If your business is one of the many businesses that needs additional equity capital, then you have a basic choice: do you seek the expertise and capital of a financial or strategic investor? The two have very different implications.

Financial investors, broadly defined, include venture capital funds (for start-ups or companies early into their life cycle), angel investors (for small companies) and private equity funds.  As the name implies, "financial" investors typically bring equity finance and expertise primarily of a financial nature, although many financial investors also pride themselves on bringing value-added knowledge in other areas, such as corporate governance, restructuring or sometimes even expertise in specialised sectors, such as logistics or food and beverages.

Each financial investor will have criteria for eligible investments that are clearly set, such as geographic scope, minimum and maximum investment size or sectors of preference.
Strategic investors have an industry specialisation and would include multinational corporations or medium-sized companies seeking to go international. Locally, there are an increasing number of Central and Eastern European (CEE) companies developing a strategy to acquire and grow throughout the region, which seem to an account for an ever-increasing proportion of overall CEE investment activity.

Whether you target a financial or strategic investor depends on your objectives. For example, my company has a client who insisted on a strategic investor, because he wanted to exit his business as soon as possible and did not want to stay on for the several years, as a financial investor would generally require. A different client insisted on a strategic investor because he had a very successful concept locally and wanted the cross-selling synergies of services that a strategic investor would bring. Another insisted on a financial investor because he had intellectual property to which he did not want a potential competitor to have access. Many clients will solicit interest from both strategic and financial investors.

Offering your business to a financial investor will typically take a higher degree of preparation. You will need to have an extremely thorough business plan with cash flows that may be relatively accurately forecast over at least a five-year horizon, including revenues, expenses and capital expenditures.  
Despite difficult financial market conditions, it is possible to find both financial and strategic investors, provided your business is sufficiently attractive and valuation expectations are realistic.

Key distinctions
When it comes to control, financial investors will typically allow the local owner day-to-day operational control. While some will insist on owning at least 51 per cent, others will agree to take minority interest. Strategic investors as a rule require total control because more often than not the focus will be on merging the new acquisition into global or regional operations to gain synergies.

A financial investor, as the name implies, is more likely to bring great financial expertise, as well as in some areas of operation, possibly expertise in corporate governance, and the strategic investor brings know-how, technology, systems, access to markets and operating expertise within the sector in question.
Financial investors come with their exit strategies ready and are typically looking at a three- to seven-year investment horizon. Strategic investors are generally not concerned about exiting and come with a long-term focus.

Nor are strategic investors likely to be very concerned with the rate of return, looking instead at operational synergies with the investor’s existing operations. They may or may not require a cash flow forecast, while their financial counterparts will normally require a detailed cash flow forecast demonstrating returns, since financial returns over the time frame of their investment is likely to be their main focus.

Quality of existing management is generally vital to the transaction with financial investors, as they will typically try to tie in the management for at least several years with equity participation. Quality of management is important for many strategic investors as well, but others might have their own management ready to be "parachuted" into the company.

*Les Nemethy is the chief executive officer of Euro-Phoenix Financial Advisors Ltd. (www.europhoenix.com), a Central European corporate finance company focused on mergers and acquisitions.