I’m contacted almost every day by people claiming that XYZ Corporation has a strong interest in investing in or acquiring our company. We are different than many companies as that is not a desired part of our current succession plan. Having investors in your business can bring major benefits, but it also comes with high price. Here are my thoughts on why not to choose to have investors unless your desire was always to leverage your opportunity to maximize your return.

Some Reasons Why not to have Investors

1. Loss of Control over your Culture

• Investors want some equity ownership and rights in business decisions.
• You may have to compromise on your vision, strategy, or company culture.
• It is very difficult prioritizing giving and serving your team and your customers while making sure you fulfill their return on investment.
• Investors may be more concerned with improving margins and reduction in expenses and not so much about customer service and company culture.

2. Pressure for Fast Growth, Sometimes Forced Growth

• Not always, but investors sometimes expect quick returns on their investment.
• If there’s not an expectation on immediate increase in profit, they expect rapid revenue growth and increase value.
• This can lead to culture decline with unsustainable scaling or sacrificing long-term goals for short-term profits. This also can lead to customer satisfaction issues.
• Overstaffing, typically in sales, for fast growth. This can lead to rushed decisions, layoffs and other cost-cutting measures if results do not happen fast enough, even if company is profitable.
• Without investors more time can be spent on long-term strategy and having patience with building relationships and trust with prospects and customers.

3. Dilution of Ownership

• With each investment in additional acquisitions, your ownership stake shrinks.
• Eventually you may only own and control a minority share of the company you started.
• Your desire would be that overall financial value and return have increased at least proportionally to shrinking portion of ownership.

4. Expectations of Return on Investments

• Many investors consolidate investments to create an IPO or acquisition.
• If your desire is to build a legacy business with a family-like culture, it probably won’t align with this investment growth strategy.
• The more investment money, the more attention paid to financial metrics versus company values and purpose.

5. Increased Reporting & Oversight

• Although to have a strong stable company you must keep thorough financial reports, expect more financial reporting, as well as compliance and standards reporting depending on the type of ownership involvement
• Investors like to look at spreadsheets and percentage returns. Be prepared to produce, review, and justify regular financial reports and updates.
• This reporting typically adds to an administrative burden and can slow decision making.

6. Impact on Team Members

• Lack of transparency from investors makes creating team stability and predictability harder
• Team members don’t understand why investor decisions are made. For example, profits may be up, but investors choose to lay off some staff.
• Company will run more from spreadsheet analysis versus the “why” of what the business was founded upon.
• Great performing team members could become casualties of forced layoffs.

Thoughts on Ways to Avoid needing Investors

• Embrace a frugal mindset, making delayed gratification a priority.
• Don’t overexpand with payroll, acquisitions and other costs without secured growth.
• Pay your accounts payable very timely to establish growing credit lines.
• Diligently manage your accounts receivable
• Put significant money aside for slow months or slow payers of services.
• Reinvest profits and establish financial assets to help secure larger credit lines.
• Use loans strategically when necessary.
• Establish and build honest and trusted banking relationships.
• Use contractors and outsource non-core tasks to minimize fixed payroll costs.
• Make sure your company is staying relevant in your industry.
• Ensure that no single customer is more than 5% of your total business.
• Focus on building a team of versatile hard-working team members.
• Minimizing your turnover to eliminating lower performing team members.
• Build a team of player coaches where everyone is engaged in the product or solutions.
• Have defined annual WIG’s (Wildly Important Goals).
• Have a corporate financial bonus and rewards system that ties into your annual WIG’s.
• Have a few simple company values that are easy for all team members to remember.
• Focus on a business of serving others with faith, family and business in that priority.

In Summary:

The choice of going on as business as usual, a succession plan, whether it’s keeping it in the family, transitioning to a close management team, or selling to outside buyers will have different impacts on your team’s culture and concerns and ultimately you as owners on the decision and the direction you desire to go. While bringing in investors may seem appealing for reasons such as easing financial stress, accelerating growth, or allowing owners to cash is some of their equity, this path is not without disadvantages and concern from your committed long-term team members.

Major drawbacks of taking on outside investors often include a loss of ownership control, increased pressure for rapid growth and profits, and potential conflicts with the company’s established values and culture. As owners, if you decide that is way you need or desire, always remember it usually took a great team who were committed and worked hard to bring your company to the value it has attained. Make sure team members are taken care of.

In the end businesses that have ongoing growth strategies and follow an internal succession plan will allow their team members to experience more predictability and stability. Follow my suggestions on how to avoid outside investors and you should have a flourishing business both personally and financially.