When you’re trying to keep a business afloat, the single most important asset that you can have is flexibility. The simplest way to have flexibility is to have easy access to capital, but for small businesses with a relatively low turnover, this can be quite a challenge. When income falls below expectations, or sudden rate rises or regulatory changes push up basic expenditure, it can be all too easy to get into trouble. That’s when help from investors can make all the difference.
What can an investor gain from increasing a stake?
There are always risks involved in investment, so from the investor’s point of view, putting money into a struggling business might not seem like a good idea – it could be a case of throwing good money after bad. On the other hand, if the general management of the business is good – or if its managers are willing to give the investor a degree of direct control at least until the crisis is over – then an injection of cash might be all that’s needed to save it from being sunk by bad luck. In this situation, investing more can be a means of salvaging the initial investment, which would be lost if the company went under.
Are new investors a better idea?
From a business owner’s point of view, while that extra cash might be essential, existing investors might not be the best people to get it from. The plus side of turning to someone already familiar with the firm is that there’s an existing relationship with some degree of established trust, and it’s usually easier to explain what has gone wrong and demonstrate the ability of the business team to set things back on course. On the other hand, bringing in new investors means that stakes in the business are more widely spread, so there’s less risk of cohesive shareholder opposition to management decisions. Furthermore, in some cases, a new investor might bring particular expertise or connections that are useful to putting the business on a stronger footing.
Attracting new investors
Seeking new investors takes effort because you’ll need to do a lot of research to make sure that you’ve identified the right people, as well as polishing up your business plan and selling it to them. This is possible, though, even in times of cash flow crisis, as Yusuf Alireza demonstrated when he successfully got together the investors who bailed out the struggling Noble Group. The former Goldman Sachs executive worked hard to change perceptions of the company, understanding that the real value of a company to investors is based on confidence – theirs and, in turn, that of the market.
The right combination of investor and company can create a win-win situation for all involved. If they’re diligently managed by people who know what they’re doing, most businesses are quite capable of turning their fortunes around. They just need the money to get themselves through the inevitable rough patches created by external circumstances – then they can go on to produce a healthy level of profit for their owners and investors.