Why and how should you open up your capital to a financier ?

If one saying tells us that a small home is better than a large one at someone else's, another asserts that unity is strength.

It appears that in the realm of entrepreneurship and finance, the topic of the necessity, opportunity, or obligation to « bring a financier into the capital »  also encounters these two seemingly contradictory approaches.

Let's try to summarize and synthesize the factors that lead a shareholder, often a majority shareholder and a leader, to choose (or not) to bring in an investor described as a "financier" into the capital of "its" SME.

Through a few simple questions, we will try to understand, even if we already have a sense that it all comes down to will, pragmatism, and compromise.

Bringing in a financier into the capital : an eminently strategic context

Indeed, the participation of a financier is a matter of strategic consideration because the operation itself modifies, and significantly, the essential parameters of the company.

  • First, the ownership structure of its current or future capital is affected: it often involves dilution and in any case the entry of a new shareholder.
  • Consequently, governance and the obligation to share both information and value lead to substantial changes in the reasoning and behavior of management teams and shareholders.

Several scenarios call for studying the entry of financiers :

  • The identification of a need for financing related to the development phase that requires an injection of fresh equity capital : this is the typical scenario that encourages seeking financial investors.
  • A context of acquisition, with a primary focus on LBO (Leveraged Buy Out), whether for an individual or a legal entity, and for the external growth for the SME or the group, which once again involves mobilizing long-term non-amortizable resources in the short term.
  • The desire of shareholders to realize assets: "the famous" cash-out or even the OBO (Owner Buy Out).
  • The safeguarding of the company, a more challenging subject, in a context of restructuring that also advocates for an injection of new equity capital followed by a typically majority stake.
  • ...But also, the desire to "exit" or even "remove" the/a shareholder, an operation which, by exception, does not directly benefit from the financial windfall of the newcomer.

The aim is to diversify one's ownership and thus avoid being diluted by a single player. By favoring common interests other than those of an industrial, for example, the founder will often find a more suitable governance structure.

What about the consequences and the broader usefulness of such an operation ? What are the points of caution to consider ?

The advantages of bringing in a financier are numerous.

  • The consequence of its participation is first and foremost to provide financing in a strategic context, as we mentioned, but it is not the only motivation, even if the weighting of choices tends toward the first.
    The interest in strengthening equity through a third party is first and foremost a financing issue. So, "cash, cash, and more cash"... whether it's for the company itself (capital increase or, more generally, an increase in equity) or for the shareholder (assumption of selling shares), the primary motivation is to generate resources.
  • The network of relationships brought in and the communication-marketing aspect are probably less essential motivations, although one motivation does not exclude the other.
  • The structuring aspect of the investor's presence is reassuring and strengthens the organization and credibility vis-à-vis third parties or partners, whether they are bankers, clients, or suppliers, for example.
  • Internally, the financier will be involved in team retention efforts and will facilitate the attraction of new talents.

Points to consider when opening up your capital to a financier

The operation involves a thorough understanding of potential drawbacks and consequences of such an operation and to inquire about the precautions to be taken. The topics are numerous, and the stakes are high on important aspects such as :

  • The sharing of governance and power;
  • The sharing of information : it sometimes involves organizational changes;
  • The sharing of profits and value;
  • The exit of the financial partner (which should be discussed early on);
  • The subject of negotiating the entry terms (what percentage of ownership for a given amount) naturally raises the issue of valuing the company, and the structure itself requires confronting differing approaches.

Finally, and to be concrete, the arrival of the financier, precisely because he is not the best expert of the company's business, will require the entrepreneur to accept the constraints of transparent communication among shareholders and to benefit from it for himself and his internal organization. As we have understood, this involves reporting, often negatively anticipated, but which greatly contributes to the mutual understanding of the two types of shareholders.

Moreover, once the technical and administrative issues are resolved, it becomes apparent that being accountable to others also leads to a better understanding of the organization that one must "manage". The financier, seeking analytical and reflective elements (rather than control), will also oblige leaders to provide "good" reasoned answers, engaging in recurring questioning. And not only on financial matters: the new non-specialist shareholder will "love," contrary to what one might think, to inquire about economic issues (products, markets, innovation, competition...), organization, and HR in particular, as he understands well that the key functions of the company are not primarily, except in exceptional cases, those of finance.

A financial investor in the capital : how ? What is the process ?

Indeed, after the thinking phase, the decision and action phase naturally follows, where everyone becomes aware of the complexity of the operation.

  • First, the process involves negotiations on various aspects such as dilution (and thus, beforehand, work on the valuation of the company), entry and exit terms, conversion terms, and even management packages, etc.
  • Then, the steps to "close the deal" involve navigating the intricacies of exchanges and analysis of the offers received, followed by the implementation of the shareholders' agreement and the closing arrangements.

...and MBA Capital in all of this ?

As we have seen, the choice is of a structural nature and commits the parties involved over a long period.

The thought process in early preparation is essential and should be supported by a specialized team.

Necessity being the law, it is important to surround oneself with the right team and make decisions based on well-informed reflections and shared analyses.

Then naturally comes the necessary stage of searching for and choosing the financier who is likely – a challenge in itself – to "tick all the right boxes." This phase is preceded by the drafting of a memorandum containing a business plan that will be sent to a panel of stakeholders whose corporate purpose and investment strategy are compatible with the size, industry, and the operation itself.

Other important steps include meetings that can reinforce mutual interest in product-market aspects as well as the willingness to work together on this stage necessary to complete the project.

MBA Capital's involvement, in synergy with the company's advisors and shareholders, will occur at every stage of the process, whether it's the initial planning, investor search, or managing the key stages of the process. This includes, of course, analyzing financial and legal proposals right up to the closing itself.

To put in a nutshell, there are multiple ways to succeed and achieve your objectives, especially when it comes to business development. Opening up your capital to financiers is one approach, and it may even become an objective in itself.

It's a means because the incoming financier brings long-term financing, an external perspective, and their network. This naturally adds strength and confidence. An outsider is generally assumed to have the ability and power to provide funding and can also persuade the company's bankers to say "yes" (to borrow an old slogan from one of them).

Internally, the financier remains a structuring actor who requires communication and sometimes accountability. They are often an actor capable of retaining and attracting new talents because they ensure the sustainability and innovation in the company's development and value creation strategy as shareholders.

Entering the capital by the financier is not an obligation, and unless in exceptional cases, not a necessary harm; it is a means and an opportunity.

Capable of helping to achieve stages of development and innovation within a relatively short timeframe, the financier ultimately becomes an economic actor and, as a partner, contributes to value creation.

Stéphane MICHEL

Updated on June 9, 2023


Do you have a question?

Our teams are present to answer you

Tache d'or
Tache d'or

Would you like to receive our newsletter?

To receive the latest information from MBA Capital, subscribe to the newsletter!

Votre abonnement n'a pas pu être sauvegardé. Veuillez réessayer.
Votre abonnement a été couronné de succès.