While some companies are privately owned, others let investors buy stock in their business, literally allowing outsiders to own a ‘share’ of the outfit. That means that third parties can benefit from the success of a business, but they can also find themselves making a loss if things go wrong.
If you own your own business, there might come a time when you find yourself considering whether it would be a good idea to open it up to others by selling shares. There can be many reasons for thinking about doing so, along with both advantages and disadvantages. So how can you decide whether or not it’s a good idea?
As with many things in life, timing is everything. The majority of business decisions are no different and getting the schedule just right can determine whether those plans turn out to be the right or wrong ones. Making a move at a particular moment can mean grabbing an opportunity or missing it. Choosing whether or not to invite investors into taking a stake in your company revolves around doing so when the conditions are optimal.
For instance, you might need an injection of capital and have worked out that taking on a loan might prove too expensive in the long run if you agree on a deal at current interest rates. Likewise, having the means to expand to make the most of advantageous trading conditions could mean that you need to take advice from someone who wants to become involved in your business (by owning a share of it) on board.
Someone who knows all about choosing the right moment is Alex Friedman, co-founder of Jackson Hole Economics and former CEO of GAM Investments. With experience gained in roles such as Chief Investment Officer of UBS and his position as Chief Financial Officer of the Bill & Melinda Gates Foundation, Friedman’s recent reports on the movements of US equities since the coronavirus pandemic began have seen his reputation go from strength to strength.
Selling shares in your business doesn’t have to mean giving up control. For one thing, you can make sure that you always have a controlling interest in terms of the number of total shares available and the way they are distributed. At its simplest, this means that you would always make sure to own at least 51% of the shares in your company.
However, anyone willing to hand over their own money in return for a potential share in the future profits your company will make will need to feel their investment is in safe hands. This means that levels of communication that you might not normally be used to will become the new normal and that you will ultimately have to consider third-party interests when it comes to making further decisions about the running of your business.
Selling shares in a small business isn’t as simple as ‘floating’ on a stock exchange because a public listing is the most expensive option and includes a great deal of legal and auditing preparation.
Selling shares privately might not have to involve filing with the SEC, and that is why finding the right Angel investors and other individuals can be a much more straightforward option. Even venture capitalists and other businesses operating in the same field might be interested in ‘buying into’ what you have to offer.
Depending on the type of investor you are looking for, some will only be willing to inject cash into your business if the plan is for rapid expansion with a view to selling on at a fixed later date. That is particularly common in the digital world, where a new platform or app might need seed money to create a ‘proof of concept’ level of success, with the ultimate aim being to sell on to a much larger established company. Many large tech firms now use this ‘buyout’ approach alongside their in-house research and development projects.
If you aim to build up your own business to become a standalone giant in its field, you will need to choose who you sell stock to very carefully, and you will have to have a very convincing business plan to back it all up.
Selling shares in your business needs to be the right path to take at the right point in your timeline. Other options, such as loans, using reserve funds, or even investing more of your own money might be riskier but might also be the best way of moving forward. Only you can decide.