Company owners usually get into business to take control of their life. They may be unhappy with their previous employer or business. Whatever the reason, a substantial part of the decision to go into business is about taking back control. Bringing in an investor requires a different mindset as you are going to have to give up some aspect of control of your business.
There are many ways to be right, so there is no right or wrong time for an investor to be brought into a business. In the Business Legal Lifecycle we have placed the time for this to occur in Phase 6 which is called Maximising Your Business and Bringing in Investors.
Phase 6 occurs after the business owner has started their business, brought in some staff and protected their intellectual property. As a business owner you have something to protect.
There are two main reasons for this; first, the business will be most attractive to an investor when all of these parts are in place.
Second, many business owners think that when they have taken these steps that they can jump straight into expansion (Phase 7). The truth is that this is a mistake; a business needs to be consolidated, ensuring that everything is set up correctly before it expands.
As a business owner you need to decide if bringing in an investor is right for you – every person’s situation is different. Key considerations include:
Advantages for the Business Owner
What’s in it for you? As with anything in business you need to think about what you will receive in exchange for bringing in the investor. This may take the form of a cash injection into the business or bringing in the investor’s knowledge and experience.
What are your goals? All business owners should have some goals and a direction they are going with the business. These will change over time; a business owner may start up with the idea of just having a lifestyle business and may change those goals as they progress through their business.
Disadvantages for the Business Owner
What is the business owner losing as a result of bringing in an investor? Whether an investor loans money or buys equity in the business they are taking something from the owner. The business owner needs to think about whether this will work for them in their business.
Can the business owner and investor work together? The owner needs to assess whether they can work with the investor, what level of involvement the investor will have in the business and their history. An investor will have their own ideas about what is to happen in the company. A business owner needs to carefully assess these considerations and decide if it’s right for them and their business.
Jeremy Streten is a lawyer and the author of “The Business Legal Lifecycle” (www.businesslegallifecycle.com), which is designed to help business owners understand what they are doing in their business from a legal perspective and give them a plan for the future. The Business Legal Lifecycle won the Queensland Law Society’s Innovation in Law Award and the Abundance Global Innovation Award in 2018.