It was several decades ago that I learnt from the late Chief Gamaliel Onosode that a one percent stake in an excellent company can be a lot more valuable than one hundred percent stake in a not-so-good company.
Since then, I have been involved in company valuations, investment advisory and mediation etc. In my experience, what has remained so persistent and recurring in the African entrepreneurship landscape is the focus on ownership by entrepreneurs rather than the value of company. Unfortunately, this comes at great costs to the entrepreneurs in the long run and the loss of opportunities. How does it happen?
Typically, the entrepreneur registers a company in which they own one hundred percent alone or with family and friends. They put in a lot of effort over some three to ten years and get to a stage where they are at their wits end. Fortunately, they have at that point proven their concept but lack the additional resources, experience and relationships they need to seize the vast opportunities ahead of them and take their company to the ‘next level’. They talk to friends about their dilemma and get introduced to potential investors who have financial resources as well as business networks and experience to easily help seize those opportunities.
Company valuation then comes in. The investor looks at where the company is before their intervention and where they could easily get it to in a few years’ time. The investors will put in funds, they will make the phone calls, they will help align the strategy of the company etc. Naturally, they will ask for a certain percentage of the company in return for their varied investments. This is where, I have seen, over and over again, discussions often fall through. Unfortunately.
Company valuation, which most investors are generally good at will take into consideration several factors like current financial performance, industry, state and stage of the firm, managerial capacity, market share, market growth rate, state of the company’s balance sheet, etc. There are various methods and models of valuing a company and an entrepreneur must be knowledgeable and dispassionate about them.
Obviously, there are times when the investors often get ‘greedy’. But more often than not the cause of failure of the discussions is that the entrepreneurs are not willing to surrender what they consider a large piece of what ‘they own’. This can be very unrealistic, unhelpful and even dream-killing.
The entrepreneur seeking investment should keep not just keep an eye on their ownership ‘dilution’ but the value the investor or investors can help create. In addition to the financial benefits that the value can bring to the entrepreneur, the right investors can help open doors the entrepreneur might never be able to open on their own. The right investors can also bring in their experience that can help save the business from difficult situations. The right investors can foresee opportunities as well as pitfalls ahead of the entrepreneur.
It is very important for the entrepreneur seeking investors to focus on the value to be created by investors.
If you are an entrepreneur seeking investors, contact the right advisor that can help guide you dispassionately through the process. Ensure that the investment is guided by appropriately enforceable agreements and laws. You must be fully transparent with your potential investors during initial discussions and when they eventually get onboard in your company. Nothing makes business life easy amongst partners like transparency, sincerity and integrity in everything that is said, communicated and done.
When seeking investment, just remember, Chief Onosode is right: A small ownership of a very good business that is doing very well, serving customers and making money for its owners, is better than a wholly owned business that can’t seize business opportunities and isn’t making any money for you.
Feature Photo credit: Rodnae Productions from Pexels