It is important that prospective entrepreneurs fully understand the concept of business equity. Running a business can be a complex process, and while many entrepreneurs have excellent business ideas and make brilliant salespeople, it is common for entrepreneurs to struggle with managing the financial and investment side of a business. Almost every business requires capital investment and this means that business equity should be understood and managed.
What is business equity?
In its simplest terms, business equity is everything of monetary value that a business owns. The equity of a business determines whether a business is succeeding or failing. If at any one time all the assets of a business have a value lower than that of all its debts, the business is said to be in negative equity.
Of course, it is common for a new business to experience negative equity because new businesses have many start-up costs and these costs are often for non-material services, such as consultancy, advertising, promotional media, or standard running costs, and the loads and investments into the company will usually be higher than the value of the business.
This is why angel investors and venture capitalists must be careful when selecting into which businesses to invest their money.
Finance equities also refer to shares in a business. Equities are essentially pieces of a company that are usually owned by company directors and investors.
For example, if a company is valued at $500,000, which would be a figure based on all company assets plus projected profits for the forthcoming years, it could divide its equity into 500 shares, each with a value of $1,000. When the company grows in value, the value of each share increases.
If a venture capitalist purchases 100 shares when the company starts up, he or she will own 20 per cent of the business at an initial cost of $100,000. If the company grows by a factor of ten, the investment will grow to one million dollars.
One thing to bear in mind is that investors are looking to make a good profit, to get a good return on their investments. This is why investors can steer the direction of a company by voting on agenda items during annual general meetings. Sometimes investors may not agree with the way the business is being managed and this can lead to conflict.
Some people have been successful in this; as seen from Mukesh Valabhji’s blog, he been successful with business equity.
Where to get more help
Every new business must be set up properly and for this, they should ensure that a finance manager is employed. Usually in a larger business, one person on the board of directors will be responsible for the financial administration. There are many rules and regulations to comply with, especially with respect to taxation.
Anyone planning to start a new business should seek out business start-up advice from an accountant or business consultant. Setting up a company correctly is essential for investment and future growth.
Fortunately, once a business is set up correctly, it is relatively straightforward to manage and this gives great peace of mind to entrepreneurs who are able to focus on their core areas of building the business.