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For entrepreneurs

Private equity funds are one of most important sources of financing for entrepreneurs in the early stages of life cycle of their company. In Croatia, this method of financing companies is still considered low due to the small number of private equity funds and poor willingness of the entrepreneurs to accept such type of financing. Private equity is not the best suited method of financing for every project or company at every moment of their life cycle. If the answers to these questions are positive then this is the right moment to consider funding your company development with the capital supplied from private equity.

Are you ready to be an entrepreneur - to take responsibility of managing your company in a methodical and structured way, delegate responsibility to your team and know how to motivate them and gather knowledge and apply it within the company?

  • Are you ready to "give" a part of your company equity ownership to investors in return for capital?
  • Do you do business in a sector that is achieving high growth rates?
  • Are your companys development plans ambitious enough?
  • Do you have a team that will follow you? Do the team members have necessary experience?
  • Does your company have technological or competitive advantage that can be developed or used?
  • Are you willing to share strategic decision with investors?
  • Do you see a real possibility in selling equity and stocks of all co-owners in the company?

Private equity is an option to consider if you want to:

  • Create a new "business"
  • Improve and develop your revenues from export
  • Use creativity and innovation of your team
  • Employ highly qualified staff
  • Sell a portion or entirety of your company
  • Expand your business and acquire competition
  • Produce a new product or market a new service
  • Sell a portion of company assets

Private equity financing carries the following:

  • Long-term capital for the company
  • Better bargaining position with banks, suppliers and customers
  • Partnership in which all share the risk and the reward
  • Capital on negotiated terms
  • Introduction of high management standards
  • Strategic and operative support and financial advice in the event of a crisis
  • Connections through contacts and companies in the fund’s portfolio
  • Partial or complete company sale strategy

...and you are asked to:

  1. High growth rates, competitive product or service
  2. High quality and stable management team that is capable of meeting the agreed upon business plan
  3. Quality management procedures or establishing their potential in short term
  4. Transparent property structure without interweaving of personal and company assets
  5. Sales agreement on the part of the investor - with or without the other owners

Investment Procedure:

Investment Procedure

Most often the investment negotiation breaks down duringthe valuation process of companies and rights or obligations on the sale of whole or a part of the company after 3-5 years from initial investment. Regarding the sale of the funds equity portion of the company, it is likely that the fund will have to"exit" from their investment in the company before the end of the term of the fund (which is a maximum of 12 years). Theoretically we can conclude that the fund could participate in a particular investment for a maximum of 12 years. However, the longer an investment period in a company, a higher return on invested assets is expected and any investment period longer than 3-5 years is a major problem in finding potential buyers for the investment because it is assumed that the investment has failed for some particular reason so, potential buyers are more cautious. In any case, all co-owners have the right of first refusal of equity or stocks owned by the fund at the time the fund is seeking a serious potential buyer of its shares in a company.

Valuation of the company at the conclusion of the investment transaction is also a serious matter of discussion. Specifically, each entrepreneur is emotionally attached to his or her company because of involvement in its growth since its founding. The main dilemma facing entrepreneurs is to grow slowly with their own resources or to grow rapidly with their own resources in addition with the help of other resources provided by the fund. Specifically the following question is often asked: “do I want to be a 100% owner of a company that will be worth a 100 or a 60% owner of the company that will be worth 250?”

Valuation methods of the company’s value are standardized, but they carry in themselves elements of subjective judgments about the risks of each investment since investment opportunities are often companies that are not publicly listed. Private equity funds are not interested in company asset values (buildings, land, etc.) but rather in company profitability and cash flow. Company’s resources that do not contribute to creating new value from the financial investors’ point of view are not crucial in valuing a company. The most commonly used methods for estimating the value of investment opportunities are:

  • DCF - discounted cash flow
  • Comparisons with similar companies in a certain sector (profit, cash flow, income, EBIT, EBITDA)
  • Opportunity cost - profitability in relation to other investment opportunity with same level of risk

Satisfying valuation methods and ultimately an agreement between the entrepreneur and the fund provide a basis for further valuation and investing. The ideal final outcome is a "win-win" situation because without a consensual entry into the "marriage" between the entrepreneur and the fund in which both parties combine their interests, there is no successful investment.