There are three types of investors who invest in an existing business: the aspiring entrepreneur who buys into the business through a management buy-in, the business that acquires a stake through a strategic acquisition (for example, a competitor or a party from outside the industry), and the investor itself—an informal investor or an investment firm (private equity/venture capital). Each type has a different objective, time horizon, and level of involvement.
Investing, also called buying into a business, comes in many forms. We look at investing in an existing business from the buyer's and the seller's point of view. But who are these investors?
You can invest in an existing business in various roles, each with its own reasons and goals. You can invest as an (aspiring) entrepreneur, as a business, or as an investor.
What types of investors are there?
1. Investing as an (aspiring) entrepreneur
Investing as an aspiring entrepreneur is called a management buy-in.
In a management buy-in, someone from outside the business acquires an equity stake. The typical MBI candidate is often a (former) manager at a publicly traded or large company. He or she is tired of the endless meetings, the sluggish decision-making, and the lack of entrepreneurship within a large organization and wants to be at the helm. But they aren’t keen on starting their own business by building a business from scratch. Buying a business is an ideal “fast track” for them. These managers often have the necessary funds—in the form of a severance package or an additional mortgage on their home—to (partially) acquire a business.
In recent years, a new group has emerged among MBI investors: former entrepreneurs who have successfully sold their businesses. These are often relatively young entrepreneurs who put their business up for sale after a few good years—such as during the dot-com boom—but after a period of rest, their entrepreneurial spirit is reignited, and they buy a business to experience the thrill of entrepreneurship once again. This category is very similar to that of an investor, with the key difference being that this former entrepreneur is actively and operationally involved in the business in which he buys a stake.
2. Investing as a Business
In this type of investment, another business acquires a stake: this could be a direct competitor, a business outside the industry, or a financial institution. This is often referred to as a strategic acquisition.
For a competitor, a business may be an attractive acquisition target. This investor wants to strengthen his own market position by acquiring a stake in another business—perhaps because that business has developed a new technology, to offer customers a wider range of products, or to negotiate a higher discount based on larger purchase volumes.
For a company outside an industry, entering a new market can sometimes involve high barriers to entry. A smart way to gain access to that market is to buy a partial stake in a business within that industry, whether or not through a buy-and-build strategy. The acquiring company then doesn’t have to fight for customers, revenue, and a slice of market share, but instead buys a business that’s already up and running.
A financial investor is usually an investment firm; this investor is unlikely to take over management of the business itself. That’s why these types of deals often involve a business acquisition in the form of a management buy-in (MBI) or management buy-out(MBO), or the investment firm itself proposes an MBI or MBO candidate. This entrepreneur is then the one who runs the show, while the investor advises him from behind the scenes.
3. Investing as an Investor
In the small and medium-sized enterprise (SME) sector, it is often informal investors or investment firms that invest in existing businesses.
Informal investors are generally wealthy former entrepreneurs who have made their money by selling all or part of their business. They become co-owners by purchasing a portion of the shares or by providing a subordinated loan (often a combination of both). The Netherlands has an estimated 5,000 informal investors who primarily invest in theseed and early-stage phases of a business. The amounts involved typically range from 50,000 to 250,000 euros. In addition to capital, informal investors also contribute their knowledge and experience and make their personal networks available to the entrepreneur.
Investment firms (also known as venture capitalists or private equity firms ) have much more capital available for investments than informal investors. A few hundred million euros per fund is the norm. There are about 300 investment firms in the Netherlands that manage the assets of large private investors and investment funds, with whom they make specific agreements regarding target returns, target markets, selection criteria, and decision-making.
Frequently Asked Questions
What types of investors are there when investing in an existing business?
Three types: the aspiring entrepreneur (through a management buy-in), the business (through a strategic acquisition), and the investor themselves (an informal investor or investment firm).
What is a management buy-in?
A form of investment in which someone from outside the business—often a (former) manager—purchases a stake in the business and takes on an operational role.
What is a strategic acquisition?
An investment made by another business—such as a competitor or a business from outside the industry—to strengthen its own market position or enter a new market.
What’s the difference between an informal investor and an investment firm?
Informal investors are high-net-worth individuals who often invest between 50,000 and 250,000 euros, bringing their own expertise and network to the table. Investment firms (venture capital/private equity) manage funds that often total a few hundred million euros.
How much does an informal investor invest on average?
Typically between 50,000 and 250,000 euros, especially during a business’s startup and early growth phases.
