Which offer should you take?

Which offer should you take in the business 

By John Paul - weekly mail director @ smallstarter business 

After unsuccessful attempts to raise capital from family, friends and a couple of outside investors, he decided to go it alone with his own funds.

A few years after, he’s had major success with his young business and some major media exposure.

Now, he’s getting offers from friends, family, his bank, and a couple of outside investors who are keen to be part of his business.

So, he has a new problem: which offer should he take?

This is a tricky problem to have.

Very few things in life compare to the feeling of being courted by different investors who are eager, and sometimes begging, to give you their money.

If you handle the situation poorly, your business could suffer major consequences that you may regret forever.

But if you handle it right, you could cut a really good deal for yourself.

Since every business and situation is different, here are the 4 main things you should consider before you shake hands on an offer.

Substance

At the very minimum, anyone who comes on board your business should bring something to the table.

They could bring capital, operational support, access to useful contacts, technical expertise, business experience, etc.

Substance is important in business relationships. Else, one party is going to feel used down the road.

This is particularly important because of the sentiments that can come especially with family and friends.

Your friend may be great as a friend but terrible as an investor or business partner.

The same applies to members of your immediate and extended family.

Also, pay more attention to what they can actually do – and not what they say they can do.

Focus on substance.

Cost

This particularly applies to investors or business partners who want to contribute capital to your business.

How much interest do they want on the loan?

How much equity do they want in exchange for their investment?

Remember, since you have several offers, you have the high ground – you have the bargaining advantage.

It’s important that you consider all the offers and use that advantage to get the investment at a reasonable cost.

However, always remember that the investor with the lowest cost may not necessarily be the best investor for you.

Therefore, make sure you consider cost as just one piece of your selection criteria.

Timeline

When does the investor expect to get their money back? This includes returns, dividends, exits, interest payments, or the principal itself.

If yours is a startup or young business, you need patient capital.

Therefore, the longer you can keep the funds in your business, the better.

If you’re getting a loan, ask for a moratorium – a delay or waiting period before you start to pay back the loan.

Better still, you can pay back the loan as a lump sum at a convenient time in the future, with all the accumulated interest.

If you’re getting equity, it’s important to clarify that profits from the business would be reinvested into the business to grow it.

Again, it all depends on your business. Every situation is different.

Just make sure you cut a deal with a convenient timeline.

Control

Accepting investors’ money may affect your sole power to make decisions for the business.

However, this depends on how much equity you give away in exchange for capital.

Some investors want to be passive – they’re happy to have you in charge as long as their investment keeps doing well.

Some other investors want to be involved in the business. They want to be part of major decisions and will need constant updates.

There are also those investors who will act like you work for them.

The kind of personalities you bring on board will play a big part in the kind of disagreements and conflicts you’re going to have, and how well you can resolve them.