When they start out in business a significant number of entrepreneurs operate on a shoestring and grow their companies slowly over time. Many of the world’s greatest businesses were developed in this way; a combination of hard work and great products or services enabling them to expand organically.
There are many famous examples of this approach; Marriott International being an excellent example. In 1927, John Willard Marriott started selling root beer on a small stall in Washington DC. Five years later he had a small chain of restaurants and in 1957 opened the first motel. By 1985 the business had grown and employed over 150,000 people. Today it is one of the largest hospitality, hotel chains and food services companies in the world.
The biggest period of growth for Marriott came after 1953, which was when it floated on the US stock exchange; this was the first time it received any major investment.
There is no doubt that Marriott had great success by following their path, but it was 26 years of hard graft before the business really started to grow. Marriott was a true entrepreneur with an excellent business mind and he achieved so much, but there is the lingering question, ‘what could he have achieved if he had sought extra investment earlier on?’
The advantages of private equity
Before a company floats on a stock exchange capital is usually raised either by loans or private investments. Private investors become shareholders in the business; they take a dividend payment if the company makes a profit and if the shares float on the stock exchange they stand to make large returns on their investment.
Unlike a bank loan, private equity investors do not expect to be paid back; if the business fails, they lose their investment. This is the biggest advantage to a business owner because it reduces risk. Yes, profits will be shared with investors, but the business is less likely to go bankrupt if can avoid taking out expensive loans.
Another huge advantage of private investment is that it can bring expertise to the table. Many investors will want to take an active role in the company and some will insist on being present during board meetings when major decisions are made. Others may provide strategic business advice or help an entrepreneur to network with others who can help the business grow through partnerships.
Private equity investment provides much more that a cash injection; an experienced mentor may identify problems with the business plan and help shape the company for faster growth.
Finding an investor
Private equity investors rarely come knocking on the door; they need to be approached with a business proposal, ideally one that is too good to refuse. Many investors now specialise in partnering with fast growing and dynamic businesses that are showing great early potential.
One such group is AnaCap, which is headed up by Joe Giannamore, an experienced investor who started out in the auto finance industry. AnaCap take an active role in the development of the companies they invest in.
Whichever equity investment company is selected it is important to determine the level of active engagement it expects to make; as much as it may seem like a good idea to have a silent investor, this is not always the best way to proceed if it is hoped to grow the business rapidly.
Private equity may seem like a daunting prospect at first, but it has the all the benefits of a bank loan without the risk of defaulting. It can also bring a fresh perspective from business experts. It is never too soon to start investigating the various options available.