You are owner of a small or medium (Lebanese)enterprise (SME) and you are facing one or more of the following situations:
• What you sell (products or services) have high potential but you have limited resources to grow (both human and financial);
• You are doing fine, but cannot afford the extra efforts needed;
• You have used all your capacity to raise debt and you are looking for alternative financing options;
• You need to open to new distribution channels on the local or regional/international market;
• You need to build a solid infrastructure to maintain and protect your edge;
• You want to grow but are concerned with the risk implications.
Your bank/friends/colleagues have recommended you to bring in investors in order to move forward. But the search is hard. You have checked around and some (distant)connection is offering to bring in investors on board to check out your business:
• But you have either to make the trip to meet with them, probably in the Gulf nowadays (taking expenses from more urgent or relevant items) or stay on hold, waiting for their next visit to Lebanon.
• The timing may be wrong: Lebanese SMEs could be a hard sell with the current market conditions on uncertainty and instability. Buyers assume you are desperate and ask for a bargain. You are tempted to wait.
• But the feeling of urgency is clear: unless you move immediately, you may lose a unique opportunity. The market is 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? You are in for a long ride: long wait, long process, and uncertain outcome.
You are also concerned about loss of control of your business to the new investor, the reporting constraints, and the loss of independence. You are already missing your comfortable space, not having to report to anyone. 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 wish you could have a clearer picture; you wish you could makethe wise choices at low cost; you wish you could be lucky and find the perfect fit.
You have a very heavy responsibility: You want to take your company to the next phase, efficiently and cost effectively. But the tasks ahead are too tedious and tricky.
Private equity funds for development are the pools of capital invested by private equity firms. The fund obtains capital commitments from certain qualified investors such as financial institutions and wealthy individuals to invest a specified amount in the equity of existing businesses.Private equity funds buy in equity against stakes in the business. They check out the business, they evaluate the business during the due diligence exercise, draw a road map on how to invest in the business, set the development objectives, and how to exit within a limited period. Along the way they make sure their investment is well-treated and they get returns that live up to the promises.
The Lebanese market may not be too familiar with equity capital funding for historical and structural reasons. But recently, there have been many success stories and positive experiences of value-creation and mutually beneficial partnerships. Of course, there have also been reports of some 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 ones currently offered on the Lebanese market—are very attractive. You probably have used your limit. And when you take a loan, no one shares the risk with you. You have to pay it all back yourself, whatever the circumstances. You are on your own, dealing with risks of uncertainty, instability, and market downturn. The equity capital investor is aware of all the painful realities of the business life. He has integrated them in his analysis andvaluation. He is sharing the risks with you. And he will be doing his best to minimize and mitigate them. It is good to have a partner.
2- Dealing with the professionals always pays off
You are dealing with professionals all the way: their valuation of your company is rational, documented and integrating all the relevant factors. Negotiations are clear and streamlined. You will not be wasting time and resources dealing with amateurs or unsophisticated potential partners.The professional equity fund managers have very clearly defined rules and organizational structure. You are pretty safe.
3- Clearly defined process
Whenever you reach an agreement, all the important issues will be addressed and clarified. Many scenarios will be anticipated. 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 to continue doing what you are best at doing. When necessary, they are willing to bring in the missing skills for a healthy growth. They would not mind minimizing their intervention. They are not into micro-management (unless necessary). They invest in people and your ability to deliver.
5- Credibility for your business
When the professional equity investors get in, they examine your business. If they like it, they let you know it. They see a potential for growth and value creation. They show 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, ask questions, and articulate all the necessary details including strategy for positioning, development, and growth.They share with you their vision, perspective, and experience. Your equity partner sees the value in your business and its potential, and gives you a fair assessment, and like the other board members will look at the big picture and thinking outside the box. You see the road ahead clearly. You know where you are going and how far and how fast you should get there. Motivation and clear objectives are good drivers.
7- Monetization of your business
You used to run the business, and whenever you needed loans or funds, you would have to offer personal guarantees or start a painful seduction dance to prove the value of your business. Once an equity fund has invested in your business, it is an easier sell to convince the market at large of the starting valuation. More leverage possibilities for 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 objective of creating value—aggressively if possible—build an attractive item, sell it out, make profits, and move on. The equity fund investor does not target to take over your business or to run it indefinitely. The rules of the game are clearly defined from the beginning. No change in the agenda along the way. No need to watch your back. You can focus on your business.
9- Your business is on the map
The equity capital professionals have come on board. They have created value. Time for them to move out. They offer their 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 more visible. And that is good for business.
10- Bottom line
If every thing goes right on track, if you succeed in attracting a professional equity investor to your business, you will benefit from a very good learning experience, get help creating value for your business, and build a more sustainable business. Your future has improved, significantly.
If you feel you can make the cut and get an equity investor to take notice, prepare yourself thoroughly.Increasingly, many players are will be looking for opportunities on the Lebanese equity market. They say there is a lot of untapped value and high potential.
Having said all that, there will be situations where you will not need equity financing: If your business has very low risk, is not facing challenges for growth and survival or if you do not need to sell out for cash, then you do not need to share your benefits with outsiders with limited potential for added value. Just keep on doing what you have been doing, the good old-fashioned way.
Nagy Rizk Fund Manager The Building Block Equity fund [email protected]
