You are owner of a small or medium (Lebanese)enterprise (SME) and you are facing one or more of thefollowing situations:
• What you sell (products or services) have high potentialbut you have limited resources to grow (both human andfinancial);
• You are doing fine, but cannot afford the extra effortsneeded;
• You have used all your capacity to raise debt and youare looking for alternative financing options;
• You need to open to new distribution channels on thelocal or regional/international market;
• You need to build a solid infrastructure to maintain andprotect your edge;
• You want to grow but are concerned with the riskimplications.
Your bank/friends/colleagues have recommended youto bring in investors in order to move forward. But thesearch is hard. You have checked around and some (distant)connection is offering to bring in investors on board tocheck out your business:
• But you have either to make the trip to meet with them,probably in the Gulf nowadays (taking expenses from moreurgent or relevant items) or stay on hold, waiting for theirnext visit to Lebanon.
• The timing may be wrong: Lebanese SMEs could be a hardsell with the current market conditions on uncertainty andinstability. Buyers assume you are desperate and ask for abargain. You are tempted to wait.
• But the feeling of urgency is clear: unless you moveimmediately, you may lose a unique opportunity. The marketis growing and you do not want to miss the train.
• You do not know what to expect and how to deal with the“mighty investor.” A savior, a foe or just a partner? Youare in for a long ride: long wait, long process, anduncertain outcome.
You are also concerned about loss of control ofyour business to the new investor, the reportingconstraints, and the loss of independence. You are alreadymissing your comfortable space, not having to report toanyone. Why would you want to bring in strangers?
Many questions are crossing and clashing into your mind.You are tempted to put things on hold, then to do something,then to wait and see. You are turning in circles. You wishyou could have a clearer picture; you wish you could makethe wise choices at low cost; you wish you could be luckyand find the perfect fit.
You have a very heavy responsibility: You want totake your company to the next phase, efficiently and costeffectively. But the tasks ahead are too tedious andtricky.
Private equity funds for development are the pools ofcapital invested by private equity firms. The fund obtainscapital commitments from certain qualified investors such asfinancial institutions and wealthy individuals to invest aspecified amount in the equity of existing businesses.Private equity funds buy in equity against stakes in thebusiness. They check out the business, they evaluate thebusiness during the due diligence exercise, draw a road mapon how to invest in the business, set the developmentobjectives, and how to exit within a limited period. Alongthe way they make sure their investment is well-treated andthey get returns that live up to the promises.
The Lebanese market may not be too familiar with equitycapital funding for historical and structural reasons. Butrecently, there have been many success stories and positiveexperiences of value-creation and mutually beneficialpartnerships. Of course, there have also been reports ofsome horror stories and bad experiences.
So, should you consider equity funding for your business?Is equity funding right for you?
10 good reasons to consider equity capital funding:
1- Risk sharing is a good tradeoff
Loans for business—especially the subsidized onescurrently offered on the Lebanese market—are veryattractive. You probably have used your limit. And when youtake a loan, no one shares the risk with you. You have topay it all back yourself, whatever the circumstances. Youare on your own, dealing with risks of uncertainty,instability, and market downturn. The equity capitalinvestor is aware of all the painful realities of thebusiness life. He has integrated them in his analysis andvaluation. He is sharing the risks with you. And he will bedoing his best to minimize and mitigate them. It is good tohave a partner.
2- Dealing with the professionals always pays off
You are dealing with professionals all the way: theirvaluation of your company is rational, documented andintegrating all the relevant factors. Negotiations are clearand streamlined. You will not be wasting time and resourcesdealing with amateurs or unsophisticated potential partners.The professional equity fund managers have very clearlydefined rules and organizational structure. You are prettysafe.
3- Clearly defined process
Whenever you reach an agreement, all the important issueswill be addressed and clarified. Many scenarios will beanticipated. No improvisation or rule-bending along the way.No bad surprises around the corner.
4- You are not losing control of your business
Your new partners want you to succeed. They want you tocontinue doing what you are best at doing. When necessary,they are willing to bring in the missing skills for ahealthy growth. They would not mind minimizing theirintervention. They are not into micro-management (unlessnecessary). They invest in people and your ability todeliver.
5- Credibility for your business
When the professional equity investors get in, theyexamine your business. If they like it, they let you knowit. They see a potential for growth and value creation. Theyshow faith in you. They give you a validation stamp.Credibility is fundamental to accelerate your entry into anew market, reduce your sales cycle, recruit new talents,and negotiate better funding terms and business deals. Youhave already won a solid vote. Your business is bankable.
6- Articulated strategy for your business
Professional equity investors look at your business, askquestions, and articulate all the necessary detailsincluding strategy for positioning, development, and growth.They share with you their vision, perspective, andexperience. Your equity partner sees the value in yourbusiness and its potential, and gives you a fair assessment,and like the other board members will look at the bigpicture and thinking outside the box. You see the road aheadclearly. You know where you are going and how far and howfast you should get there. Motivation and clear objectivesare good drivers.
7- Monetization of your business
You used to run the business, and whenever you neededloans or funds, you would have to offer personal guaranteesor start a painful seduction dance to prove the value ofyour business. Once an equity fund has invested in yourbusiness, it is an easier sell to convince the market atlarge of the starting valuation. More leverage possibilitiesfor the business or for your own shares for a second round.Well done.
8- One Agenda, clear objectives
The equity fund will get on board with the clear objectiveof creating value—aggressively if possible—build anattractive item, sell it out, make profits, and move on. Theequity fund investor does not target to take over yourbusiness or to run it indefinitely. The rules of the gameare clearly defined from the beginning. No change in theagenda along the way. No need to watch your back. You canfocus on your business.
9- Your business is on the map
The equity capital professionals have come on board. Theyhave created value. Time for them to move out. They offertheir shares to potential buyers (insiders or outsiders).The buyers take notice of your value, your competitive edge,and your potential in their own portfolio. You are morevisible. And that is good for business.
10- Bottom line
If every thing goes right on track, if you succeed inattracting a professional equity investor to your business,you will benefit from a very good learning experience, gethelp creating value for your business, and build a moresustainable business. Your future has improved,significantly.
If you feel you can make the cut and get an equityinvestor to take notice, prepare yourself thoroughly.Increasingly, many players are will be looking foropportunities on the Lebanese equity market. They say thereis a lot of untapped value and high potential.
Having said all that, there will be situations where youwill not need equity financing: If your business has verylow risk, is not facing challenges for growth and survivalor if you do not need to sell out for cash, then you do notneed to share your benefits with outsiders with limitedpotential for added value. Just keep on doing what you havebeen doing, the good old-fashioned way.
The Building Block Equity fund