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An Affair is Always a Bad Idea

Randy (not his real name) was about to make a life-altering decision. He had a need, and he wanted to fulfill it. The long term consequences were of less concern than getting what he wanted, right now.

He called me, I suppose, wanting me to tell him it was a good idea. But with years of experience advising men and women in this situation, all I could do was tell Randy the truth from my heart. “Bringing in a minority investor might feel good in the short term, but you’ll likely regret it in the long term.”

Randy started his company in 2006 and it reached a peak in 2014. Expecting growth to continue, Randy opened two new distribution locations in 2015. But the new locations had underperformed and the company lost a key customer in late 2016. By mid-2017, Randy was feeling a cash pinch which led to his decision to seek a minority investor.

At first pass, Randy’s plan to sell a minority stake made good sense. Despite his recent challenges, Randy had a good company and the growth he could fuel with outside investment was pretty darned exciting. It didn’t take a huge leap of faith to see how a new investment of capital could quickly get him back to levels not seen since 2014. On the other hand, without outside capital, Randy might not get back to that same point for a few more years.

So while it seemed like a good idea, I compared bringing in a minority investor to having an affair (with which, I might add, I have had no personal experience). An equity investor solves an immediate need, and that is a good thing. But an equity investment also brings a new relationship(s), with strings so to speak.  Not only giving up a piece of the future, bringing in a minority investor affects the business owner’s decision-making process, how he compensates himself, who he hires, etc.

But I’ll still have the majority control,” Randy said, “so I’ll continue to run the company as I see fit.” “That’s the common perception,” I said to Randy, “but it’s not true anymore. Minority investors insist on having input to most decisions, everything from compensation all the way to those that are strategic in nature.”

I don’t know when this trend started to happen, but in recent years minority investors have gotten more demanding to ensure that they have rights to “speak into” operational decisions made by the business owner. I’ve seen proposals from minority investors that are incredibly heavy handed in this regard. As the golden rule says, “he who has the gold makes the rules.”

I suggested to Randy that he develop a five-year forecast with and without the equity investment. Unless he was absolutely positively certain that the minority investment would create more value than he was giving up today, it made no sense to bring in the new money and its strings. It might feel good now, but boy howdy, it could be a time bomb down the road. The best way to handle an affair is to not start one.

JIM CUMBEE is President of Tennessee Valley Group, Inc. a retainer-based business brokerage and transition mediation firm in Franklin, TN. Cumbee is an attorney and has an MBA from Harvard Business School. He has a wide range of corporate and entrepreneurial experiences that make him one of the most sought-after business transition advisors in the state of Tennessee.

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Tennessee Valley Group

Jim is an attorney (non-resident status with the Missouri Bar) and though he no longer practices law, he has read and negotiated enough legal documents to fill a cargo tanker. He has an MBA from Harvard Business School and knows how Wall Street and private equity operates. Jim is a Tennessee Supreme Court Rule 31 listed general civil mediator with tons of experience helping business owners (large and small) work through sensitive problems to achieve winning results. He is the author of "Home Run, A Pro's Guide to Selling Your Business, Seven Principles to Make Your Company Irresistible."

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