Many times an owner may desire to raise cash by selling part of their business. This is called “Equity Financing.” Your equity is the value of your company less what you owe. By selling part of that equity, you are giving up partial control of the company.
Such an arrangement can be a partnership, where the person buying in purchases a share in the business and becomes a full partner. Or, if the business is incorporated, for a jointly determined sum of money, the person buying in owns a given percentage of the business.
Often such relationships are built with vendors or other complementary businesses that provide a natural working relationship. It is important to verify the financial background of any investor to make certain they are a good fit and are not going to cause you financial problems down the road. You can arrange for an accredited investor via a Private Placement through investment banks and agents. However, a substantial fee is charged by the banks or agent for finding the investor. If you decide to pursue equity financing, you will need to decide whether the fee is worth the security of find the right match for your business.
What percentage of the business will be given up for the investment is based on what the current value of the business is. To determine what a fair price is, a business valuation will need to be prepared based on reasonable and justifiable accounting methods. Such a valuation should be prepared by a neutral, outside accountant so that both you and the investor are confident that the numbers are unbiased.
Equity financing has a number of similarities with a merger, but in a merger the whole business is essentially sold, and equity financing only involves selling partial ownership in the business.
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