Scrutinise investor's proposal carefully

Last updated 05:00 04/08/2014

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Q: A customer has made an unsolicited offer to invest in my business. He is an experienced businessman and has given me sound advice in the past.

The money would fund my business growth plans but how do I determine a fair value for a share in my business and how much control should I give up?

A: The valuation of your company will depend largely on life stage, revenues and projections. The final number is always fairly subjective, tending higher on your side and lower on any investor's.

But do you actually need an investor? And do you need this particular one?

A valued adviser does not necessarily make a sound investor. But the relationship is a strong foundation.

If you had to pick a person and skill set to make your business leap forward, what would it be?

Don't be distracted by the cash.

On the upside, this unsolicited offer is a positive reflection on your company.

Taking private investment requires a strong set of agreed expectations, formalised at the least in a shareholders' agreement.

Talk this through with your potential investor before talking money. Get clear on what role the investor will play and what their continued contribution will be, what their expectations are for the investment (do they expect a return in a certain timeframe?), and how they expect the money to be used. All details and agreements should be reviewed by an independent party.

Despite the fact this person knows your business, is experienced and a valued supporter, as soon as they consider a financial interest, they lose objectivity.

As you start talking valuation, be cautious and perhaps look at a staged investment. By breaking the investment into chunks, you limit risk on both sides.

Investment amounts can be based on milestone achievements, which should be clear if you are funding growth plans.

This way you can test the investor relationship as you go.

Without knowing more about the shape of your company, it is hard to say what is fair value but, as a general rule, younger companies give up more equity for less money, as any valuation is unproven. The more established you are, the better you can size up the company, and the clearer you can be on fair value.

An independent valuation can be a good starting point.

And ask yourself whether this is someone you want to be permanently hitched to.

The investment will disappear but the investor will last a lifetime.

Nick Churchouse is head of customer engagement at Creative HQ. If you have a question for our experts, email roeland.vandenbergh@fairfaxmedia.co.nz.

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- BusinessDay.co.nz

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