Private equity or flotation to provide exit for angel investors?
I am planning on injecting some investment into my £7m retail business in order to continue expansion, possibly through a VC or a float. Currently, I have two private backers who own 20% of the business but who are willing to exit for the right price. What are the pros and cons of private equity and markets such as AIM? Also, how do I best maintain a grip on my company as investors and board members both come and go?
A. Andy Clayton of Secantor writes:
To grow securely you may need more skills and expertise on your team as well as more funds. The costs will be expensive, and you can expect a major management distraction for three to nine months. You must have a clear strategy for using the funds, and show that you have evaluated the risks and understand the pressures. If shareholders are exiting you must be able to explain why. But with a good cash flow record and robust profits projection, you stand a good chance of raising the money. Venture capital is likely to be highly geared to mezzanine debt and you will need to service repayments of capital and interest. Demanding criteria will be imposed and under-performance may result in a ratcheting down of your equity stake. Anticipate some restrictions management of the business and expect to provide regular management information. You will also need to get approval before taking key financial or strategic decisions. A flotation will give you more control but greater public scrutiny. Your business is rather small for AIM but the PLUS market might be a possibility. You might consider short-term funding before seeking flotation at a higher value later. AIM/ PLUS rules are more flexible than a full listing, but brokers will be mindful of institutional investors’ preferred standards of corporate governance. They are likely to expect the appointment of non-executive directors and want to see an experienced finance director in place during and after the fl oat. Remember, fundraising is time-consuming and often frustrating. Make one person responsible for the entire process (usually the finance director). If he or she doesn’t have prior experience, your corporate finance adviser is a key appointment – choose one who understands your market and take references.