How does it Work? Equity investment is a good way of getting involved in the business decision-making process. As an owner, the equity investor has certain control over both operational and strategic issues concerning the business.
An equity investor's unique interest in and aspiration for certain business sectors and industries influence his or her equity investment decisions as to select what businesses.
The perceived synergy and chemistry between the management of the business/existing owner(s) and the equity investor(s) are important to the success of the joint venture.
RELATED: How Risky Should You Be With Your Investments?
A Guide to Equity Investment and Equity Finance
Different Types of Equity Investment
Venture capital investment. Venture capitalists invest in businesses at early stages when the success or failure of a business is everything but certain. Venture capital investment carries higher risks but also potentially bigger rewards.
Private equity investment. Private equity firms invest in publicly listed companies and then take them private.
Away from the public eye, private equity firms seek to do what they do best, that is, improving management and business efficiencies to make a company more profitable.
Leveraged buyout. This is a rare way to become an equity investor without really investing much of your equity capital.
When a company's existing owners wish for a way out but can't find an investor with cash to buy the business, they locate someone called a financial sponsor instead, normally a private equity firm but without committing itself to invest its capital.
Next, a business loan called an LBO loan is arranged with the owners' company as the borrower and the cash raised buys out the existing owners, leaving the financial sponsor to be the caretaker of the company.
The new debt has recourse only on the company, not on the private equity firm. The bootstrap transaction makes the equity firm, the financial sponsor, now the sole “owner” of the company.
Is an Equity Investment Right for You, the Investor?
Equity investment is having a business partner. Do you have enough business passions and are ready to get deeply involved in business operations. Or you are better off by lending money and then staying on the sideline?
Do you have good interpersonal communication skills to interact well with the management of the business?
Are you prepared to risk losing your investment capital if the business fails?
Advantage
As an equity investor, you stand to gain big if the business you invested in prospers.
You learn first-hand knowledge about running a business.
Disadvantage
Potential conflicts with management and existing owners over business decisions.
Your investment capital is potentially a risk capital.
Finding a business
Many start-ups may need capital support, as well as some companies in later stages.
If you're a serious private equity investor, consider taking an underperforming public company private and turning it around.
You can always invest through the stock market. By accumulating enough shares publicly, trying to be a good corporate raider, getting on the company's board, and influencing management for better business.
What Do Businesses Look For?
Show business owners that you as an investor have the same business passions as they do.
Assure both management and owners that you'll contribute in a good way and leave them enough autonomy.
Convince the business that accepting an equity investment is better than looking for debt financing, given that they may be short on cash flows from operations at this point of their business.
And finally, let them know that you're a savvy investor and have invested in many businesses successfully.
Checklist
Check against alternative debt investment.
Is the business selected the right kind for you as an investor?
Be ready to have an ongoing presentation with management.
Hire a business or management consultant as your advisor to assist you in this business investment venture.
FAQ
Where can I find businesses?
Get in touch with the business community, especially through various trade organizations. Attend events sponsored by your local Business Link and chamber of commerce, also other investor conferences where businesses are invited to make their capital-raising pitches to investors.
