If you run a small or medium enterprise in Africa, you’ve probably been in this situation before. Foreign investors have approached you promising huge stashes of capital in exchange for shares.  More often, the deal ends well if you are dealing with the right people. But at times, the foreign capital ends up being a big delusion, and within no time, could spell a final blow to your small enterprise.

A client and a good friend Charles, was introduced to two foreign nationals who were in the country over two years ago.  They had come to the country to scout for consultancy deals.  At the time, his start up was in need of expansion capital which he could not get from the banks or mainstream PE and debt funds.They met and after lengthy discussions, agreed to proceed with a possible share purchase. 

A quick background check through the search engines did not offer much from the internet.  He grew wary but found himself in a corner because he needed the funds to grow his business.  After six months of discussions and negotiations, Charles signed the share transfer agreements, transfer forms and other relevant documents to facilitate the sale. This was done without consulting a lawyer, without reading between the lines with regard to the contract and lack of sufficient background information about the two foreigners.

His first discovery was that the payment he received, part payment for his shares was subject to hidden clauses on the contract that made the deposit for shares a loan secured by the same shares he was selling. Secondly, the complementing interests turned out to a client snatching exercise by the new shareholders. The worst was their successful efforts to kick him out of his directorship at the company. 

He sought legal counsel, ran to court to save his many years of trying to grow the company and source of revenue.  It was a bit too late. Charles lost the company and had to face the harsh realities of waking up one day to find that the company was no longer his own.

His efforts to use the courts to fight for his funds were returned with criminal suits by his new shareholders who claimed that the company records were falsified thus misrepresenting true facts about the company.  It has cost him a lot of time and money and even worse, a long earned reputation.

Locked out by mainstream financiers especially banks, small and medium enterprises find themselves in a situation where the best way to raise growth capital is through relatives, friends and friends of friends. When this financier turns out to be a foreigner, small business owners tend to slacken on the checks which at most times gives the foreigner a leeway to manipulate and gain an upper hand. 

If you find your business in a situation that it can’t survive for another six months unless funds are not availed immediately, then it means that your model is not right or you are just in the wrong business. The best way to fund growth is through a systematic, well calculated approach that lays emphasis on timing and right mix.
 
I believe in the importance of a double check on the business plan before seeking funding.A wrong mix between debt and equity could spell doom over the medium to long term.

One of the primary do’s before bringing in any foreign capital into the business is first putting your house in order; this will range from accounts to statutory filings to board composition to filing system.  If you have to get an independent opinion on all the checks, the better.

Second would be to conduct a thorough background check on the incoming investors.  An independent person will be best suited to conduct this. Charles let emotions fall into play and this ruined the transaction because there were no checks done on the investors.  A check later confirmed that the same investors have in the past purported to invest in companies only to manipulate shareholders using hidden clauses in contracts.

Third, never taking shortcuts would work best. If you do not have a law background, signing a contract before a lawyer’s opinion could work against you.

It is always important to create and manage a timetable that helps you check boxes of things that must be done through the deal process.  This will help you ensure that nothing is left to chance thus hindering the deal process.

It helps to raise capital for your business. But the myth that a foreigner will more likely fund you could disappoint at times. Patience, which majority of SMEs seeking funding do not want to contend with could save you a great deal of a peaceful future.

Michael‎ Musau
Independent Consultant
[email protected]