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March 2011
WANTED: SMART OWNERS TO PARTNER WITH SMART CAPITALISTS
By Sam Frowine

     How would you react if a capitalist looked at your business and asked, “Is this a business I want to own?”

     As owners, isn’t that one of our greatest fears around capital—the fear that we’ll lose control of our business? Deep down, don’t we fear that some vulture capitalist is just waiting to tell us what to do and how to do it and, eventually, take away from us this business we’ve raised from a pup?

     What if I suggested a new world view about capital partners? Here’s what I suggest: In some cases, smart capital partners can be the opportunity to capture our place in the emerging economy by making the equity in our companies more valuable.

     Let’s come back to that idea.

     Before we get around to shifting our world view, first let’s admit what equity typically means to us. Equity represents our control of the business. It represents our freedom to make our own decisions, some of which will be good for the business and some of which may not be so good for the business. Equity represents our right to look at the business—and all its assets—as our personal property to use, to re-invest, to drain, to spend, to trade off in exchange for loyalty, even to squander, if that’s our choice.

     And if we share equity, our percentage represents the degree to which we can have our own way and the degree to which we are answerable to others for those choices.

     Don’t be offended. I’m an owner, too, and I live in the trenches with owners every day. I know what’s in our hearts and I’m in no position to judge.

     So let’s be clear about what I’m saying: First and foremost, equity equals control. It also represents our freedom from accountability and transparency when it comes to the money of the business.

     In a more concrete sense, equity has always equaled what we see as the real assets of the business—land or buildings or capital equipment, accounts receivable, even. We believe this to be true because these are the very real assets our banks have always named as collateral when they loaned us money. Like the equity in our home, the equity in our business was measurable and hopefully stable and accumulating.

     That was then. This is now.

     Wise capitalists are asking, “Is this a business I want to own?” not because they want to displace us. They are really saying, “Has this owner created equity value? Is this an owner I want to partner with?”

     Most owners grossly underestimate the risk of the penny stock of their closely-held business. Owners have an upside-down concept that says their equity is more secure when they are in control of it. In reality, the presence of a smart capitalist can stabilize the value of that penny stock, creating objective value.

     If you attract the interest of a smart capitalist, consider it a compliment. Smart capitalists are looking for a business asset with the potential to become fundamentally more valuable with the stimulant of capital. They just want to know if you’re the kind of smart owner they want to partner with, the kind that gets the importance of healthy equity and healthy return on the risk of ownership.

Are you that kind of smart owner?

 

Face Your Fears

Behind our drive to succeed as business owners lie three core fears:

• fear of exposure

• fear of humiliation

• fear of loss of control

     The prospect of inviting a capitalist into our game ratchets up all these fears. What if the capitalist spots the inadequacies we work so hard to hide? What will be revealed by the transparency of the capitalization process? What if we fail—that’s going to be a lot more humiliating if it happens in plain view of capitalists (who have clearly never failed themselves; look how much money they have!). And, of course, loss of control is inherent to the process of securing capital.

     Facing these fears brings its own payoff. Face them and they lose power. For some of us, that’s worth as much as the capital infusion. Sometimes we have to give up something to get something more.

 

Dancing with a Capitalist

     Potential capitalists are certainly giving you a long, hard look before committing to invest in your business. You should be taking an equally hard look at prospective capitalists before the music starts.

     Here’s what to look for when you’re courting a smart capitalist (or vice versa):

     • Connections you trust: How did this capitalist come into your life? Who does this capitalist know that you trust? Who is the capitalist accountable to? Who’s around the capitalist? You’re looking for someone of integrity, not just someone with money.

     • Real risk: How did the capitalist make his or her money? Whose money is the capitalist really risking? Is this the capitalist’s money or has the capitalist raised “other people’s money”? A smart capitalist with real skin in the game looks for the highest potential for success, which is what you want, too.

     • Rigorous discovery: You want a capital partner who puts you through a rigorous process of due diligence. This serves as validation and as a reality check for both parties and creates some assurance of stability.

     • Commitment to a blueprint: Everyone should understand revenue goals, cash flow requirements and income streams, as well as the plan for governance and oversight of the investment. Look for a concrete planning process and accountability for execution.

     • More than money: In addition to capital, you should expect insights, wisdom and accountability to create equity value for yourself and strength on your financial picture. Look for a smart capitalist who wants to make an underperforming asset better by applying strategic thinking as well as capital. You will know the smart capitalist by the questions asked in your fist real time together.

     • Exit expectations: Look for a capital partner who expects to exit the partnership when it’s time for the owner to buy him out of his position.

     Content provided by Sam Frowine, founder and owner of The Performance Group, which works with business owners to build the value of their business asset, and Performance Capital Group, a boutique investment bank. For a complimentary copy of Enterprise Capital 2011 about implementing a successful capital strategy, contact him at 704-597-5156 or sam@theperformancegroupusa.com.

 

Founder, owner and President of The Performance Group, Ltd.
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