As a small business, one of the most important stages in your growth and development will most likely involve seeking out investment opportunities. However, finding the best investor can be a tricky process – covering everything from deciding on the best investment method for your structure, to determining an accurate business valuation.
Here, we explore what makes a good buyer, and outlines strategies for finding the right kind of investor for your business.
What Makes a Good Investor?
It is important to consider a number of criteria when drawing up your list of potential investors.
The first of these is whether the investment will help with your economies of scale – the reduction of your average and marginal costs caused by scaling up the size of your business. Not all businesses stand to gain the same advantages here – those with more variable costs will find it harder to scale up through investment.
Related to this is the potential for economies of scope, by which a business lowers its average total cost of production by producing a greater diversity of goods. Ideally, an investment should allow you to do this in such a way that any new products have the potential for cross-selling to existing customers.
You should also consider the potential for synergies between the investor and your own company. This could be through greater access to technology and staff that will help with improving the overall function and efficiency of your business, or it could involve merging two different stage of production together through vertical integration.
Finding the Right Kind of Investor
Not every investment opportunity will be the right fit for your business, and finding the most suitable one will likely involve deciding between two distinct types of investor:
Financial Investors– this type of investor, usually an investment company, is primarily looking for a standalone opportunity that offers a good return. As such, they will be likely to offer a lower price, although they will usually be able to provide you with a great deal of growth and business advice. Often, their strategy will be to hold on to your business for a significant length of time before they consider selling. During this time, your management structure is likely to stay largely the same.
Strategic Investors– this investor will be more likely to focus on the potential for synergy, and tying in their business with yours. They may well be from the same industry as you, which can reduce the complexity of the due diligence phase significantly, although it may mean that they have a less experienced M&A team. It is common for a strategic investor to acquire a business indefinitely, and work to integrate its structures into its own.
Understanding the investment avenue that will best benefit your business is crucial to your future success. You should also ensure that you go into the funding process armed with as much knowledge and information as possible – the financial services platform Pomanda offers a free business valuation calculator, and you can find out more about the sale process with their guide to selling your SME. Finding the right investor for any business, but especially for an SME, is about carefully assessing how it will enable you to maximise your business’spotential, and reach a deal that is mutually beneficial.