As an entrepreneur, you may make the choice to find a new shareholder for several reasons. This may be because you want to sell a business and retire, but it may also be that you want to continue as an entrepreneur and need growth capital (e.g. for a growth plan, acquisition, refinancing or buying out a fellow shareholder) and a sparring partner who can bring something to the business.
An important step is to identify suitable parties. Here a distinction is often made between two types of parties: strategic investors (direct competitors or parties in an adjacent market segment) and financial investors (for example, private equity or family offices of wealthy families).
For smaller investments, one can also consider informal investors or angel investors: wealthy individuals, often with entrepreneurial experience, who may also bring relevant market knowledge.
Financial investors
Financial investors such as private equity tend to have a sector-agnostic investment policy. They orient themselves broadly on the acquisition market and are offered a wide range of propositions by corporate finance advisers. If they see an opportunity for a good purchase price and an attractive business case, often followed by good opportunities to resell the business after 3-5 years, they engage in further discussions about a possible participation.
After a letter of intent is signed, this party will further study the market and the business in question during the due diligence process. If they come to different insights during this process, the acquisition process will be cancelled. Often these investors use a broad funnel: they receive a high number of propositions, with a limited number of which a letter of intent is reached, and after which there is a chance that during the due diligence process the acquisition is abandoned due to new insights.
In addition, financial investors are often primarily concerned with deals. After an acquisition is completed, they move on to the next acquisition process almost immediately. This is because private equity often works from funds with a limited term: a lot has to be invested in a short period of time at the beginning of the fund cycle, and once the fund is fully invested, it is soon investigated which participations can be resold at a profit. The attention paid to businesses during participation to add value is often limited.
Strategic investors
Strategic investors are in many ways the exact opposite of private equity. For example, they usually have no intention of buying the purchased business again. Moreover, sector knowledge is plentiful, and the buying party will be able and willing to provide a lot of input to add value.
However, the consequence of a strategic buyer is often that the business loses its autonomy. It will have to report to headquarters and work in the imposed pattern. Where possible, businesses will be integrated to unify and achieve cost synergies, and sometimes the acquired business will have merged away altogether over time. Some former employees may have joined the new entity with refreshing enthusiasm, but others will no longer be able to identify with the business and leave.
Investors with sector focus
An intermediate variant is for an investor to specialize in a particular sector. These parties move away from financial parties, acting more like a holding company with equity interests in a group of similar, independent businesses, working to create value. Cooperation between the mutual businesses on both sides is often helpful.
Sector investors consider fewer different acquisition propositions. Many propositions do not meet the desired business criteria and are not followed up in advance. This means that the remaining propositions are looked at a lot more seriously, and here also a better informed decision can be made whether or not to speak further.
If the investor is positive after these talks, and a letter of intent is concluded, the deal security is a lot higher. During the due diligence, there will also be a lot more focus on the business and soft indicators, instead of only looking at financial, tax and legal documents. Because of know-how and the network of the investor and portfolio companies, any operational shortcomings can be addressed.
Depending on the structure of the investment fund, these parties are often focused on the long term. They want to further expand their position in the market in question and will therefore spend more time on the business itself after acquisition. The investor will want to use the sector knowledge and know-how already present in the business, and will cooperate with the management team concerned to take advantage of growth opportunities. In this way, value can be added jointly.
