Benefits of bringing in minority investors.

• Author: Schaye, Paul
• Position: PrivateCOMPANIES

A lifetime of building a business can be shattered when the union between the business owner and an outside investor goes bad. Company owners fear that investors will come in to revamp the management structure and do irreparable harm to client, employee and supplier relationships. Business owners ask, "Will our business wind up in a chop-shop, or will our legacy live on?"

Working with minority investors, who typically hold 30 percent to 49 percent of the company, might be the perfect solution because owners can cash out part of their equity for liquidity and diversification, and keep control to get a second bite of the apple on future profits.

These transactions are on the upswing. According to research firm Dealogic, private-equity investment deals of less than $100 million jumped from $5.4 billion in 2003 to almost $9 billion in 2005.

Companies considering a minority investor should consider the following issues:

1. When to Secure Minority Investors. There are a few instances where business conditions are ripe to seek out a minority investor:

   Strong Upside and Shareholders Want Expansion, Liquidity and Diversification: Owners want to retain control while taking the next step to grow the business. A minority investor allows the owners to realize their dream and stay around to reap more rewards.

   Marketplace Changes Require Capital and Expertise: With globalization and the emergence of new markets, now might be the ideal time to expand. A minority investor might provide just the resources you need to build relationships internationally.

   Strong Need for Outside Business Counsel: Current owners and management sometimes acknowledge that their skill sets limit the growth of the business. Minority investors have limited control, yet a company can still use their expert counsel as needed.

2. Getting Your "Prenuptial" Agreement in Order. The relationship between a company and its minority investor is like a marriage, requiring special consideration:

   Allow Time for "Dating:" With a minority investor, both parties are "committing" to a long-term relationship. So, first make a list of ideal characteristics. Are you looking for investors familiar with similar industries as your company's? Do you want investors with a hands-on or hands-off approach?

   Ask Direct Questions: Too often, a transaction sours because straight-forward questions were not asked beforehand. Questions like:

   * What is your vision and investment strategy? How does our company fit into...