09 September 2011
Dragon’s Den seems like a good idea. Someone injects cash into your business; they bring years of experience, a proven track record and a contacts book to die for – and all you have to do is give away a slice of your equity. And even if it’s not one of the Dragons, the idea of an outside investor can be attractive, providing the capital and sometimes the expertise that a small business needs to grow.
One thing is for certain – with the proliferation of ‘business angel’ organisations and the continuing reluctance of the banks to lend to certain sectors, the number of outside shareholders in UK businesses can only be set to increase.
And yet…tales of disputes between shareholders are ten-a-penny. Barristers specialising in corporate dispute resolution rest easy, knowing that unless human nature changes the flow of work will never dry up. Why do controlling directors have so many problems with outside shareholders? After all, on the face of it both parties want the same thing – success for the company. There seem to be three main reasons for the arguments.
Strategy – yes, both parties want success, but all too often there are arguments about how that success can – or should – be achieved. Expand at all costs? Go into new markets? It’s easy to see how disagreements can arise.
Level of dividends – if you do decide to pursue aggressive growth, this may well mean that cash needs retaining in the business and therefore can’t be paid out as dividends. Controlling directors need to remember that outside shareholders invested for one reason only – to get a return on their money. If they’re not convinced about expansion or growth prospects, the outside shareholders may well argue that the cash should be paid as dividends instead.
Disposal of the business – whilst dividends are being paid and the company is growing your outside shareholders may well be happy. But they’ll be constantly aware that “everything has a price.” And they’re not emotionally attached to the business either. Your company is almost certainly the only company you’re involved with. It’s your baby. To an outside shareholder, it may simply be one of many investments – on which they’re expecting a return.
Outside shareholders can bring many benefits: they can help a business achieve growth it otherwise wouldn’t have been able to achieve. But they can bring problems as well. Like a marriage, it doesn’t always end ‘happily ever after.’ Remember too, that if you are looking for an injection of funds into your business, outside shareholders are only one of many options available to you.
Raising capital is a complex area and there are many factors you’ll need to consider. If you are thinking of bringing in an outside shareholder, or you’d like to discuss any aspect of investment in your company or the company’s capital structure, then please don’t hesitate to contact us.