The role of the board in negotiating a minority investment.
By Paul L. Schaye
There are two extremes with outside money: Either it’s from a bank that has no involvement in business operations, or the cash comes from a majority investor or buyout that takes away control from the current ownership.
However, there is a powerful middle ground boards can consider: minority investors. This option can allow a company to maintain control while securing the cash to move the company forward.
Last year Forbes Inc. became its own business news story when, for the first time in its 90-year privately owned history, the company sold a significant stake to an outside private equity investor. As Steve Forbes said, the partnership gives us a chance to move faster than we would have been able to do otherwise, both in the United States and overseas.
What Drives the Decision
When the board is given the option to consider outside funding from a minority investor, five key factors can drive the decision:
Questions to the investor
When the board conducts an evaluation, here are some key questions the prospective minority investor must answer:
Questions about the investor
The board should also ask the following questions when checking the minority investor’s references:
A question for the board
Finally, the board must ask itself, are we ready to have someone else at the table with money at risk who will add another layer of accountability? The Answer will help determine whether the minority Investor is an asset or a liability.
In some cases, if management is pushing for a Minority investor transaction, what management sees As a benefit to the company could be seen as a Detriment by the board.
For example, if a minority investor is going to put in $150 million, that money could be as preferred equity or subordinate equity. While it might help grow the company in the near future, it could push back the shareholders in the capital structure.
All about the relationship
Ultimately, board members must decide what is in the long-term interest of the company and the Shareholders. It could be a matter of opinion how this new capital will be spent. For example, the Management team might want to use the money to pay down debt, while the shareholders would rather pay out dividends.
The good news is that today investors have a lot Of capital and are seeking out companies. Many are willing to take a smaller portion of businesses they participate in. Boards do not have to be as concerned about whether or not the money is out There; rather, the board can focus on whether the Potential transaction will lead to a mutually beneficial relationship.