When a minority investor makes sense: the role of the board in negotiating a minority investment.

• Author: Schaye, Paul L.
• Position: CORPORATE REORGANIZATION

There are two extremes with outside money: Either it's from a bank that has no involvement in business operations, or the cash comes from a majority investor or buyout that takes away control from the current ownership. However, there is a powerful middle ground boards can consider: minority investors. This option can allow a company to maintain control while securing the cash to move the company forward.

Last year Forbes Inc. became its own business news story when, for the first time in its 90-year privately owned history, the company sold a significant stake to an outside private equity investor. As Steve Forbes said, "The partnership gives us a chance to move faster than we would have been able to do otherwise, both in the United States and overseas."

What drives the decision

When the board is given the option to consider outside funding from a minority investor, five key factors can drive the decision:

* Strong Upside for Expansion, Liquidity, and Diversification: Shareholders want to retain control while taking the next step to grow the business. A minority investor allows the owners to maintain their vision and reap more rewards in the future.

* Need for Business Counsel: Management and board members sometimes must acknowledge that their skill sets could limit the growth of the business. While minority investors do not take over the business, they can provide expert counsel to fill voids.

* Transformation in the Marketplace Requires Expertise: With globalization and the emergence of new markets, expansion will require both money and expertise. A minority investor can provide the resources needed to build relationships internationally.

* Making More Aggressive Business Decisions: When current owners have the option of taking some of their money out and still maintaining control, they can embark on new ventures they would otherwise avoid.

* Maintaining or Attracting Better Talent: Often a company wants to keep its star people or draw leaders in the industry who want to see a fresh dynamic in the company. That new energy can be infused by a minority investor.

Even if the minority investor is brought to the board by management with a potential arrangement in place, due diligence by the board is still necessary. Although a minority investor would have less control than a majority investor, the board members must assure the shareholders that they are getting the best possible transaction. The transaction must address both the financial...