“There are two main types of investors; financial and strategic. They fundamentally invest for very different reasons. So it’s important to know why a company may want to invest and why.”
Let’s deal with financial investors first as this is the model that most people are familiar with. A financial investor will buy shares in your business to have a stake in the profits and cash flows (and capital gains on the shares) and so achieving a return on their investment. Basically they are investing for a clear financial return.
A strategic investor, on the other hand, is typically a buyer from the same industry and would be looking beyond the financial returns and would also consider your operations to identify opportunities to capitalize on potential synergies that may exist. The financial return calculation would change for them if they can integrate your business with theirs in some way to create gains through such synergies. For example, they may acquire your core operations and integrate it into their structure without the need to acquire all your overheads. They may also have access to better commercial terms with suppliers and would help improve your margins.
In summary, a strategic investor is looking for synergies with their industry and investing in a business that offers strategic value by extending their market reach or opening up a new market or territory.“
If you are mainly looking for funding while retaining control of your business, and only considering selling a minority equity stake (less than 50%), then financial investors may be more suitable. They typically like the management teams to continue managing the business, and in addition to the financing they usually offer other benefits such as access to their network, improving the company’s governance, better terms for bank financing if needed and limited involvement in the day-to-day operations other than being on the board of directors and contributing towards the direction of the business and involvement in major business decisions.
Strategic investors typically like to acquire a majority stake (more than 50%) which enables them to consolidate the combined financial performance, and are well positioned to exploit synergies between the two businesses as discussed above in addition to providing managerial support and expertise which may not have been available to the seller earlier. They usually take a more operational role after acquisition with a relatively high level of involvement in the day-to-day operations. A good partnership with a strategic investor can also provide something additional that the other may not have had previously, such as entry into a new market or the ability to provide a specialist skill and customer base.
When considering which type of investor to target, it’s really about what your business needs to grow at this current point in time and how an investor will help you.
It’s also about your current situation. An owner nearing retirement may want to exit the business and sell the business in its entirety. Whereas a small brand in a niche market like an App Development company may want to seek investment from a well know global digital group so that it can expand on a global scale. By seeking investment from a big worldwide brand in the IT sector it can reach global markets it could not reach on its own.
The directors at Advisors M.E. have worked with the big consulting companies and throughout their careers completed deals totalling over AED 1 billion across a wide range of sectors. They can advise you on the right type of investor and help match you with specific investors. Simply get in touch below for a confidential conversation. “It’s really about what your business needs to grow at this current point in time and how an investor will help you meet your five year financial plan.”
If you are looking to take your company to the next level through investment or company sale, contact us for a no strings attached and confidential conversation today on:
email@example.com or call +971 (0)2 551 5996.
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