A large corporation wants the entire minority stake in our business

Dear Aunty B,

We have just started a capital raising and we have had a large corporation suggest they take the entire minority stake.

It is very tempting as it means we don’t have to spend the year pitching to investors. They are a very large company in our industry and they have also offered to take a position on our board, which could assist greatly with networks and introductions to channels.

It would also be fantastic for our profile to have such a high profile investor. We are pinching ourselves because surely it can’t be as good as it sounds and we thought we would ask you.

Can’t believe our luck,
Sydney

Dear Can’t believe our luck,

Look, you are sweet. Really! It is lovely to see your excitement and far be it for me to put a hole in your balloon because maybe it is as good as it looks. But you did ask me for the negatives so you can make a balanced decision.

So your first step is to understand why the large corporation wants to invest in you. There can be lots of reasons. You may have an innovation or a leading position in a new market that they want to know more about.

They may want a stake in your key people. They may want to simply invest in your business to seek higher returns on their money than they would get in a bank. Or they can be looking for increased market share. Whatever it is you need to clearly understand that, as it will influence their future behaviour. And why should their future behaviour bother you?

Well, a large company with a minority stake can be great, but it can also be a millstone around your neck. The main reason is they often come with conditions. First they, or their nominated person, gets a seat on the board. Fine and dandy if their view of the business fits yours. But what if it doesn’t?

The new board director might decide that a dividend should be paid that year when you want to reinvest for growth. Or that the executive team isn’t doing a great job and they have just the people that you should interview. Or that the company should grow much faster/slower. Or that taking in more funds isn’t a good idea… in other words you trade some flexibility and control for their stake.

The large company may also then have a right of first refusal if you want to sell down further. And their involvement could frighten off other strategic investors who may also be reluctant to put in a competitive bid for the business if there was an outright sale.

And of course on SmartCompany you will find stories of companies whose minority investors have made their life hell by changing their minds at some crucial point and not putting in the funds/services they promised and leaving the company high and dry.

So there is a lot to weigh up. While the idea of a year of investor presentations looks painful and distracting, it can be the better solution if you are not very clear and confident that the large partner is the right partner for you.

Be smart,
Your Aunty B

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