Getting the fit right: Are all investors created equal?

Seeking investment capital to help grow your business can be an exciting time. If you have taken the right steps in preparing your business for investment, you may find yourself with a number of suitors looking to assist you in your growth journey.

In our position as advisors to growing businesses, we have the privilege of assisting existing owners and investors partner with the aim of improving and growing Australian businesses. We see many great partnerships which lead to strong, viable and profitable businesses. From time to time we see where it doesn’t work.

Business failure results from a number of factors. Many may result from external influences. Frequently however, failures arise because the business has taken on capital from an investor who is not the right match. Having the wrong investment partner in your business can, at best, be a growth stopper. At worst, it can be a destroyer of value.

For food and agribusinesses, the consequences of a failed investment can be crippling. They are often capital intensive, operate in highly competitive markets and suffer from a shortage of available (non-debt) capital. It can be difficult to recover from a wrong investment partnership and difficult to replace capital.

Focussing investment negotiations on price and risk protection are important. However in our experience, the best protection is to find an investor who has the best alignment to your business and provides a value proposition beyond a cash investment.

Here are some key takeaways we have learned from working with successful (and unsuccessful) partnerships.

Align your expectations

Before taking on investment capital, ask yourself: Does the investor’s expectations for the business align with yours?

Do you have the same growth targets? Are your strategies as to the rate, source and short term impact of growth aligned? Are your income distribution expectations aligned?

Do you both understand your future capital (or debt) funding requirements and the source of those funds?

A misalignment between owners (and management) on short or long term business plans can be a significant impediment to execution of a business’s growth strategy.

Seek more than just capital

The most beneficial investment is the one that brings opportunities to your business beyond an initial capital injection. In reviewing an investment proposal, consider what else the investor can bring to the table.

In food and agribusinesses for example, it may be access to broader distribution channels, new markets or new technologies.

Does the investor have industry knowledge or particular management capabilities that can fill a gap in expertise in your business?

Are you strategically aligned?

Many partnerships fail to reach their full potential when one partner begins to lose interest in the business or prioritises its other business interests and opportunities. Research and ask questions about your potential investment partner to determine whether they will keep driving your business.

Consider whether you are a material and strategically important investment to them.

Do they have investments in their portfolio which are or may be in competition to you? If so, how will you ensure (in a practical manner) that your business will be given the appropriate attention and priorities it deserves?

Are they the right people for you?

In looking at investment opportunities, professional investors critically assess the quality of the management within the business. We hear from many credentialed and experienced investors that they often back people before they back businesses. In the same manner, you need to think of an investor as your business partner. You need to have confidence in their ability to deliver on their part of the bargain and in your combined ability to work together to drive the business.

Do your due diligence.

What is their reputation in your industry?

What are their recent investments? Does your business, and the nature of their investment in your business, suit their investment thesis? How detailed is their knowledge of your industry and markets?

How involved are they in business operations or strategy? What expectations do they have on you as a founder or manager of the business?

If you are considering seeking investment into your business, or are currently evaluating investment opportunities, and would like to discuss some of the key issues that can arise in executing and implementing investment opportunities, please contact Michael Garry.

Michael Garry is a Director at Kain Lawyers. Michael has over a decade of experience specialising in corporate finance, mergers and acquisitions and funds within a range of industries including Food & Agribusiness. 

Kain Lawyers will be holding its inaugural Food & Agribusiness Breakfast in October 2016, focusing on capital investment in food and agribusinesses. If you would like to come along, please contact Dayna Roberts for more information or speak directly to Michael Garry.