When?

There are times in the life of a company when new strategic challenges arise that require investments greater than the cash flow generated by the business and its initial liquid assets. These new challenges often threaten the company's long-term survival and therefore limited resources must not prevent it from dealing with them. Examples of this are the need to expand production facilities, entering new geographical markets, strengthening brands with bigger marketing budgets, an opportunity to buy up a competitor, the need to increase investment in research and development, etc.

There are various alternatives that these companies can use to obtain the funds they need to deal with the business' growth. The most obvious and usual is an increase in equity through which the current shareholders inject the funds that the company needs for these new projects. This simply involves agreeing on a share premium in cases in which the share capital is not subscribed by all the shareholders and depending on their stake. If an increase in capital subscribed by the current shareholders is not possible or sufficient, the company can dispose of assets it does not need or increase its bank debt. If this is also impossible, undesirable or insufficient, the company can bring new financial partners in as shareholders to provide the necessary funds.

There are many kinds of financial investors. Some of them are specialists in certain economic sectors, while others have a more general investment profile. One can also differentiate between those that require disinvestment mechanisms to be used after a period of time and those that are more flexible when it comes to selling their stake in the company in the future.

Equity increases aimed at developing companies (development capital) are one of the kinds of transactions that venture capital companies are generally involved in. The development of the capital markets and the appearance of several companies of this kind in Spain has made it possible for a large number of medium-sized companies to find satisfactory formulas to develop plans for strong growth. In addition, in many cases, bringing new financial partners into the company as shareholders has enabled orderly professionalization of family companies and organizational improvements. Bringing these new partners into family owned companies increasingly involves significant changes in their corporate culture. For example, venture capital companies tend to like the management team to own shares in the company if they do not already. This may take place either through the management team taking part in the increase in capital, through stock option plans or by buying released shares.

Over recent years, Family Offices have also made their presence felt in our market. Under this umbrella, Spanish business families have set up vehicles to invest in unlisted companies from sectors different to their traditional businesses.

When increasing capital in order to develop the business, it is important for the current shareholders not choose the new partner to be brought in solely based on valuation criteria. Although the valuation before the increase in equity is important, getting hold of funds to develop the company, prioritizing its future value and selecting the most suitable partner based on their non-monetary contributions, are also aspects that must be taken into account.