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Equity Financing Do's and Don’ts

Provided by the International Finance Corporation


Do's

  • Your homework and use various methods to work out an approximate value of your business.
  • Remember that potential investors know less than you about your business, but probably know much more than you about valuing businesses.
  • Get professional advice on which valuation method is right for your business, and ask a finance professional to either check your calculations or work the figures out for you.
  • Remember that an investor can bring more than just money into the business. They might also have specific technical expertise, management knowledge, or useful contacts that can help your business.
  • Try to remember that the negotiation is not personal.  It is, literally, just business. So, be honest, negotiate hard, and be prepared to walk away if things don’t feel right.
  • Think carefully about what kind of shares you are prepared to offer an investor. Voting shares give a degree of control over future business decisions and are of higher value than non-voting shares.

Don'ts

  • Go into negotiations alone – bring a financial or legal adviser with you to meetings.
  • Make unjustified projections of future profits—the investor will use past profits as a guide, no matter what you say.
  • Walk away from negotiations too early. A low opening offer is probably just a negotiation tactic.
  • Be afraid to ask what additional support he investor can offer your business (advice, skills contacts etc.).
  • Sell more than 50% of your business for any price, unless you want someone else to take control.
  • Forget, professional investors do this all the time and will use any means available to them to keep the cost of their investment down. It is your job to convince them that your business is worth more than they think it is.

 

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The material in this work is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law.  IFC does not guarantee the accuracy, reliability or completeness of the content included in this work, or for the conclusions or judgments described herein, and accepts no responsibility or  liability for any omissions or errors (including, without limitation, typographical errors and technical errors) in the content whatsoever or for reliance thereon.

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