Selecting the right equity investor

What you need to consider when
selecting an equity investor

Formal criteria

Many equity investors only invest in companies of a certain size, such as larger medium-sized companies, or in a particular sector, e.g. technology companies. Some also confine their investments to specific situations – for example, successions. What is more, the majority of financial investors also only agree to majority shareholdings. However, there are certain equity investors who cater to medium-sized companies and who also consider minority interests and mezzanine financing.

A reliable purchase price reputation

Even the best growth plans can fast become The easiest way to decide who you want to hold detailed talks with would be to take the indicative offer price of the interested parties. However, caution is required here. The offer price rarely remains at the level proposed at this early stage. There are equity investors who, as soon as they have made it to the short list, will find all manner of reasons to make significant downward adjustments to the price during the due diligence process. Here, it is important to be aware of the investor’s reputation and track record.

Financial flexibility

Even the best growth plans can fast become obsolete in times of political uncertainty or technological disruption. This makes it all the more important to have a financial investor at your side who can act swiftly and who has the financial means to react appropriately if circumstances change. Pay attention to how your equity investor has reacted to planning delays in the past. Did they turn down an investment opportunity simply because they had to consider the fixed term of a fund? Or perhaps they did not have access to a the right network to guarantee the required acquisition financing? Did the investor require an exit even though the timing was not right? All of the above indicate a lack of flexibility at times when you need it most.

Industry know-how

For a long time, an equity investor’s industry expertise – above all apparent in the context of their past investments – was one of the key selection criteria for a seller. As valuable as industry and market know-how continue to be, it is also clear – especially in times of digital transformation – how valuable cross-sector strategic know-how and experience are when creating a well-structured development strategy for your company. A financial investor with a diverse portfolio can, for example, provide new inspiration for business models or have a better idea of what to consider when modernizing IT systems. The shortage of skilled workers is another issue that is currently hindering many companies’ growth plans. An equity investor who can help here can be invaluable.

Support in operational matters

When implementing growth plans, questions can arise relating to operational matters outside the remit of day-to-day business. You may want to discuss and resolve such matters internally, among a small group of peers. It may also make sense to implement the necessary changes immediately. At times like this, an equity investor with an experienced team of operating partners can provide swift support. However, it is essential that this operating partner team has the necessary entrepreneurial know-how and experience to really be able to help. Otherwise, there is no real benefit to you. Clarify early on the extent to which you can influence decisions regarding the involvement of such operating partners. This will ensure that you retain entrepreneurial control of day-to-day operations.

A reliable network of experts

Given that the demands made of and by companies are becoming increasingly diverse, even very large equity investors cannot provide all the necessary know-how in-house. So a financial investor’s network of contacts is, actually, very important. You can find out how reliable the network is by looking at the track record of previous investments. Here, size really does matter: Well-established equity investors with numerous investments are in a better position to prove that they can provide the right advisor, partner or manager if a new approach is needed or the unexpected occurs.

Roles and responsibilities

Are you looking for an equity investor who will also take over the running of the day-to-day business? There are times, especially in crisis situations, when this approach can be very helpful. However, if you want to sell a shareholding but also continue as managing director, or if an existing manager should replace you (for example, as part of a management buyout), then this kind of far-reaching influence can be unhelpful.

As such, make sure you know in advance what you want from your financial investor and how they define themselves. Can they or should they bring an external manager into your company (management buy in)? Many equity investors focus on just providing strategic support, usually in the form a supervisory board mandate. This gives the company the freedom to continue making management decisions but also safeguards the legitimate interests of the new shareholder.

Regional proximity

And last but not least, there are important practical considerations that should not be ignored. Does your equity investor get back to you quickly when you have queries? Do the meetings take place face-to-face or via video/telephone conferencing? Can meetings be arranged at short notice or does the investor need to fly in from London? How well does your investor understand not just the German legal system but also local practices? Most Anglo-Saxon financial investors employ Germans to look after their investments in Germany – but who stands in for them if they are not available? How well you, your former management colleagues and employees, and perhaps even your customers and suppliers, get on with the equity investor is also always a question of corporate culture. A financial investor with headquarters in the USA is often managed differently to the typical SME investor here in Germany. Before committing, find out whether their style suits you and your company. 

The value of principles

When it comes down to it, after careful analysis of all of the above factors, the ‘chemistry’ between you and your equity investor is also a deciding factor. Are they true to their word or do they backtrack on things that had been agreed on in earlier discussions? Do you value the dialog, feel it is a partnership of equals and respect each other’s views and opinions? How have other entrepreneurs assessed their experiences with your potential investor? Ask for references and let your M&A advisor also gather a few opinions.

Our recommendation: Selecting the right equity investor

There is no doubt that the selling price is an important factor – but so is the question of whether or not the equity investor is a good match for you and your company. Because of the regional ties and sometimes even a regional link in the company’s name, many entrepreneurs wish for a fair solution that secures the company’s long-term success. Our recommendation: Set a realistic minimum bid price as a criterion for the shortlist. However, when it comes to making the final decision, also consider which other factors speak for the investor: network of contacts, financial flexibility and a working relationship that instills trust and confidence.