When you are in the process of buying a business you will probably need money. You will notice that this money has to come from somewhere. If it isn’t your pocket then two sources: 1) lenders 2) Investors. Set aside lenders for a moment and let us concentrate on investors. There are two kinds of investors, passive and not passive. The hardest kind of investor to find in this world is a passive investor other than Mom, Dad or the relatives.
A passive investor embodies the best of all worlds, they throw lots of money at your deal, they don’t ask for management or control, they don’t call you up all the time and demand answers. But they are exceedingly rare for the first time buyer. You can find them but you need to spend three times as much time looking for them as compared to the rest of the buying process. They have to be very comfortable with your background and track record to let you have full control of their money. If you aren’t clear in your mind what close contacts you might have that could be passive investors then save that thought for another day when time isn’t critical.
One more wrinkle with passive investors is that you need to observe security laws when dealing with them. When you take on multiple passive investors be aware of private placement rules and Regulation D 504, 505 and 506. In a nutshell, passive investors need disclosure in the form of a prospectus. At smaller dollar amounts raised, say under $1.0 Million, a simple prospectus is desirable. At higher amounts it is mandatory and you must file with the SEC and with the states where you intend to market your offering. The better way is to take on as few investors as possible – one is a good number but then you may not get enough money with just one investor.
The more likely scenario for taking on investors is the non-passive or partnership scenario. Participating, operating or control partners are much easier to find and can propel your dealmaking into overdrive in short order. You can even advertise for these folks and treat them like, well, partners. There are varying degrees of participation that partners can have from almost hands off to running the whole company. They can own 10% or 75% of the company. I have done both. I have done buyouts with existing management where they received 10% and have worked with mostly money partners who took control. Both methods work although one must always seek to maximize ownership and control where possible.
Such partners can spell out their own needs and write them into the deal. Usually they will hover around and look to help out if necessary. The key thing is to get a money commitment out of them from the beginning. Then how much control, operating responsibility or ownership they will receive is a matter of negotiation. The key to a successful deal is making sure there is a clearly defined partner/shareholder agreement and exit strategy so that two partners can part ways if things go awry.
