Attracting the right capital

Last month we discussed the difference between equity and debt funding.

Equity matches the long term and/or medium term journey of the business. Equity finance will receive a dividend when the business is only successful and ordinarily be repaid on the sale.

Debt is supplied over a period or agreed term and is generally repayable through the trading results of the business whether successful or not or through a programme of refinancing.

On sale all finance will be repaid as the new owners take over.

The sale can be via a trade or private equity business and is designed to put new fresh capital into the business to help it develop and grow in to new products or markets.

This new round of finance, not necessarily the second round, but probably once the business has matured will also in most instances instal new management. The founding entrepreneur will leave.

The original business created by the entrepreneur will clearly dramatically change through this process.

The warning signs are that the entrepreneur must attract the right capital at the outset in order that he/she is not forced to sell under duress not achieving the right price and not selling to the wrong people. Care is required.