Partners and Investors: The Inside Story on Outside Investment¹
Business growth often requires outside funding. Working capital is required for daily operations. Partners and investors provide expansion money, experience and skills to grow your business.
On the other hand, partners and investors are stakeholders that sometimes create problems - big problems! A partner maintains an ownership stake, and participates in company decisions, depending on the partnership agreement.
Investors simply provide funds in exchange for an ownership stake or future return. Typically, a partner takes on a company role, while an investor simply provides an infusion of cash.
Investor or Partner?
Seek an investor if you plan to:
- purchase new equipment or facilities;
- develop or launch new products or services;
- pay down high-interest debt;
- undertake a major marketing initiative.
Seek a partner if you plan to:
- gain access to capital;
- offer additional expertise or services;
- bring business functions in-house;
- add capabilities and skills to the business team;
- access new customers or markets.
Having a partner may not be easy. A partner shares in decisions and responsibilities. Find a partner whose skills complement your own to ensure harmony in those decisions and responsibilities.
Since an investor creates less daily stress for a business owner, this is the way to go if you don't want to cede control of "your baby."
Investor Pros and Cons
Many people and institutions invest in small and mid-sized companies: banks, friends, family, private investment groups, venture capitalists, government agencies and even suppliers or vendors.
- The interest on an investor loan is deductible as a standard business expense. It comes right off the top line of your business return.
- Investors don't receive managerial control.
- Investor money (equity capital) is not a loan and isn't paid back if the business fails. Professional investors weigh risk versus reward carefully. Very carefully.
- A loan (as opposed to an investment) is a financial obligation that must be repaid.
- If you default on a loan, you may have to give up control of day-to-day business operations.
- Investors typically expect to receive some control over the business in exchange for their investment, based on the agreement.
Family and friends are typically "silent" investors who receive a financial return but don't take control of the business. Venture capitalists (VC) are more likely to require a formal role in making business decisions.
Partner Pros and Cons
Partners' funding, while important, is just one factor in determining whether they're the right choice for you.
What should you look for in a partner?
- a good fit of skills, experience and work ethic
- complementary work styles
- similar business philosophies
- good communication skills
- respect for and courtesy toward others
- outstanding personal and professional ethics
- Multiple owners make it easier to borrow additional funds because the perceived lender risk is lower.
- Partners share duties, tasks and responsibilities. (Take a day off occasionally.)
- With a limited partnership, in which an investor's responsibilities are limited by agreement, you raise capital while retaining the majority of decision-making rights.
- Unlike a loan, a partner's investment is only repaid when the company profits.
- You become liable for certain debts and other claims filed against a partner.
- A partner can enter into legal agreements that the other partner is required to uphold.
- In a limited partnership you may bear the responsibility for debts and other obligations.
- Most importantly, partners expect to have a say in how the business is run.
If you simply need funding, look for investors or lenders and maintain control over your business.
If you need funding and complementary skills, or you want to share the burden of running a business, then a partner provides both financial and human capital.