If you’re looking to grow your business, external finance could provide the catalyst your business needs because quite often, turning your home-grown idea into a value-driven entity requires funding.
But selling a stake in a business that you’ve built up can be an emotional, stressful and challenging thing to do. So how do you know if you’re ready?
Finding the right finance can be a tough process. Your business may be critiqued and analysed, and your resources could be stretched while you’re fundraising.
It can be a long slog and selling a stake in your business, which may also involve stripping back control, could be a daunting step to take.
But the rewards could be significant for your business. If you’re wondering whether you’re ready for external finance, you’ll need to ask yourself some difficult questions, like the ones we’ve set out below:
Do you know which types of finance may be right for you?
Knowing the funding options available and which finance option you should go for will help you prepare for finance.
Types of equity finance may include Angel Investment, Equity Crowdfunding, Private Equity and Venture Capital. Each brings different benefits and different risks, and each requires different levels of commitment from both you and your potential investor. (Understand finance options here).
For Equity Crowdfunding, for example, you may need to be prepared to share certain information about your business publicly. With Angel Investment, you may need to be able to work closely with an individual on a growth plan.
Each has their own unique advantages and disadvantages, so it’s important to get a good understanding of your options to see which appeals to you, even if just in theory, when you’re weighing up equity investment.
Do you have a clear plan?
Sourcing finance could place a heavy burden on your resources – often on finances and your time – so you need to be prepared.
Have a clear picture of your business’s finances and arm yourself with a detailed understanding of how your business might grow and where the value lies.
Be honest with yourself about exactly how much equity you want to sell. Many advisers suggest that if you’re just starting out, you should be thinking about selling somewhere between 10-20% of equity however this is personal to you and your business, and ultimately this will fall somewhere in between what you’re comfortable with and what your investor requires to make their investment worthwhile.
But knowing the amount of finance you need may also help you find the right investor further down the line and help explain how they could get a return on their investment.
Think about your timeline. How much time do you have to find finance? Set yourself a deadline so that you’re less likely to waste valuable time.
Are you ready for the emotional challenge?
The search for finance could not only be a challenge on resources, it may also be emotionally intense and you should be prepared to deal with setbacks.
Finding finance can involve lots of meetings and lots of pitches. Your business may be questioned and critiqued, and you may be rejected at some point in your journey to investment.
Added to that, the process can often be in the public eye, and a no from one investor can lead to a domino effect.
You may need to be mentally prepared for the journey. Ask yourself if you’re prepared to deal with these obstacles and keep your long-term goals in mind.
Are you prepared to dilute control of your business?
The funding process may only part of the story. Once you’ve secured investment you need to be ready for the possibility of sharing responsibility for your business – which might be a first for you.
Diluting control of your business can be a scary prospect. Your opinion may no longer be final and you need to be comfortable with that because relationships with investors are often long-standing - you will need to work together to foster growth.
For example, Angel Investors can often take a hands-on approach to businesses they invest in.
You will need to be prepared to spend time i with investors on a day-to-day basis, as they may be able to help you overcome challenges and achieve the growth you’re driving towards.
Do you have what it takes if things really take off?
You’ve been through the tough process, you’ve secured investment and you’re watching your business grow. But are you really ready for the boom?
Your investor(s) will be looking for returns, so you may need to have difficult business conversations and your ambition must continue to motivate your investor so that they in turn are motivated to continue to help your business grow.
Another point to consider is that a growing business may need to change. That as a business owner, moving from a smaller business and a culture you’ve created to something bigger or different can be difficult. You should consider whether you’re happy for that culture to change.
Selling a stake in your business usually requires commitment and preparation. But the results can be worth it. Are you ready?