Equity finance is a phrase that SME owners have trouble warming to. Recent research from AIB disclosed that 70% of SMEs do not find equity finance appealing at all. What’s more, two thirds of the company owners surveyed weren’t even familiar with the concept of equity finance.

For early stage companies and those operating in the tech sector, equity finance is a more palatable – and often their only – funding option. They sell shares in their business to get access to vital early investment that they wouldn’t otherwise secure through traditional debt finance such as loans and overdrafts.

Trepidation keeps the owners of the majority of established SMEs away from equity finance. Three out of four business owners in the AIB survey expressed the view that the don’t contemplate selling equity for fear of losing control of the venture.

John Fogarty, managing director of AIB Corporate Finance,  notes that only so much can be financed from cashflow, and unlike bank debt, which is the starting point for companies when they want to expand, equity helps maximise the range of other finance options that they can bring on board.

“It also offers a degree of comfort to lenders when they see that a company has taken the steps to raise private equity,” says Fogarty. “The idea of bringing another shareholder into a business which the owner has spent decades building can be difficult at first but in practice the new equity investor is not trying to take over the business. The reality is that they are investing in the business and the management because they believe it has a profitable future ahead and they see the potential.

In Association with

“Generally, new equity investors are not seeking to come in and run the business. They are backing the owner and management team, and they will work with them to grow the business and to generate returns for the benefit of all shareholders.”

Brothers David and Andrew Maxwell decided to buy the Boojum burrito bar chain from founders John and Karen Blisard in 2015. To do so, the Maxwells partnered with Renatus Capital Partners, a boutique private equity operation run by Mark Flood and Brendan Traynor. Since the takeover, Boojum has added two new stores to the chain, which now comprises eight outlets. “When we got down to doing the deal, there was a gap in terms of what our bank could lend us and the asking price,” says David Maxwell. “Rather than let the deal go, it was suggested that we look at introducing more equity into the business.”

Renatus owns the majority shareholding, and the Maxwells run the business day-to-day. “Renatus helps us make high-level decisions and they have also pushed us on and made us better operators,” says Maxwell. “This deal wouldn’t have happened without the private equity. Once you understand the role private equity can play in growing your business and feel comfortable about it, then it really makes sense.”

Exit Horizon

AIB’s John Fogarty cautions that when outside investors are brought on board, it’s very important that they share the same view of the company’s future and the direction it should take. He adds that private equity investors are not going to be there for the long term either.

“Typically, they might have a four to six-year horizon before they want to exit, because they too have their own shareholders and investors to return capital to. On the other hand, family offices or private high net-worth individuals, might take a slightly longer term view, depending on the company.”

Photo: Boojum directors David Maxwell (left) and Andrew Maxwell