Let’s imagine a business owner running an industrial operation valued at $200,000. Now, suppose the owner is seeking investors; in this case, there are three main investment opportunities:
1. Raising Capital (Fundraise)
This is the best option if the business owner wants to expand the business—whether by purchasing new machinery, acquiring more raw materials, setting up a new factory in a different location, or adding new products to the portfolio—and lacks the financial resources to achieve this goal.
In this scenario, the business owner seeks investors to inject equity into the business. First, a fair valuation of the business is conducted. For example, an investor might contribute $100,000, raising the total business value to $300,000. The shares would then be distributed between the original owner and the investor at a ratio of 2 to 1.
For the investor, this option is often more reassuring than the alternatives we’ll discuss later. It ensures that the business owner is motivated and focused on growing the business, aligning their interests with those of the investor in generating profit.
2. Partial Sale or Partial Transition
In this case, the business owner might need liquidity for personal expenses, to invest in another field, or for any reason other than reinvesting in the current business.
Here, the owner offers part of the business for sale. The business, still valued at $200,000, remains unchanged. The investor provides the owner with $100,000, which does not go into developing the business. As a result, the ownership is split equally, with the investor and the original owner each holding 50%.
This investment choice can provide the owner with the financial relief they need, whether to address a personal crisis or fulfill a financial need. For the investor, it increases their stake in the business. It may be a good option if the business doesn’t require immediate development or expansion.
3. Total Sale or Full Transition
In this scenario, the investor buys the entire business from the original owner, transferring full ownership. This assumes that the investor either:
a) has extensive knowledge of running the business,
b) has skilled managers with expertise in the field to handle the business,
c) receives guarantees from the original owner to maintain smooth operations for a sufficient period until new management is in place, or
d) some combination of the above.
For the business owner, this option is appealing if they wish to step away from managing the business, seek new opportunities, or relocate. For the investor, it’s ideal if they see significant potential in the business and prefer full control, whether for strategic alignment or other reasons.
Regardless of the chosen investment route, investors should verify the business's financial and legal details, as discussed in our article series, “Before You Invest.”