It’s been a remarkable time in private capital markets. The sheer amount of capital available and “chasing” opportunities has driven up valuations. Innovation and flexibility on the capital side have created more opportunities for entrepreneurs to do the kind of deal they really want, rather than just take what’s being offered.
With that background, it’s not surprising that a common conversation these days is “should I take in capital?”
From our perch, we’ve got an interesting perspective. We’re talking with investors, typically funds looking to invest in healthy businesses, aiming to invest a few million dollars to tens of millions to provide growth capital, shareholder liquidity or some combination. Those investors span a range of structures, risk tolerances, investment horizons (short-term to “forever”), target industries, involvement/control, personalities, … well, you get it. In some ways, the capital markets have fragmented so that investors get their best results by differentiating on risk–horizon–industry–control/non-control so that, among the thousands of investors out there, a subset will target each opportunity niche.
On the other hand, entrepreneurs/founders are inundated with outreach from capital providers. While it’s encouraging to know that there are multiple investors interested in being your partner, the founder’s first question is the hardest one to answer: “should I take in capital?” Once that’s answered, the right process can be defined, with the founder’s goals in mind, sources and uses of capital, etc. But that initial step of seriously considering bringing in capital, be it a minority investor, a “quiet” investor, or a control investor is tough to conceptualize. What will life look like if I take $20 million out of the business? What will that mean for my family? What am I giving up if I do this? Am I ready to sell the business in a few years? Am I possibly on an IPO track? Will an investor stay with me long-term? Can I have my cake and eat it too? If I’m OK with taking on a partner to see some personal liquidity, should I also be thinking about an outright sale?
Everyone has heard the horror stories – the investor who wrests control from the founder and forces a sale, the investor who pushes the founder out. In many cases, the success stories are the quiet ones.
We often find it’s helpful for client to speak candidly with a couple of investors before beginning a formal process. Taking that step can help dispel some myths and raise new questions for the owners to consider. In this market, business owners should have the confidence to consider their options carefully and to make the most of what the market has to offer.
Alan Fullerton is a partner with Mirus Capital Advisors. He works with owners of middle market businesses and can be reached at email@example.com.