Expansion capital

Expansion capital can allow your business to:

• create new products
• enter new markets
• acquire other businesses
• invest in new systems and equipment

The aim is to help your business grow as much as possible.

An expansion capital firm invests large sums of money into your business in return for an equity stake (and usually a seat on your board). This allows you to grow faster with the benefit of the investors' strategic help and advice.

Expansion capital is typically suited to businesses that want to accelerate their growth without giving up control. Investors typically plan for a three-year to five-year holding period, but they can invest for longer if it will help your business grow.

You can appoint an external adviser to support you through the process, but not everyone chooses to do so.

Retain control

You can access large sums of money and the investor will receive a share of your business (usually between 10% and 40%).

Help and advice

The investor will take a seat on your board, so you can expect direction and guidance from a business expert.

Repeat funding

Follow-on investments are common in the expansion capital world and are part of an ongoing dialogue with your investor.

Scale that suits you

You and the investors can set goals and strategies to grow at a pace that suits the business.

Charges and fees

There may be legal costs involved during the due diligence process. Any advisers you hire may also expect a retainer.

Uncertain growth

There is no guarantee that investment will result in growth and success for your business.

Less control

While you won't give up complete control, your control over the business will be diluted.

About your business

• Business stage:  Post-revenue, profitable and growing
• Annual turnover:  £5m–£100m
• Growth rate:  Between 5%–30%
• Sectors:  All
• Regions:  All

About the finance

• Purpose of finance:  Create new products, enter new markets, acquire other businesses or invest in new systems and equipment to drive growth
• Amount available:  £2m–£20m (depending on the percentage of the shareholding)
• Duration of finance:  3–5 years
• Cost of finance:  Due diligence and legal fees will apply. If you appoint an adviser, they will expect a retainer
• Time it can take to get finance:  At least 3 months but can be up to a year

Ask an expert: Alistair Brew, investor at BGF

Growth potential

Expansion capital investors look for companies with a scalable product or service. Your business needs to have a plan in place, as well as the ambition to achieve it.

Alignment of interests

The business, your existing stakeholders and the investors all need to be on the same page.

Vision and self-awareness

Investors want to see both the big picture and the granular details. An overarching vision. You, as the founder of the business, need to understand what your value drivers and operational levers are.

Cost

Due diligence and legal fees may apply, and advisers often expect a retainer as a sign of commitment.

Time

Preparing and applying for funding can be time-consuming.

Board seats

A fund will usually put one or more of the investment team on your company’s board. At the same time, you may also appoint an independent non-executive director. You need to make sure you can all work together.

Control

If your company doesn't meet its targets, some fund investors may take control of future decision-making.

Dilution

After the expansion capital fund has invested in your business, you and any other initial shareholders are likely to own a smaller percentage of the company.

Wide-ranging change

You need to be open to making strategic, operational and management-related changes to your business.

This infographicLink opens in a new window shows you the typical journey to securing expansion capital.

To learn what steps you need to take to ready your business for expansion capital, use this checklist.