Small business owners, by the very nature of their jobs, often find themselves needing to be a jack-of-all-trades. They need to have the management skills to motivate and control their workforce, the financial acumen to raise capital and budget responsibly, and the marketing skills needed to advertise their product, engage in social media, and work towards managing your reputation online. And, of course, they also must have the ingenuity to maintain their unique product or service in the first place.
All of these responsibilities can together be quite overwhelming at times, but most owners wouldn’t have it any other way. Which is why outside investors are always a cause for wariness.
For many small business owners, a dearth of capital or a promise of growth brings with it a concerning prospect: the possibility that the company will need to bring in outside investors, in the process diluting the owner’s control. Are you struggling with the decision of whether to dilute and bring in outside investors? If yes, you may be struggling to decide whether an ownership dilution is right for your business – and for you. Here are a few key questions to ask yourself:
-How will dilution translate into growth? Bringing in outside investment and diluting the ownership of your business can provide a capital infusion necessary to grow your company without any loan obligations. But if this infusion will not likely translate into growth, you may find yourself answering to outside investors long after the money dries up.
-Can managerial control be preserved? Selling shares in your business does not necessarily mean you have ceded some amount of command. Rather, if these are non-controlling shares, an investor is owed a return but not a say in the company’s management. Many business owners find this arrangement preferable. If you are one of them, make a point of seeking out investors who are content with a hands-off approach.
-What other options are available to you? If you’re looking for a capital infusion because your business is struggling, you may want to consider alternatives such as loans, overhead reductions, layoffs, and price increases. On the other hand, if capital is desired as a means of spurring growth, make sure that your timing is right (ie that you truly are on the verge of growth) before choosing dilution over other capital-raising means.
These are three of the main questions to ask yourself when deciding whether to dilute your small business. Although dilution is an unappealing process for many business owners, it may be an important step to take for the future vibrancy of your company. Just make sure that you know what you’re getting into before going forward.