lose 100% of your assets or have a partner,  isn’t the latter better?

 

This company has proprietary products therefore it would have been easy  to find a partner as proven by the 10 bidders for the company’s assets.  If you wait until it is too late, then there is nothing to rescue, if you wait until too late, your business is not worth much and you will not have much equity left.  If you seek financing too early, you may not need the partner and you just got a partner even though you could have weathered the storm.  There is a point which is the right time.  Keep in mind that it takes time to find an investor.  You will never time the closing of the investor with the best possible moment in the company’s evolution.

 

Just remember, if you wait too long, there may not be anything to salvage or your equity stake will be very small.  If you go too early, you will have a partner that you may not have needed.  Partners can be a financial partner and also an active partner who can bring the company to the next level.

 

If you have thoughts about getting a partner, there must have been something that you saw that started you to think about it.  As a result, maybe you should pursue your thoughts and keep looking.  If you are not in dire straits, you can keep looking even if it takes years until you find the right partner.  The partner should not just bring in money or experience, he/she must be able to get along with you and your clients.


Filed under: Business strategies — Gary Landa @ 8:40 am


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