What options to I have to allow my angel investor to realise an exit?
My original investor wants to sell his 25% stake in the business, but I am not in a position to buy it. He also wants to sell to an institutional buyer, although I am not sure if this is a good idea for the company. He is keen to move on and I would like to allow him to realise his investment, but I am unsure how to handle matters. What are my options?
A. Alysoun Stewart writes:
There are a number of issues here: first, addressing the price expectations of your current investor; second, the potential loss of knowledge from a founding stakeholder if he has played any active role in the business; third, the need to raise capital or find a new investor.
The starting point is to agree the price, which may require a company valuation by an independent expert. This valuation will largely drive the manner in which the purchase of the shares is funded.
The most obvious source of funding is the company’s own balance sheet rather than another, external equity, investor. If there are sufficient reserves available to permit the shares to be bought back by the company – ie you have assets over which a bank is able to take the necessary security and a cash-positive business – then bank debt is the simplest route. This can take many forms, but typically could involve:
… a term loan secured on the assets and future cashfl ows of the business
… a revolver facility, blending term loan and overdraft facility, and charging interest on total net debt
… asset financing, where the debt is secured on specific assets.
Clearly, a bank will play less of an active role in the business than an equity investor, but it will enable you to increase your own stake in the business to 100%.
If you specifically wish to replace the outgoing equity with new equity involvement, you are looking either at the private equity (venture capital) community or a business angel. Bear in mind that an institutional investor will seek to maximise their return, so will have relatively high growth expectations over a relatively short period (normally three to five years) to achieve a profitable exit. You would need to consider carefully whether this strategy fits with your aspirations and vision.
A business angel is likely to adopt a softer approach, but is probably the hardest option because fi nding suitable candidates with sufficient capital, relevant experience and cultural fi t is not easy.
In assessing the most suitable route, the following questions will be relevant:
… how much say in the daily running will an investor/funder require?
… will they require a seat on the board?
… what fees are associated with their involvement?
… what interest rates will be applied?
… what are the management reporting requirements?
… what exit strategy will be set?
As you have recognised, this decision will shape the future, so it is important to get it right for you and the business.
Alysoun Stewart is director of commercial and strategic services at Grant Thornton, the leading global accounting, tax and business advisory firm. www.grant-thornton.co.uk