What you should know about equity investment

Equity investment is the result of putting money into a small business that results in some percentage of ownership. If you are looking for an active investment then equity investment is a good way, of getting involved into the business decision making process.This is because as an owner, the equity investor has certain control over both operational and strategic issues, concerning the business, they have invested in. For most equity investor's they possess a unique interest in and aspiration for certain business sectors and industries. This often influences his or her equity investment decisions, as to what business they select to invest in. It is important to note that the synergy and chemistry, between the management of the business/existing owner(s), and the equity investor(s), is very important to the success of the joint venture.

Before entering equity investment you need to determine if it is right for you. Equity investment means having a business partner. You will need to clearly determine if you have enough business passion, and are ready to get deeply involved in business operations. If you are not you may be better off by lending money, and then staying on the side line. You will also want to recognize if you have good inter-personal communication skills to interact well with management of the business. And most of all you need to know if you are prepared to risk losing your investment capital if the business fails.

There are different types of equity investment. These are-

• Venture capital investment-These are individuals who invest in businesses at early stages, when the success or failure of a business, is still highly unknown. Because of this venture capital investment, carries higher risks, but also potentially bigger rewards.


• Private equity investment-This is done by firms who invest in publicly listed companies, and then take them private. This is most often done out of the public eye and private equity firms seek to do what they do best, by improving management ,and business efficiencies, in order to make a company more profitable.


• Leveraged buyout-This is the most rare way to become an equity investor, without really investing much of your own equity capital. This happens when a business' existing owners wish for a way out but can't find an investor, with cash to buy the business. Instead they locate someone called financial sponsor, (normally a private equity firm), but without committing itself to investing its own capital. The next step is that a business loan (known as a Leveraged Buyout Out loan), is arranged with the owners' company as the borrower, and the cash raised buys out the existing owners. This leaves the financial sponsor to be the care taker of the company. It should be noted that the new debt has recourse only on the company, not on the private equity firm. This transaction makes the equity firm, (the financial sponsor), now the sole "owner" of the company.

There are certain advantages and disadvantages to taking an equity investment position. Some of these are-

• As an equity investor, you stand to gain big if the business you invested in prospers.


• You can learn first-hand and gain significant knowledge about running a business


• You may have potential conflicts with management and existing owners, over business decisions.


• You must understand that investment capital is potentially a risk capital.


• If after assessing the risks, you determine that equity investing is for you, there are certain things you can do to successfully enhance your position. This include-


• Be sure to show business owners that you as an investor have the same business passions as they do.


• Work to assure both management and owners, that you'll contribute in a good way and leave them enough autonomy.


• Convince the business that accepting an equity investment is better than looking for a debt financing, given that they may be short on cash flows, from operations at this point of their business.