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No Nonsense Guide to finance for high growth companies


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  • 1. No-Nonsense Guide to Finance for High Growth Companies Finding the right adviser • Business planning Venture capital • Angel finance • AIM and OFEX Bank debt • Invoice and asset-based finance Sale and leaseback • Managing investor relations
  • 2. NO-NONSENSE GUIDE TO FINANCE FOR HIGH GROWTH COMPANIES WELCOME While obtaining the right finance is essential to any successful high growth strategy, the process of locating and securing it can be challenging for even the most experienced business. This guide can help your quest for funds by giving you a better understanding of: I Assessing your specific funding needs I Where and how to get the right advice I Various funding options including loans, venture capital, leasing, invoice discounting and Government support I Pitching to and dealing with investors This guide incorporates the experiences of businesses just like yours, along with advice from industry experts, so you get an inside practical view of how to be successful. And as it is from Business Link, the Government backed business support service, there is no product sell or bias – just objective guidance on what is available within the marketplace. Clearly this guide can only ever be a starting point. We hope that as a result of using it you feel better positioned to access the support you need. Should you need to talk to someone then our Business Link advisers will be only too pleased to help. To find your local Business Link, phone 0845 600 9 006 or visit Finally, if you are a new or early-stage small business looking to raise small amounts or start-up funds, you may be interested in our No-nonsense Guide to Small Business Funding. This can be ordered by either calling 0845 600 9 006 or by visiting
  • 3. HOW TO USE THIS GUIDE The guide is divided into four sections: 1. PREPARATION Before you approach anybody for funding, you will need to work out where your business is, where you want it to go, and how much you need to take it there. This section introduces the main financing options, and give tips on how to draw up a successful business plan. 2. FUNDING OPTIONS AND PROCESS This section looks in more detail at the various types of finance available and how to go about securing them. As well as funding options such as leasing and invoice discounting, it covers borrowing from banks, obtaining equity investment from business angels or venture capitalists, and what to consider if you are thinking of floating your business. We also look at how to make your pitch to investors, and what to negotiate in a deal. 3. AFTER THE EVENT Accepting investment introduces a new element to your business: the investor. They will have an interest in how the business develops, and may expect some influence and input. If managed well this can be a beneficial relationship for both parties – we examine how. 4. RESOURCES Here we provide information on schemes the Government runs to help businesses innovate, be informed on best practice and encourage growth. For more on all these issues, visit the Business Link website at:
  • 4. NO-NONSENSE GUIDE TO FINANCE FOR HIGH GROWTH COMPANIES Contents 1 PREPARATION Attracting equity investment ....................10 G Investors will have high expectations of where your business should be and the track record of your management team. Find out what they are looking for from you A business plan to raise finance ..............12 G A credible and deliverable plan is necessary for securing any type of finance. However, Why do you want finance?............................2 the detail required varies. Find out here what G Analyse your business to determine where makes a suitable plan for all types of finance you want to take it and what sources of funding will help you to get there. This will help determine where you go next Bring in the experts ......................................6 G Advice is usually necessary for securing finance, whether debt or equity. Find out here which adviser you need, what to expect from them and how much they will cost Calculating what you need ..........................8 G Lenders and investors expect you to assess carefully how much you will need, what it is for and how you plan to use it
  • 5. 2 FUNDING OPTIONS AND PROCESS Growth through bank loans....................14 Venture capital ........................................26 G Bank debt, whether through overdrafts or G Venture capitalists often offer larger loans, can be an inexpensive source of amounts of equity finance than business finance. We explore the pros and cons angels. Find out how to source them, what the costs may be and how long it may take Borrowing against your invoices ..........16 G Invoice discounting lets you raise finance Should I float my company? ..................30 while keeping equity. Find out here how you G A market listing could allow you to raise may be able to get up to 90 per cent of the larger sums of equity finance and increase value of your invoices paid upfront your business’s profile and credibility Making use of your assets......................18 Making the perfect pitch ........................32 G How borrowing against your business’s G For all forms of equity finance, you will need assets, such as machinery, vehicles or to pitch to investors. Find out how to get the premises, can be a useful source of finance most from your presentation Should you buy or lease assets? ..........20 Agreeing the terms of the deal..............34 G How choosing to lease assets rather than G If your pitch goes well, you then enter the buying them can free working capital for negotiation stage. Here you and your day-to-day expenditure investors agree how you can work together Angel finance ..........................................22 G Business angels may be able to offer your company equity finance, often along with useful skills, experience and contacts 3 AFTER THE EVENT 4 GOVERNMENT RESOURCES Managing investor relations ..................37 Government support: what’s on offer? 39 G Accepting investment finance affects how you G We look at schemes the Government runs to run your business, but the relationship can help you succeed. They cover subjects from be made to work for both of you innovation to alternative funding
  • 6. SECTION 1 Preparation Why do you want finance? If organic growth is difficult, raising finance may be the best way to expand your business. Determine your needs and the best route for you I f you’ve reached the point where your business requires an injection of cash, it CASE STUDY Daniel Drury may not always be obvious whether your took over web analytics first port of call should be a high-street bank company WebAbacus and or a professional investment house that will raised £1.2m from VC firm take a stake in your company in return for Top Technology Ventures and providing funds. By analysing your business – later from private investors. both in terms of where you are and where you “Outside investment was essential. We want to take it – the most appropriate means needed money for sales and marketing as to finance growth should become clearer. the team was made up of technical people. If you are seeking finance, the chances are Peaks and troughs were a problem, as your business has come to some sort of once we’d sold a product we’d spend time crossroads or pressure point. For a start-up implementing it. By the time we went to technology company this could mean a investors, after the dot com bubble burst, requirement for enough cash to pay wages we had around 30 customers and £200,000 and office costs until the first product makes in revenues. If a business isn’t a brand new it onto the market. For a consumer goods concept, investors want to talk with end- producer on the verge of securing its first users to see it is proven to make money.” contract to supply a multiple retailer, cash might be needed to expand production and distribution to fulfil the demands of its situation, it is important to focus on the prospective customer. On an operational level, funding options that not only align with your you may require a cushion against the peaks objectives but also your stage of development. and troughs of cashflow. Whatever the Debt and equity IN BRIEF FINDING FINANCE Broadly speaking, you can raise money for your business either by incurring debt or by G Determine what you’ve achieved and selling equity. There are several fundraising where the company is now solutions to consider within these two camps. G Ask yourself how appropriate your Forms of debt go beyond the familiar sector is for various types of finance concepts of borrowing, overdrafts and leasing, G Allow a time ‘buffer’ in case and include very specific solutions such as fundraising takes longer than expected invoice discounting. Whatever the debt G Focus on the types of finance arrangement, you are effectively purchasing appropriate to your growth plan money, usually by paying interest on credit G Seek specialist advice extended to you and on the basis of being able to provide sufficient security. 2
  • 7. Where next? SECTION Pages 8-9 For advice on calculating your needs 1 not be growth related. A problem caused by cashflow fluctuations, for instance, might be solved by extending an overdraft facility. Alternatively, invoice discounting (where a lender will pay you whenever an invoice is raised, so you don’t need to wait for the customer to pay) may keep you out of the red. For equity finance, investors will require a If the aim is to preserve working capital, stake in your company based on the size of it may make more sense to lease equipment the sum on offer against the perceived value than buy it, while a loan may be used for of the business. Rather than lending, the larger one-off outlays. backer is buying into the company, although investors tend to structure deals with an Funding growth element of debt too. This ensures some Debt-based solutions may be flexible, but payback over the period of the investment, there will be times to consider equity finance. prior to eventually selling the stake. Rapid expansion from a turnover of £500,000 Fear of losing control, the expense involved, per annum up to £10m, for example, may call the timescale and concerns about complex for increasing production, opening an office in deals deter some businesses from exploring Europe or employing a bigger sales team. equity finance. But equity investors can also You could, of course, fund this by borrowing improve your business’s long-term prospects against assets – but even if lenders are by providing valuable skills and expertise. forthcoming, repayments will be a drain on the business. In circumstances such as this, Operational issues equity investment can provide upfront cash Although it is impossible to generalise, without the burden or regular repayments. businesses often choose debt finance to True, this means reducing your stake in the address an operational issue that may or may company – but if all goes according to plan, 12 QUESTIONS TO ASK YOURSELF 1 What are my business’s finances like? operate in may not match the interests of Lenders and investors are more likely to the investment houses on your list. put up money if your finances are sound. 6 What is the business worth? 2 How much is my business spending and 7 What will finance cost in fees or equity? how much will the growth plan cost? 8 How quickly do I need it? 3 How much do I need to raise to fulfil my 9 What contingency funds could I access if business objectives? fundraising takes longer than expected or 4 And how much is it feasible to raise if I fail to raise finance? from the various possible sources? 10 When does the backer need to be paid 5 What factors will affect what kinds of back or when will I need to find an exit? finance I can seek? For instance, your 11 Will I be able to raise further funds? company’s growth potential may not be 12 Should I be looking for one lump sum, sufficient to attract a VC, or the sector you or staged payments over several years? 3
  • 8. SECTION 1 Preparation Find the right finance solution -£5 ght: 0 ,00 ced ns 00 0,0 sou 1m an la the real value of your holding will grow. Also 0-£ fin wth p s £1 unt Op nce 00 plu gro ical important, private investors can actively help ,00 n tio o m- a 00 you grow by giving advice and recommending Typ Am Fin 0 £5 £1 executive and non-executive directors. You will be working closely with your equity Bank loans Q Q New premises; rolling out chains, marketing; investors, so get to know them first: it’s working capital; important that the chemistry is right. low-end acquisitions Equity finance can come from a number of sources. These include friends and family Invoice Working capital and discounting lower risk, less costly (personal contacts who have the money and versions of other inclination to back your plans with anything growth plans from a few hundred to a few thousand pounds), business angels (individuals who specialise in supporting young, growing Asset- Working capital and based lower risk, less costly companies) and venture capitalists. The latter lending versions of other will probably only be interested in investments growth plans of £1m plus, and will be looking for a flotation or trade sale within a few years to allow them Leasing Working capital and to achieve a high return. lower risk, less costly Whoever you are dealing with, seek versions of other sound advice. While your accountant will growth plans undoubtedly help you in your relationship with lenders, dealing with equity investors requires Angel Medium to high growth, more specialist help. A legal adviser should finance medium to high-risk growth plans – check any deal, and when preparing to talk to acquisitions; product venture capitalists, enlist the help of a launches; new corporate finance specialist. Mid-tier premises; marketing accountancy firms are particularly strong in Venture Q High growth, medium to this area. Advisers will also be able to help capital high-risk growth plans you establish whether you really need to raise – acquisitions; product finance or whether your problems can instead launches; new be addressed in other ways. premises; national or global expansion For instance, if cashflow is a problem, it may be possible to resolve the issue by OFEX High growth, medium to raising invoices more quickly or by taking a high-risk growth plans – acquisitions; product more proactive approach in chasing unpaid or service launches; debts. There are always alternatives. I new premises; national or global expansion AIM High growth, medium to Where to go next high-risk growth plans – acquisitions; product For help with choosing the right finance, or service launches; visit: new premises; national or global expansion 4
  • 9. Where next? SECTION Pages 10-11 To see if you’re right for equity investment 1 Likely amount of finance to secure from this source Q Possible amount of finance to secure from this source Unlikely amount of finance to secure from this source ed s , int and fee rges er rat rest ch ical uir mb es req e nu e ns os e Tim g Typ a Co Pa Pr 1-3 mths Interest of 2.75-4 per cent Retain control, and a You may be required to 14-15 above base rate, plus a cheaper source of offer personal guarantees. lending fee of finance Need to service loan 1-1.5 per cent of the loan repayments immediately 1-4 wks Service charge of Receive up to 90 per cent A minimum turnover may 16-17 0.1-1 per cent of turnover, of the value of invoices be required plus interest of upfront 1-4 per cent above the base rate 4-6 wks Interest of 1.75-2.5 Debts can be secured Minimum may be set too 18-19 per cent above base rate, against stock, machinery, high for smaller plus a lending fee of premises, invoices and businesses. Ownership of 0.5-1.5 per cent of even brands assets remains with the loan lender Days- Deposit of 5-30 per cent. Almost anything can be You do not have ownership 20-21 1 mth Finance fee of 1.25-10 leased. Access to the of your assets per cent above base rate. most up-to-date Due diligence of 0.25-1 equipment. There are tax per cent of total advanced benefits 3-6 mths, Typically up to 10 per cent More prepared to back Angels are often hard to 22-25 but could of funds raised, though early stage businesses. find. They will seek an exit, be up to less for larger May offer contacts, typically after three to five 1 yr investments. advice and skills. Process years. You have to Legal/accountancy fees. often less formal and relinquish equity Equity for private investors rigorous than for VCs 3-6 mths, Corporate finance fees of You can raise larger VCs expect rights over 26-29 but could 5 per cent*. 5 per cent amounts. Strong the business. They will be more equity options. Legal costs management and seek an exit in three to up to £30,000. industry contacts five years. You have to Accountancy fees and 20 relinquish equity per cent or more of equity 3-6 mths, 12.6 per cent* of funds Profile and credibility. Expensive to raise. Lack of 30-31 but could raised on average, Offers more funds than future liquidity in shares. be more including advisers' fees. debt/angels, but is still Reporting to shareholders Often as much as appropriate for small takes time. You have to £200,000 businesses. Less give up equity. There is a regulated than AIM limited pool of investors 3-6 mths, 10.5 per cent* of funds Profile and credibility. Expensive to raise. Lack of 30-31 but could raised on average, Firms typically raise future liquidity in shares. be more including advisers' fees. larger amounts than Reporting to shareholders Often as much as through debt, business takes time. You give up £300,000 to £400,000 angels or OFEX equity. Better suited to medium-sized businesses * Typical amount – fees are negotiable 5
  • 10. SECTION 1 Preparation Bring in the experts Expert advice is essential when raising funds. But how do you find the right expert? G etting funding is a hard job but it can be made a lot easier by employing an CASE STUDY John expert to help. An expert will not only Heathcote is CEO of an help the deal run more smoothly, but they’re AIM-listed engineering and useful to help pinpoint possible flaws in your machinery company, Pursuit plans (for example, are you pushing the Dynamics, which raised business in the wrong direction, is your £2.4m in March 2004 through a private management team up to scratch?). Experts placing to institutional shareholders. will also help you identify alternative sources of “Personal relationships are crucial in funding and introduce you to useful contacts. business, and when our corporate finance To gain funding, you will have to spend time adviser moved to a competitor, so did we. away from your day-to-day business role, We knew him, trusted him and had an especially for the larger equity funding excellent rapport, which made switching an options which can take up to six months, and easy decision. This opened doors to you still might not get the finance. An expert institutional shareholders and introduced can guide you. The cost may seem high, but us to a whole new source of funding.” the long-term benefits of growth far outweigh the short-term costs of expert advice. Finding a good expert will be the hardest Try and get recommendations from friends part. Contact your local Business Link and and business contacts, ask your accountant speak to an adviser. They can provide an and bank manager, or go to professional objective assessment of your needs, and they bodies such as the Law Society. Whoever you will also use their expertise to search a choose, it’s important to select an expert national database of advisers, providing you who’s right for your business. Make a with at least three recommendations. shortlist, then meet them and discuss your business needs and look at who they have IN BRIEF THE EXPERTS worked with in the past. Ideally you are looking for someone who can not only help G Businesses that seek expert help build you gain finance, but also someone who turnover faster than those that don’t understands your company. Find out: G Accountants and lawyers are essential I What sort of information and advice you can for raising finance. For equity finance expect from the expert and going public, you will also need a I How often you will meet, and for how long corporate finance adviser, a broker and I If you will be able to call them in a crisis a financial PR consultancy I What areas they will cover G Build advisers’ costs into funds sought I What you will need to do yourself I What results you can expect 6
  • 11. Where next? SECTION Pages 8-9 For advice on calculating your needs 1 FURTHER POINTS TO THINK ABOUT General questions to ask Points to think about I What types of fundraising does the I Speak to one of the adviser’s recent expert specialise in? Check their track clients and find out how the adviser record in your business sector operates and what they did for them I Which lenders and investors do they I Think carefully about the fee structure work with? Are they impartial? and get the motivations right to get the I How quickly can they secure you finance? most out of your relationship. One I How do they propose structuring fees? possible option would be to combine I Can they supply three references, a retainer, a bonus for getting better ideally in a similar business area? terms and a closing fee Be clear also about how much effort you Corporate finance adviser are prepared to put into the relationship. To These sit between cash-hungry businesses make the most of your meetings, make sure and prospective lenders or investors, and can you have all the key facts and figures ready. help both to source and secure all types of Otherwise, you may waste the meeting finance at a higher level. Charges are usually hunting for information. You’ll also need to made up of a series of fixed fees, a closing make sure you follow through on the adviser’s fee and possibly a bonus. Fees may be as suggestions if they are to have any impact. much as 7 per cent for deals under £1m, but Where possible, agree specific targets and 2-6 per cent for larger deals. interim milestones and deadlines. Be honest and communicate, letting them know if you Financial PR adviser are unhappy with the way things are going. A financial PR adviser is necessary for a And check whether they feel that you have market listing, where profile and contacts lived up to your side of the deal. help raise funds. They typically charge a retainer of £2,000 to £10,000 a month. Some Accountant accept a project or success fee. Likely to be one of your first outside sources of help for all fundraisings, along with your NOMADs and corporate advisers legal adviser. Charges will partly depend on Companies listing on AIM must employ a the amount you raise. For larger sums, you nominated adviser (NOMAD) to ensure they typically pay 1 per cent of funds raised. meet regulatory requirements. OFEX listings Otherwise an hourly rate of £200 to £400, or require a corporate adviser. Expect to pay a £175 to £300 outside London, is standard. flat fee of £100,000 to £400,000, plus around 3-4 per cent of funds raised. I Legal adviser You cannot raise equity finance without a legal adviser. Fees for raising £500,000 in Where to go next venture capital would typically cost between For more on advisers, visit: £15,000 and £40,000. For a flotation, fees would range from £25,000 to around £70,000. 7
  • 12. SECTION 1 Preparation Calculating what you need Before you seek finance, you need to work out what is realistic in terms of amount, the timescale and the factors that will affect these calculations B ackers expect you to arrive at the sum you seek through careful planning and CASE STUDY When CEO of rigorous research. Fundamentally, they Michael Smith want to know what it is for, how long it will persuaded 16 business last and when you will provide returns. angels to invest £500,000 in a new venture he broke the How much should I ask for? budget into three parts. You need to cost each aspect of your growth “We budgeted carefully to get to profit. strategy. For acquisitions it helps if you have Pre-launch we needed £100,000 for stock, identified potential targets and valued the office space, IT and salaries, then enough business. To launch a product or service you to last a year (revenues should cover costs will need a marketing plan, which includes: after six months), and a contingency buffer.” who you will target, assumptions about how many sales or customers you hope to acquire, the medium you intend to use and working capital you are after, you will need to the cost of the campaign. assess market rate salaries if hiring staff; the Opening or purchasing new premises will cost of equipment required; or how much require some assessment of the cost to buy suppliers would charge for additional stock. or rent in the area you plan to locate, as well For all forms of finance, and particularly as any modifications you will make. If it is when raising larger sums of equity finance, Rob Donaldson of accountancy firm Baker IN BRIEF YOUR FUNDING NEEDS Tilly advises: “It is sometimes worth adding a little extra to the sum you seek as, if the fees G Research what your plans will cost, are fixed, they effectively become a smaller your expected returns and how long percentage of the total if more funds are the finance will last raised. Also, implementing a business plan G Consider what affects your often costs more than you expect it to.” calculations – sector, track record, You should plan to be covered for at least strategy, lifestage of business, existing a year in immediate financing as it’s difficult finance, assets to ask for more later and could take months G Think about how quickly you need it to raise depending on the source. Directors G Value the company accurately of companies listing on a public market are G Build in contingency actually required to sign off a working capital statement that accounts for at least the next 8
  • 13. Where next? SECTION Pages 14-15 For advice on using bank debt for growth 1 12 months. “Company directors tend to take an optimistic view of prospects,” says CASE STUDY Actinic accountant Stephen Bayfield of PKF, founder Chris Barling, “Investors gain confidence if a contingency raised £165,000 in plan is evident, as things rarely go to plan. angel finance in 1998 Remember that sales are usually more to launch its ecommerce software product. unpredictable than costs.” “We initially wanted £1m, but having Ultimately, you may need to temper your seen 70 angels we revised it to £100,000 ambition. You may have to recalculate if the for 11 per cent equity. You can only be as financier offers you a smaller amount, so it is ambitious as the funding you can raise. worth having alternative growth plans to We cut out plans for a US office, scaled ensure you don’t lose time trying to raise back marketing and product development finance while your existing resources dwindle. and aimed to be cash positive as opposed to profitable. It took nine months to raise, What affects the amount I can seek? lasted around a year, and saw us through It is important to be realistic for the stage of to when we went for venture capital.” development your business is at. For most companies funding levels tend to rise incrementally from small amounts of debt, to uneconomical due to the percentage of funds more sophisticated facilities (such as invoice paid in fees and the amount of equity given up, finance and leasing), to angel, venture capital although the Regional Venture Capital Funds and public market funding. Think about: make investments of up to £500,000 over two I How financial institutions view your sector funding rounds [for details, go to page 28-29]. I Your management team’s track record For a listing on the Alternative Investment I Existing and potential future competitors, Market (AIM), most companies are looking to and the economic climate raise £3m or more. It is more common to I Your existing debt facilities – the difference raise smaller sums, typically £750,000 to £1m between what expansion capital you think you upwards, through the OFEX market. need plus everyday overheads as you grow, With angel investment, the time taken to and the availability of your existing facility get funding can be a bigger issue than I Your asset backing – any assets you can expense. It is most cost-effective if you need use as security with investors or lenders £100,000 or over, as costs can be around 10 I Vision – it’s important to have a clearly per cent of the funds raised, although many defined goals and ambitions for your business angels are prepared to invest smaller sums. Most important are strength of For debt, repayment costs are the main management and clarity of strategy, although issue, as the cost of securing it is minimal. I lenders will be very interested in your assets. What is the most cost-effective option? The cost of raising finance is important. The Where to go next figure sought depends heavily on the fees For The Institute of Chartered charged, particularly with equity finance [For Accountants in England Wales, visit: more on advisers’ fees, go to pages 6-7]. Raising below £1m in venture capital may be 9
  • 14. SECTION 1 Preparation Attracting equity investment To raise equity you need to make your business attractive to investors – they will look for a sound business plan and the right management team G eoff Sankey runs a regional venture capital fund (RVCF) and says that of CASE STUDY Toby Ash, over 1,000 proposals received, only co-founder of furniture chain 20 have been invested in. The most common New Heights, initially raised reason for rejection is that the plan is at £350,000 from six investors concept stage only. “There’s a misconception made up of personal that investors simply back ideas,” he says. contacts, and now has 11 UK stores. [for more on RVCFs, go to pages 26-29]. “Because we wanted to finance a chain, These figures suggest that many we needed a visible pipeline of stores. We businesses seek equity investment before didn’t have money to pay consultants, so they’re ready. You need to have the gathered information about the products combination of a strong proposition, an able and markets ourselves. We found out the management team and good preparation to cost of opening and fitting stores. You have give you a better chance of raising money. to give a figure and be able to justify it.” Investors expect substantial returns, and try to mitigate their risks of not achieving this. Look at the investor’s deal portfolio. If your Your proposition business is similar to companies they already Propositions must be watertight, clearly have on their books, they may decide not scalable and differentiated from your rivals. to commit more money in that sector. If Research potential investors. “If businesses you’re looking for angel finance, go to angel treat potential backers as if they are potential networking events and listen to speakers to customers they will probably get a far better give you an idea of the companies you’re up response,” advises Sankey. Find out about: against [for more on angels, see pages 22-25]. I Their investment range I The stage of business they typically finance Your management team I Geographical reach and sector preferences It’s important that an investor believes in and likes your management team. IN BRIEF EQUITY INVESTMENT Investors look for the following: Personal qualities: Emphasise G Match your proposition to investors’ requirements your entrepreneurial pedigree, G Investors consider track record, age, the team’s quality, illustrated through your past contacts, financial commitment and management skills successes and lessons learned. G Work out what returns you can offer Contacts: You should have good G Decide how much equity and control of your business contacts and you need to talk you would be prepared to relinquish to relevant people, including suppliers and customers. 10
  • 15. Where next? SECTION Pages 12-13 To see what to include in your business plan 1 CASE STUDY Sam Tate, co-founder of fire safety manufacturer FireAngel raised £3m through grants, business angels, OFEX and loans for parent company Sprue Aegis Plc. Commitment: You must believe in your “Backing up our claims was vital. We got business enough to invest a significant Mintel reports on the landscape, carried amount of your own money and be prepared out research with consumers and fire to devote 100 per cent of your efforts to it. brigades, and cited Government research. Team: Directors should have previous We also got a successful entrepreneur to experience in their role, and at a similar level. constructively criticise our business plan.” Track record: A strong record helps, though if you’ve been through tough times you may have a clearer idea on avoiding pitfalls. control [for advice on agreeing terms, go to Age: Investors like to back sector experience pages 34-36]. However, do bear in mind that and preferably those who have already run a by attracting investment you are growing your business. If you and your team are in your 20s business – though you end up with a relatively or over 50, raising finance for the first time smaller slice, it will be of a much bigger pie. may be harder. Hiring an experienced You should be prepared to face intense non-executive director is a possible solution. scrutiny and questioning of your judgement Management skills: Do you have the ability to and decisions. This can prove to be a positive manage growth as the business evolves, or to influence, however, as being accountable to turn the business around should it struggle? investors may help to focus your attention and drive the business forward [for more The returns you can offer on investor relations, go to pages 37-38]. For equity investors, the overriding concern is If you get turned down, remember it is a what multiple of the investment will be made largely subjective process, influenced by the and how quickly. They’re geared towards preconceptions of institutions and individuals. opportunities allowing them an early exit, Treat any rejections as chances to improve through sale or flotation [for more on exit your offering, ask for constructive feedback strategies, see the box on page 28]. They will and try to fill gaps in the proposal. You have to ask themselves the following questions: demonstrate you can get on with backers and I Is the business plan sound? that you are resilient and dedicated. I I How will we exit from the business? I Who’s going to buy it or how will the market react to flotation, and how can it be achieved? Where to go next I What are best and worst-case returns? For more on equity finance, visit: The emotional side Raising equity investment means being Visit the British Venture Capital prepared to give up a stake in your business. Association at: You may feel nervous about relinquishing 11
  • 16. SECTION 1 Preparation A business plan to raise finance Business plans to raise finance are essential marketing tools. Read how to structure your plan and what you should include to convince investors T o secure finance, you will need to have The market: Size; growth rate; major a business plan which is tailored to players; your position; technical advances; meet the individual requirements of forecasts; relevant government regulations. your finance provider. Whether debt or equity, Future opportunities: Vision and objectives; a potential backer wants to see why you need customers and their needs; target market; finance, how you plan to use it, and what product or service positioning and value evidence you have to back up any claims. offering; USPs (such as plans to make your If you have an inexperienced management product cheaper, or to launch a new product); team that hasn’t dealt with raising finance patents or other legal protection; pricing; before, you should get in an adviser who can distribution channels; marketing plans. help you build the right business plan. Operations: Financial; organisational and human resources available to the business; Structure of your plan any requirements not yet met. You should include the following: Management team: Outline background, Executive summary: Your overall vision; a responsibilities and skills of your key people. mission statement; plans; the state of the SWOT analysis: Strengths; weaknesses; business; your product or service; growth opportunities; threats. strategy; unique selling points (USPs); sales; Risks facing the business: Competition; forecasts; what funds are needed and when. potential pitfalls; barriers to entry. History and background: The business; its Financial forecasts: Sales; gross margin; origins; historical performance; sales data. assumptions underpinning figures (including financial performance to date); profit and IN BRIEF BUSINESS PLANS loss account; balance sheet and cashflow three-year forecasts; payback; breakeven. G Include background information on Financing: Loans and debt arrangements; the business, market analysis, future a breakdown of how finance will be used. opportunities, existing operations, brief Exit routes: Possible exit strategies [for management biographies, SWOT more on this, see the box on page 28]. analysis, forecasts and existing finances This covers most forms of fundraising, G Try to keep it under 40 pages in total although securing debt requires less detail, G Tailor it depending on finance sought – with added emphasis on assets, security, 10 pages may be enough to secure debt credit worthiness and aged-debtor analysis. G Keep the look and feel straightforward To read and download a sample plan, visit 12
  • 17. Where next? SECTION Pages 34-36 For advice on negotiating with investors 1 How much to include Each section should be around three or CASE STUDY Emile Qadri, four pages, with slight variations depending head of finance at men’s on the type of business – a technology fashion wholesaler business might talk more about its products’ Duchamp, used a shortened intricacies, for example. business plan to secure a Avoid overemphasising any one section, £350,000 invoice discounting facility and only use headline figures in the executive “The business plan was not too onerous. summary. “Companies tend to go overboard We produced budgets, cashflow forecasts, on financial information. The plan is simply profit and loss, and analysis of credit there to seduce investors, to make them management; the factor was interested think they want to spend more time on it,” in our turnaround of debt and volume of says Rob Donaldson of accountancy firm credit notes. As an exporter there was Baker Tilly. If there is interest, they will interest in turnover and projections for have the opportunity to find out more. each territory. It was about 10 pages long.” Empathise with your audience I Backers considering offering debt will Keep a straightforward look and tone want to be confident that they will be repaid Lengthy plans are off-putting, according to on time. Talk about how risk can be Donaldson: “An executive summary of four or controlled, loss can be limited, and security. five pages should explain what the company Adjust the tone depending on the audience does – not how it does it. Write that section I Invoice and asset-based financiers last, after you have written 20 to 30 pages on are less concerned about security, more the other relevant aspects.” about the quality of your debtor book, your Presentation is everything. Make sure you credit management capabilities, bad debt keep the language and appearance of the record, and the extent to which the business plan straightforward and easily accessible. suffers credit notes. They may want to have Use photos and graphics where relevant, an idea of the sell-on value of your assets but don’t overcrowd it. Supply the plan as [for more on how asset-based lending a professionally presented document. operates, go to pages 19-20] Get advice – but don’t allow the adviser to I For equity investors, focus on market write the plan for you. It should have some opportunities and exit options, such as trade of your own character in it, as investors are buyers and the chances of flotation backing you personally as much as the idea, so try not to make it appear too formulaic. I Focus on the present While projections are vital to help backers see where you may be going, don’t forget to Where to go next tell them about your existing sales, For more on business plans, visit customers and the make-up of your management team. “Backers want facts and figures – what you have done, who you are For more on business plans tailored to selling to, and how proven the concept is,” equity investors, visit says investor Geoff Sankey. 13
  • 18. SECTION 2 Funding options and process Growth through bank loans A bank loan costs less to arrange than equity finance, although the repayments can be constricting. How can you raise it, and is it for you? S ecured bank loans are typically repaid over three to five years at a fixed or CASE STUDY Martin variable rate of interest. They usually Jones, founder of have a lower interest rate than overdrafts £42m turnover travel (which are often used as a short-term cash company Freedom ‘buffer’) and are repaid over a shorter period Direct, secured a than commercial mortgages (although a loan £150,000 two-year can also be used for purchasing premises). loan from his bank But do bear in mind that nearly all term loans to fund needed capital expansion are still repayable on demand. “We secured £100,000 to start the business in 1997, so went back to our bank What can I use it for? How much can I raise? when we needed to pay for bigger offices. A bank loan is unlikely to fund high cost Keeping cash was important. I didn’t want growth strategies such as acquisitions, but is interference from investors, plus we didn’t good for working capital and more moderate need enough for equity finance. Leasing growth. The amount raised is unlikely to was an option, but I prefer to own assets. exceed £500,000. Taking smaller debt early on means when I look for £1m to buy new premises next What kind of company is it for? year, it should be more straightforward.” Unlike equity finance, loans are ideal for owner-managed businesses where the owner wants to retain control; backers do not directly Loans have repayments from the outset so influence decisions and the owner gets a new businesses looking to launch products or larger payout if the company is sold. For more services without sufficient cashflow to service on different types of finance, go to pages 2-5. the loan may not be considered. “Banks will be keener to lend where repayment can be evenly IN BRIEF BANK DEBT spread,” says Stephen Bayfield G Good for working capital and medium-paced expansion of accountancy firm PKF. G Retain control and avoid interference from a backer Your bank will want to know G Raising between £50,000 and £500,000 is possible the following: G Assets and track record of the management are key I The track record and G You may have to make personal guarantees, such as financial position of your putting your house up as security business and the management team 14
  • 19. Where next? SECTION Pages 8-9 For advice on calculating your requirements 2 BANK DEBT PROS CONS G It is cheaper and easier to obtain than G Businesses with little trading history equity finance may find larger loans hard to obtain G You do not have to give up any control G Defaulting on repayments or breaching of your business to a backer conditions may mean paying back in full I The loan’s purpose and your ability to repay quotation before you proceed, and read the I The value of your personal guarantees small print, looking out for hidden charges. Banks also help to administer the Government-backed Small Firms Loan Does a loan take long to secure? Guarantee. The SFLG provides security for It should take between one and three months companies that have already been turned to finalise. Either way, you should get an down for a bank loan and can guarantee answer quickly, maybe within weeks. For new loans of up to £250,000. For details, visit businesses banks can be risk-averse. Some accountants advise getting quotes from a few banks to try and force a quicker decision. What are the costs? It costs less to raise than equity finance but is What is the loan dependent on? a larger drain on cashflow. You need to check Banks will go through a strict credit scoring the annual percentage rate (APR) of interest. and underwriting process and set the I Interest charged on loans is usually following provisos before the loan is agreed: 2.75-4 per cent over base rate, although the I You will have to sign legally binding rate may be higher for new businesses. covenants. If you breach conditions, the bank Interest is charged on the amount of the will be entitled to immediate repayment in full facility you are using at any one time, and I You must achieve minimum levels of profit levied quarterly or monthly I Monthly management accounts and audited I A lending fee with arrangement costs, of annual accounts are required before and after 1-1.5 per cent of the loan, is also charged I Lenders may want to see how you manage I You and any major shareholders may need debt, with analysis of how much the business to give a personal guarantee. Offering your is owed alongside when the invoice was home as security is not unusual, however you issued (this is called aged-debtor analysis). I are putting your home at risk if you fail to make the repayments. Other options include a mortgage of business property or directors Where to go next putting more money in themselves I If you decide to pay the loan back early, a For more details on bank debt visit: prepayment fee may be charged Charges are based on the riskiness of the To use The British Banking Association’s deal and your standing. Banks expect ‘finance finder’ to compare different repayments to be spread fairly evenly. It is products, visit: worth shopping around. Get a written 15
  • 20. SECTION 2 Funding options and process Borrowing against your invoices By raising funds against the value of your invoices you can really improve your cashflow, but are factoring or invoice discounting right for you? I nvoice finance comes in two key forms – factoring and invoice discounting. For both, CASE STUDY Andrew cash is immediately advanced to you when Green is managing director you raise an invoice. You can draw an agreed of engineering recruitment percentage of each invoice, with the balance, consultancy Brightred minus fees, paid on settlement. Consultancy Group, which The difference between the two is that has worked with an invoice discounting factoring provides an additional service of company for eight months. sales ledger and collection management. “Some projects take 60 to 70 days for us Invoice finance does not necessarily work to be paid, yet we have to pay contractors for all types of business though. It is within seven days. Growth is impeded by particularly suitable for partnerships and cashflow problems so we looked for a limited companies selling goods or services strategic partner who would understand on credit to other businesses. our business. Banks don’t invest heavily in organisations like ours, but now with How to use invoice discounting invoice discounting, we can make business Invoice discounting is best used to improve decisions rather than cashflow ones.” cashflow and as a cost effective alternative to overdrafts or bank loans. Invoice discounting firms don’t need extra security to advance How much can I raise? you money. However, they’ll want to see an Invoice discounters advance 80-90 per cent of efficient credit control system and that your your invoice value, depending on turnover, business is profitable. sector, customer numbers and existing credit Invoice finance lenders will consider most controls. If your customers are credit-worthy, sectors. Some are less suitable, such as with sales not likely to become credit notes, businesses allowing the return of goods you’ll get a higher percentage. or those that take cash payments. What are the costs? I The one-off service charge IN BRIEF INVOICE DISCOUNTING ranges from 0.1-1 per cent G Get up to 90 per cent of the value of invoices of turnover. The cost depends G Retail and cash businesses are less appropriate than on how much work is involved manufacturers, distributors and service providers for the suppliers, who may G Can help to even out cashflow insist on a minimum level of G The charge is a one-off percentage of turnover, plus turnover for a minimum fee. interest on amounts borrowed I The second element of the cost is interest, which is 16
  • 21. Where next? SECTION Pages 20-21 For the possible benefits of leasing assets 2 INVOICE DISCOUNTING PROS G The amount advanced grows as your company expands G It can improve cashflow and give you flexible access to additional funds charged on what you are borrowing. This can G Can help introduce credit control range from 1-4 per cent above base rate discipline into your business I Another optional cost to consider is bad CONS debt insurance. If your clients don’t pay by G It only works for those businesses the end of the invoice term, the lender will that sell products or services on reclaim the money from you. By opting for a credit to other businesses ‘without recourse’ service, you will be covered G It’s not the cheapest form of finance for up to 100 per cent of the invoice value G You can get tied into long contracts How quickly can I get a deal? Lenders can usually give you an answer fairly your own processes. Sharp adds that invoice quickly – somewhere between a week or a discounting encourages excellent discipline: month, depending on the size and complexity “Finance companies do extensive credit of your business. They will want to: checks on your business and can pass I Examine your business and its accounts that information on to you.” I Carry out some due diligence, including scrutinising your sales ledger history and The downside of invoice discounting your credit control procedures It isn’t the cheapest way of accessing funds, I Perhaps suggest changes to your so balance your need for a smooth cashflow processes before the facility is cleared against forfeiting some of your invoice value. Also, if things go wrong you may find that What do lenders want? you’re tied into a deal for at least 12 months. They want to see profitable businesses, but Before you sign up, ask what happens if you some will consider those who are not yet want to get out of the contract. Will you still profitable or have been insolvent, if they have be charged for the whole period? a robust turnaround plan. They have similar Remember, invoice discounting is a financial concerns as banks, says Kate Sharp competitive market so negotiate on terms of The Factors and Discounters Association. and conditions such as notice periods. I “They are looking for a good business plan, sound management and financial credibility. Have your books ready, and have people Where to go next available who can express where you want to take the business,” she advises. [For advice For more advice on invoice discounting, on business plans, go to pages 12-13]. visit: Suppliers will monitor your sales ledger For The Factors and Discounters throughout the relationship. However, this Association, visit: can help identify credit risks and tighten up 17
  • 22. SECTION 2 Funding options and process Making use of your assets A less well-known source of debt finance is asset-based lending, where financiers can lend your business money using your assets as collateral A sset-based lending is a secured decisions on the value of specific assets. business loan where the borrower Asset-based lending is a specialist area pledges their assets as collateral. that is becoming increasingly popular in the Financiers lend on assets with high sell-on UK. In less than 10 years the amount raised values: stock, machinery, premises, invoices by British businesses using it has trebled – and even brands or trademarks. It is distinct from £2bn in 1993 to £6bn today [source: from invoice discounting, as invoices make Factors and Discounters Association]. A up only part of the arrangement [for more on handful of specialists offer the service, invoice discounting, go to pages 16-17]. alongside some high-street banks. Typically you will have access to a revolving credit facility (where you have an upper limit Who is it for and how much can be raised? but the total borrowed changes frequently), It works well for asset-rich businesses as with an overdraft. The size of the facility is undergoing a step change. A business subject to the value of collateral at the time, looking for extra working capital to fund and is constantly assessed, so the borrowing growth or seeking to part-finance a larger ability of a seasonal business can fluctuate. deal, such as a management buyout, typically Financiers usually retain legal ownership uses it. Lenders prefer to deal with of the assets concerned for the contract’s manufacturers, distributors and retailers. duration. Unlike bank lending, where future The amount that can be raised depends on cash projections are a major consideration in the perceived value of the assets and the the lending decision, asset financiers base likely rate of depreciation. But you can raise similar percentage levels of IN BRIEF ASSET-BASED LENDING the value of your assets that an invoice discounter would G Debt can be secured against assets including stock, lend against invoices. The machinery, premises, invoices and even brands difference is that because G Manufacturers, distributors and retailers are the asset-based lenders look at most likely users, though it’s not a common source of the total value of all your UK finance and few finance houses specialise in it assets, they can potentially G Ownership of assets is gained or retained by the lend you a lot more. lender for the duration of a contract Some assets are worth G Lenders may advance more than invoice discounters more than others: because they look at all the assets of the company I Invoices as part of an asset- G Some lenders have a minimum deal size of £5m based deal could result in an 80-85 per cent advance 18
  • 23. Where next? SECTION Pages 14-15 For advice on bank overdrafts and loans 2 I Plant, machinery and property will also command high advances, around 80 per cent CASE STUDY Jim Webster I Stock and raw materials tend to result in a is finance manager of Police lower advance of 30-70 per cent Aviation Services which Values are usually based on what assets provides police helicopters with pilots, would be worth in the event of a ‘forced sale’ equipment and maintenance. It has a or ‘orderly sale’ rather than full market value. £2.5m revolving facility. “The advantage of asset-based lending What are the costs? is that it allows us to borrow against our Costs are similar to those for an overdraft helicopters and invoices, while only dealing from a high-street bank. The annual cost of with one financier; invoice discounters can’t borrowing on a revolving credit facility is do that. Our lender used specialists to around 1.75-2.5 per cent plus an annual value our assets. The money was used as and/or closing fee of around 0.5-1.5 per cent working capital when the company changed of the total borrowed. ownership. The revolving facility suits us – Should you decide to seek a term loan we don’t need the amount that we could against fixed assets, you would be charged at borrow on a term loan. And senior similar rates to your credit facility. In order to managers do not have to handle support loans, however, the financier would administration, which is not too onerous.” have appraisals or valuations undertaken on your fixed assets. The cost of employing a valuer, which varies depending on the assets four to six weeks. After signing, some finance and size of facility, will be passed on to you. houses may allow a cooling-off period. You will also be charged monitoring costs relating to the constant ongoing review of What do lenders want? your collateral arranged by your backer, and Lenders look more for solid businesses than due diligence costs (see below). for stellar returns. “We seek companies with significant assets and prospects for How quickly can I raise the money? improvement,” says Dennis Levine, chief Not as quickly as pure invoice finance. The executive of asset-based lending specialist sums involved are larger and the valuation of Burdale Financial. “We tend to finance certain assets – brands, for example – is buyouts or refinance businesses where more complicated. The lender might have to traditional sources are less flexible.” They call in the services of a specialist valuer. expect management, collateral and sales You have to be prepared to undergo a reports on a daily, weekly or monthly basis detailed evaluation of your business (due depending on the assets being funded. I diligence). The lender will look at all your accounting systems. They’ll use an external valuer to value property, plant and Where to go next machinery, and will review your cashflow and budget projections. You’ll have to prove your For a list of asset-based lenders from cashflow is smooth enough to weather any the Factors and Discounters Association, seasonal fluctuations or unplanned drops in visit: business. The whole process should take 19
  • 24. SECTION 2 Funding options and process Should you buy or lease assets? Buying outright might not be the best use of your capital. Look at leasing and hire as an option for acquiring assets hen your business needs to acquire W assets, buying them outright might sound like the simplest option; cash purchases can work out cheaper in the long CASE STUDY Business Communications, which supplies telephone systems, leases four luxury cars. Co-founder Stewart run and the goods are classed as business Arthurs explains how the contract hire assets and so can be used as security. agreement with Fleetline helped free up However, this might not be the best use of around £140,000 to grow the business. your working capital. “In the past we bought vehicles, and the If you take out an overdraft or loan to cover deposits and financing tied up capital. the outright purchase of assets, build Leasing resolved that. Our business is interest repayments into your calculations equipment-hire, and after an initial outlay and compare that against hire or leasing it takes around 15 months to start earning costs before you make your final decision. money. By maintaining liquidity we’ve been If you don’t need to own the item able to move to larger premises, buy new immediately, consider leasing. Leasing computers, and invest in more equipment.” allows businesses to use valuable assets – such as machinery, cars or furniture – without buying them outright. These items There are a number of leasing options. A are instead bought and owned by a finance popular long-term option is direct leasing house and leased to you for a set period. where you pay a deposit followed by regular payments that ultimately cover the full value IN BRIEF LEASING of the asset and the interest accrued. Another option is operating leasing, which G You get immediate access to the assets allows you to use the assets for a shorter but pay back on a monthly basis, thereby period; the finance house can either sell or easing your company’s cashflow lease them again at the end of the contract. G Leasing companies effectively lend you If you don’t want the worry of covering the total cost of items leased maintenance costs, consider contract hire. G Almost anything can be leased – cars; This is a form of leasing often used with property; IT and telecommunications vehicles in which your monthly payments equipment; machinery; printers and can include maintenance and fuel. photocopiers; or even furniture G There are various tax benefits – for The advantages of leasing example, you can deduct lease costs I Cash that would have been spent on assets from your taxable income can be released to finance growth G It can take only days to organise I You don’t own a depreciating asset and can return it, offering flexibility 20
  • 25. Where next? SECTION Page 18-19 Find how to make the most of your owned assets 2 You will probably be asked for a deposit to help underwrite the deal – this can be anything from 5-30 per cent. Computer equipment often requires a large deposit, while industrial equipment is often less and cars lower still. In fact many vehicle manufacturers provide interest-free finance, so purchasing a vehicle could actually prove to be a wise business choice. It’s vital to get independent expert advice. Get your accountant to analyse the figures and compare the tax benefits of buying I You can lease almost anything from outright against leasing. Your accountant company cars through to computers, phones, should also be able to tell you if the overall photocopiers, machinery and furniture. cost is too high. Finance fees range from I You can access the latest equipment and 1.25-10 per cent over base rate, depending may receive maintenance and support as on credit worthiness, and a negotiable due part of the leasing deal diligence charge of 0.25-1 per cent of the I There are tax benefits. For example, you amount advanced may also be levied. can claim back VAT on lease payments and Lenders can be flexible on repayment you can also deduct the lease costs from patterns. You might be able to negotiate a your taxable income. For more details, visit deal whereby you pay a lump sum in advance, or at the end of the lease, and pay smaller monthly sums in between. Deals are The disadvantages of leasing typically for three to five years; repayment I If you lease the item long-term you’ll terms could be extended, though this is rare. probably end up paying more for the asset There are other cost benefits too. David than buying outright Harnett, director of nationwide vehicle I Leased items are not classed as business leasing firm Fleetline, says one of the biggest assets and so can’t be used as security savings for small businesses can be in administration: “Typically, the responsibility Finding a leasing company for dealing with the fleet is tacked on to Most high street banks, a range of specialist someone else’s job. An operating lease or independent leasing companies, and some contract hire can be a hassle-free option.” I manufacturers themselves now operate leasing arrangements. For a comprehensive list or advice from the Finance and Leasing Where to go next Association on where to find suitable leasing To decide whether to lease or buy, visit: partners, visit How much will it cost? For a list of leasing companies and There are no standard deals and costs can advice, visit the Finance and Leasing vary considerably by sector and by business, Association at: depending on the risk involved for the lender. 21
  • 26. SECTION 2 Funding options and process Angel finance Business angel investment can provide first-time equity fundraisers with significant sums of money, and guidance from experienced entrepreneurs f you are looking for point at which it is I financial input and guidance from experienced individual attractive to a VC firm. The most reliable way to source angels is to investors, angel finance contact one of the could be for you. many business angel Angels are usually networks, which sift wealthy entrepreneurs, opportunities for their and dealing with them pool of investors and is less formal than arrange networking with other forms of events for you to equity finance. But present your business. they are individual The National personalities so are Business Angels also less predictable. Network (NBAN) at As well as investing money, they can offer will put you in contact with skills, contacts and experience, and some angel intermediaries. will fill gaps in your management team, either by offering advice or filling specific What will angels back? roles. Angels tend to offer smaller sums at Angels invest in almost all industry sectors, an earlier stage than venture capitalists but often prefer sectors in which they have (VCs). This may help take the business to the previous experience. New, early and expansion-stage companies IN BRIEF ANGEL FINANCE are generally favoured, but they will consider all G Between £10,000 and £2m can realistically be raised businesses requiring finance. from one angel, although more has been achieved G Sourcing angel investors might require more searching What can it be used for? than finding venture capitalists (VCs), but private investors It is often used to help are more prepared to back an early stage business businesses accelerate away G Angels may be found through industry contacts, but a from the start-up phase, and more structured approach is via business angel networks mature businesses G The process is less formal than with VCs – angels often sometimes use it to launch know their sector well, and so make instinctive decisions new products and services, G You are likely to have a closer involvement with your open new premises, buy investor as they look to add value to your business competitors or to take on staff as growth demands it. 22
  • 27. Where next? SECTION Page 32-33 For advice on making a business pitch 2 ANGEL FINANCE PROS CONS G Angels often invest smaller sums than G Angels invest in only a very small VCs, so may suit newer businesses proportion of the investments they are G As well as funds, they may be able to presented with – more than 90 per cent of offer skills, contacts and experience investment opportunities are rejected at G Investment occurs in most business the initial screening sectors and at all stages of development G Many angels expect close involvement G Can be quicker and less formal than with the business they invest in, which not venture capital investors all businesses find desirable How much can be raised? investors who are interested. When you do The amounts involved in angel funding vary track down a possible backer, the process of widely, from £10,000 up to multi-million persuading them to invest can sometimes pound sums. “Most angels invest £20,000 to also be protracted – but persistence can pay. £50,000 per deal and when syndicates are “Because angels are individuals, they are formed, sums can be very large,” says unpredictable,” says Rob Donaldson, Anthony Clarke, chairman of NBAN. corporate finance partner in a nationwide How does the investment work? Investment can be upfront as a lump sum CASE STUDY or may come in stages dependent on your Veritape found an business hitting specific milestones, such as angel network to achieving sales or launching an important be a good way to new product or service. raise funds to target Where can I find business angels? emerging market Angel funding can come through personal opportunities for contacts as well as industry contacts or its new call recording technology, explains suppliers. But as mentioned earlier, the most sales director Cameron Ross. structured way is to approach a regional “We underestimated the time involved. business angel network close to your We wasted a lot speaking to banks, which business – these each represent a grouping were very disappointing. But we located a of private individuals looking for investment number of offers and were able to choose opportunities. They often operate in different the people we felt most comfortable ways – some are more active or more working with. We dealt with a syndicate of structured than others so look at their client business angels and made it clear they had portfolio first, which is often held online. to appoint a single spokesperson rather than having multiple conversations. We had Are there barriers to raising funds? VC interest as well, but angels offered a Angels are widespread and can be difficult to quicker and more personal approach.” locate. You may spend months finding 23
  • 28. SECTION 2 Funding options and process accountancy firm. “Their priorities can may expect to take a large share in your change and things can happen in their business in return for their financial input. personal lives which you can’t bargain for. I An independent angel network will charge With a VC there is a more rigorous process presentation fees of hundreds of pounds to you can see and understand.” For more on present your business at one of their events venture capitalists, go to pages 26-29. I If successful the fee can be as much as 3-5 per cent of the sum raised. Some What are the costs? networks may want an interest in the Angel finance will involve costs and charges business on top, or in place of some, of the ranging up to around 10 per cent of funds fees listed above raised and you should find out about these You should ensure you understand the at the outset. Costs are lower than venture fees charged and what you can expect to capital and public market listings [for more receive for them at the outset of the process. on these, go to pages 30-31]. It is, however, Specialist advisers in this case are not a full-time activity for one person in your always necessary. You could use your company, often the owner-manager, so the accountant, lawyer or business adviser if cost of time taken out of running the business they have relevant deal making experience. should be calculated. And because it often involves early-stage companies and is How likely is a successful fundraising? consequently considered a high risk, investors More than 90 per cent of companies seeking angel funding are turned down in the early stages, CASE STUDY Tracey according to research by Powell, managing director NBAN. Having a strong of Tiger Bay Beverages, business plan is essential raised £325,000 in angel [for more on this, go to funding for the national pages 12-13]. You will launch of a range of long- also have to be able to life smoothies. demonstrate how your “I founded the company business will use any in 2001 and spent two funds it raises to achieve years developing a range of specific growth objectives. smoothies and juices. We Angels may wish to visit needed a unique selling your business to satisfy point, and set upon themselves that their extending the shelf life, to avoid wastage without adding investment is going to be a preservatives. The unexpected expense meant we had to go success, and to work out outside of traditional areas to raise finance. While too risky for their role in the company. banks, we didn’t want to raise enough to be of interest to venture Where you are dealing capitalists. People said it would take three months, but it wasn’t with a syndicate, the that quick. We started in October 2003 and had the money by potential complications February. The investors came on board as non-executives and increase, as the various provide valuable support.” investors often have different concerns. 24
  • 29. Where next? SECTION Pages 34-36 For tips on negotiation 2 EARLY GROWTH FUNDING What is it? growth can be considered, including: Early Growth Funding is a Government I New businesses or university spin-outs programme introduced to increase the I Innovative/knowledge-intensive firms availability of risk capital funding for I Smaller manufacturers needing fresh businesses in the early stages of growth. investment to pursue new opportunities There are seven individual funds and all but one operate by matching funds How do funds operate? invested by angels and helping to form Funds are managed commercially, syndicates able to make larger with each fund responsible for vetting investments. The funds invest on applications and placing investments. essentially the same terms as angels Exit will be in the usual way, through and seek to make similar returns. trade sale or flotation. Portfolios are expected to show a mix of sectors and How much can be raised? business types. Typically match-funding of up to £100,000 to supplement private sector How can I find out more? investment of at least the same amount. For information and contact details for the various national and regional Early What type of company can benefit? Growth Funds, visit All businesses in an early stage of finance/earlygrowth.php How quickly can I raise it? and be prepared to back the venture with Angels often undertake their own due their own money as well diligence and the investment has a lot to do I Market validation of your business through with personal feeling. Due to its somewhat existing sales or known distributors is informal nature (compared to the more desirable, although it is not essential standardised process used to secure venture I Some businesses may find the close capital), the angel investment process can scrutiny constricting: many angels are take an unpredictable amount of time, seeking the thrill of being involved with although three to six months is typical. a dynamic early-stage business, not just financial rewards, so will expect to contribute What do angel investors expect? to the direction of the business I Given the strong element of risk involved in many angel investments, investors tend to seek high rewards. For more on negotiating Where to go next the terms of a deal, go to pages 34-36. For more details about angel finance, I Most will seek an exit in three to five years visit: I They will expect growth of their capital of at least 25 per cent a year, often higher For more information about the NBAN, I Your management team may need to visit: show equal commitment to the project, 25
  • 30. SECTION 2 Funding options and process Venture capital If you’re looking to raise more than £1 million and are prepared to relinquish some control and of your business, then venture capital funding may be appropriate for you enture capitalists (VCs) provide finance to I You are near to profit already V ambitious early stage growth businesses in exchange for a significant stake in the company. Typically, they help finance a major I Your overheads are tight I You don’t make promises without foundation I You and the management team are expansion strategy. The VC takes some of the prepared to invest your own money too risk, has a say in the company’s direction, I You don’t over-value your business makes a high return and usually seeks to exit I You have a good rapport with the VCs in three to five years, often through a trade sale or, in a few cases, a market flotation. What growth strategies will VCs back? Expansion strategies that include one of the What do VCs look out for? following – acquisition, new product or service VCs will expect some proof of concept and launches, new markets, locations or the maturity in the business, unless it is a new establishment of a chain. These represent business with a proven management team or, aggressive growth and are more likely to after a period of research and development, is deliver the returns VCs require. about to launch a new product or service. “We want ambition, moderated with an How much can be raised? appreciation of the risks involved in growing a Realistically you are able to raise between business,” says Bill Dempster, investment £1m and £5m if seeking venture capital manager of Northern Venture Managers for the first time. Anything below £1m is (NVM). “It needs to be informed and difficult to raise and more expensive, which balanced.” A great concept alone is not is why the government set up Regional enough. You need to be planning and Venture Capital Funds to provide equity expecting rapid and continued expansion. finance of up to £500,000. For more on It will help your cause if: this, go to page 28. IN BRIEF VENTURE CAPITAL FINANCE G It usually takes between three and eight G VCs back high-growth strategies, such as months to raise finance, sometimes more acquisitions; product or service launches; G Owner-managers will often be expected new premises; or national, European or to give up at least 20 per cent equity global business expansion G Regional Venture Capital Funds provide G An exit through flotation or trade sale is ‘equity gap’ funding of up to £500,000 expected within three to five years 26
  • 31. Where next? SECTION Page 22-25 For advice about funding from business angels 2 VENTURE CAPITAL PROS CONS G Some investors can add valuable skills G An estimated 95-98 per cent of funding and open doors for your business proposals are rejected by VCs G Investors may provide follow-up G Medium-sized to large investments are funding as your business grows more attractive than smaller investments How will the business be valued? I Typical legal fees are £20,000 to £30,000 Venture capitalist Bill Dempster says that I Specialist accountants will usually charge valuing fledgling or pre-revenue businesses 1 per cent of funds raised or an hourly rate still in the process of developing products or of between £200 and £400 in and around making a market entry is more art than London, or between £175 and £300 if outside science. “But a standard way for VCs to value Don’t assume raising £500,000 means a more established business is a multiple of paying less, as the percentage is normally the profits or earnings ratio – typically four or slightly higher for smaller fundraisings five times. Ultimately, it always depends on because they involve a similar amount of work. the nature of the business, potential and And it is still cheaper than going public, competitive pressures.” where issuing a formal prospectus for a flotation through a nominated adviser could Where can I find VCs? cost £100,000 to £300,000. The British Venture Capital Association For more on the costs and the role of (BVCA) has a full list of members at expert advisers, go to pages 6-7]., with details of investment preferences. Accountants, lawyers, corporate finance and business advisers are also CASE STUDY Daniel well-positioned to introduce you to potential Drury, who runs web investors. Otherwise, other traditional routes analytics company are business contacts; networking events WebAbacus took over set up to match investors with ambitious six months to raise businesses; and investment-readiness £1.2m in 2003. programmes run by VCs, accountancy firms “We saw about 20 and corporate finance specialists. Some VCs VCs, but learnt from ask for enquiries through their websites. each ‘no’ and went back better. Networking was important. You can look up suitable What are the costs? firms on the BVCA site and send business Advisers’ fees are the main cost to consider: plans, but without a personal introduction I Corporate finance (CF) advisers usually take it is that much harder. We also took on a around 5 per cent of the money raised, as well non-exec to add some battle experience, as equity options (again, around 5 per cent). and the ability to tighten the ship and polish You save on accountant’s costs by using CF the plan. I had built and sold a company, advisers, but you do have to pay the VC fees but this guy had done it five or six times.” and due diligence costs 27
  • 32. SECTION 2 Funding options and process How does the investment work? EXIT STRATEGIES You are unlikely to receive funds in one go unless you’re prepared to give up significantly hen starting a business, plan more in equity. Investors prefer to provide it W how you will ultimately exit it. A good strategy can help maximise the when you hit pre-agreed milestones, such as turnover growth, or delivery of a target like an value you get from capital you've built acquisition, or progress relating to products up, and end your involvement with or services. VCs will often expect to agree a minimal disruption to trading. It may mix of debt and equity, to ensure investee occur at a planned time – or a strong companies are paying something back over market, for instance, might prompt the duration of the investment. you to sell or merge your business. For more on exit strategies, visit What rights do VCs expect? In a typical deal, VCs will expect to agree certain rights of veto or areas where they expect to have an influence, including: How quickly can I raise it? I Significant items of expenditure Be aware it may take six months or more to I Hiring and firing key staff complete the process, so you shouldn’t I Major acquisitions, disposals or strategic embark on fundraising without enough cash alliances, and any fundraising strategies in reserve. It can involve months of involving giving up equity preparation, many visits to investors’ offices I Significant changes in business strategy (which may mean overnight stays in London I Control over key staff members’ and the in a lot of cases), detailed due diligence, and management team’s remuneration the disappointment of knock-backs. I Dividend payments REGIONAL VENTURE CAPITAL FUNDS (RVCFs) What is it? I Have a turnover of less than An England-wide government programme approximately £27m or a balance sheet set up to provide small and medium-sized total below approximately £18m businesses with risk capital of up to I Have their head office or material part £500,000 over two rounds. The funds, of the business in the region of the fund which help to fill the ‘equity gap’ are There are a number of sectors not commercially managed by experienced VC eligible for investment [for more detail professionals. They have the intention of on RVCFs and eligibility, visit making significant returns and stimulating private sector investment in businesses with lower funding requirements. Where are the funds? There are nine funds, each with a different What type of company can benefit? amount of total funding : Companies must: N.E. Fund – Northern Enterprise Ltd I Employ 250 or less East England – Create Partners Ltd 28
  • 33. Where next? SECTION Pages 34-36 For tips on negotiation 2 There will also be restrictions over what management are able to do if they leave CASE STUDY the business, such as being barred from Managing director forming a competing business, working for a and co-founder of competitor or poaching staff for a set period. restaurant chain But while some of your overall autonomy Las Iguanas, may be lost, VCs expect to work with the Eren Ali, raised £3m in VC funding and a investee company and share a common bank loan in July 2002, in return for 35 per interest – growing the business. Providing you cent equity to roll out his business’s always communicate well and bear your concept. It is now self-funding. investors’ interests in mind too, the “The business was too small and relationship can run very smoothly. abstract for a public listing. Angels didn’t For more on negotiation go to pages have the expertise we required and the 34-36, and for more on investor relationship banks required security. VCs understood management, go to pages 37-38. the cash-generative nature of the business and found it attractive. They are also able What returns do VCs expect? to build a top team around you. For us, the VCs usually want an annual return of about cultural fit was most important and of 10 30 per cent on the money they have invested, interested VCs, six pursued it, but only one although – while not publicly acknowledged – was coming from the right direction.” this expectation is currently slightly lower. You could feel pressure as early as 12 to 18 months in, depending on the investor and particularly those that are affiliated to banks. the condition of their portfolio. Others are Bear in mind that the longer a VC remains prepared to wait as long as eight to 10 years, involved, the more interest you’ll be paying on the debt element of the deal. To boost chances of achieving a sale or flotation, VCs will scrutinise your company’s East Midlands Fund – Catapult Venture procedures, management team and Managers Ltd accounting systems. This can often include N.W. Fund – N.W. Equity Fund your investor taking a place on the board, London Fund – London Fund Managers appointing an independent chairman or Yorkshire and Humber Fund – Yorkshire bringing in a finance director who has prior Enterprise experience of working with VCs. I S.W. Fund – S.W. Ventures S.E. Fund – S.E. Growth Fund West Midlands – Midven Ltd Where to go next For more details on RVCFs visit For more on equity funding options, visit: Alternatively, you can call your local Business Link. They will be able to provide For a directory of all UK investors, visit you with information about funds that are the British Venture Capital Association available in your local area. at: 29
  • 34. SECTION 2 Funding options and process Should I float my company? For raising over £500,000, a listing may be your best option. It is often the next step after angel and VC funding – but it can be a complex process I nitial public offerings (IPOs) involve floating Both AIM and OFEX are generalist and do not your company either on the Alternative have sector preference. There are drawbacks, Investment Market (AIM) or on OFEX. There though. An IPO is the most time-consuming is typically more new capital on offer than and expensive way to raise finance, and as a from other sources of finance. They may be form of equity finance it means you have to give worth considering if your business: up some control of your business, consider I Has an aggressive growth strategy shareholders’ interests and provide twice- I Has a strong record of profitability yearly updates on your company’s progress [for I Is in an attractive sector advice on managing investor relations, go to I Wants to raise its profile pages 37-38]. There is also no guarantee how I Needs from £500,000 to £10m or more well subscribed the offer will be; if it is priced too high, it could reduce the sum raised. What are AIM and OFEX? AIM, the London Stock Exchange’s (LSE) What can you use funds for? market for smaller companies, is often a first A public listing is ideal for company step to joining the main list. For more details acquisitions and enables you to use shares on the listing process required for AIM, visit as well as cash to fund deals. Other growth strategies requiring ready capital and The OFEX market is regulated by the promising impressive returns – such as Financial Services Authority (FSA). It product launches or commercialisation – is often used as a stepping stone to AIM. may also be appropriate, though you have For more details on the listing process to convince investors you have the capacity required for OFEX, visit to match the growth you have promised. Early stage businesses IN BRIEF FLOTATION represent a greater risk to investors than established G OFEX is good for raising £500,000 to £5m. AIM is good ones, and must therefore if you seek £1m to £10m. Strong growth potential is demonstrate a plan to get a necessary, and a track record of profit is usually helpful return on their investment. G Fees account for over 10 per cent of funds raised Directors who use the on OFEX and AIM, more for smaller IPOs proceeds of a flotation as an G Flotation takes up to six months; you must be exit from the business may be prepared to relinquish control and be strictly regulated viewed as having a lack of belief in the company. 30
  • 35. Where next? SECTION Page 6-7 For information about financial advisers 2 How much can I raise? OFEX caters mostly for companies that want CASE STUDY to raise £500,000 to £5m, although more is Travel often raised through secondary fundraisings. promotions You may raise more finance on AIM as it is company MKM favoured by more institutional investors and Marketing and AIM companies have a higher profile. Figures Promotions for 2003 show the average AIM flotation raised £1.4m by floating 24 per cent of the raised £8m, compared to £843,000 for OFEX. company on AIM in June 2004. Marketing However there have been several AIM IPOs of director Jon Harris feels their major plans £1-2m recently, and the average quoted is so for development made AIM the right option. large because of a single very big fundraising. “In 2002 we bought ourselves back from If your company isn’t ready for an IPO, a British Airways. New products required method of raising smaller amounts (£100,000 additional investment, and flotation was to £500,000) is a private placing, with shares the best fundraising option. We also offered to a select group of institutional wanted to increase the size of our call investors. In this case, you will be required to centre and consolidate three offices into produce a prospectus. For more on private one. The process was relatively painless as placings, visit or we were guided by our nominated adviser.” What are the costs? How quickly can I raise funds? I Fees are made up of the advisory costs It varies according to the complexity of the and the broker’s commission, which is a flotation, the time given by the management percentage of funds raised. They also vary and the ability of your advisers. Typically it depending on whether it is AIM or OFEX, so takes five to six months. “If you want to do it it is difficult to generalise, but they represent in a way that doesn’t impact on day-to-day a higher percentage for smaller IPOs. business, you should take your time,” advises Raising £1m at IPO could cost £250,000 or John Jenkins, managing director of OFEX. more, including legal and other adviser fees To make the process faster, companies I Expert advisers are the main cost, initially often start with an ‘introduction’ to one of for the flotation, then to keep shareholders the markets, meaning joining without raising informed. For AIM a business needs a funds. They can ‘bed-in’ and return for sponsoring nominated adviser (NOMAD). finance later. This lets institutional investors OFEX companies require a corporate finance assess the management team and its ability adviser. Advisers orchestrate the process, to perform in the public arena. A market linking you, the City, your accountants, listing will be smoother if this goes well. I lawyers, brokers and a financial PR firm For more details on choosing the right financial advisers, go to pages 6-7. Where to go next I Also calculate the cost of your For more advice on flotations, listings management team being unable to focus and IPOs, visit: entirely on the day-to-day running of the business during the flotation process 31
  • 36. SECTION 2 Funding options and process Making the perfect pitch Whether pitching to angels, VCs or investors prior to a float, find out about presentations, what to cover, who presents and which tools to use I f you’ve reached this stage then a lot of the hard work is already behind you. Investors CASE STUDY have seen your business plan or executive Henry Stewart, CEO summary [for more, go to pages 12-13], and of IT training company want to hear more. Facing investors can be Happy, raised £350,000 intimidating, but careful planning will help from a business angel you make the right impression. in November 2003. Investors know business plans are often “Pitching to business angels and venture put together by consultants, so they will try capitalists (VCs) is very different. VCs are to establish a real sense of your team, to see more formal. The meeting is friendly but that all parties have similar expectations, and you’re on the spot. Business angel funding if they can add value to your business. proved a longer, less formal process, with a series of meetings over a couple of years. What format does a pitch take? Our investor had many questions about due First meetings generally take place at the diligence, and about which part of the investor’s offices, though some prefer to see business we would sell off. The key factor is your business and processes. the quality of the management team, and Some investors provide guidance on the the investor’s faith in you as people. There presentation format, so ask first. Otherwise, may be a market opportunity – but the after the introductions, you set the agenda. investor has to believe you can exploit it.” You are typically expected to make a formal pitch, although some investors encourage informal discussion. Plan to talk for half an slides. Backers may interrupt with questions, hour, covering 20 to 30 key points using and will hold a more detailed QA session at the end. There is no set length; meetings can IN BRIEF THE PITCH last from one to three hours. “The longer it lasts, and the more questions they ask, the G Details of your management team are more successful your pitch has been,” says as important as your business concept Mat Atkinson, CEO of Mtivity, a marketing G Take a team of around three company that raised both angel and VC funds. G Aim to present for around half an hour G Cover history, products, finances, the What should the presentation cover? growth opportunity, market conditions, I Update them with anything that has and a (SWOT) analysis occurred since you submitted your proposal G Anticipate tough questions, and think I The quality of your team is often more about how you will answer them important than details of your products I Relevant industry experience and expertise 32
  • 37. Where next? SECTION Pages 34-35 To find out how to negotiate the best deal 2 QUESTIONS INVESTORS ASK 1 Are you really filling a gap in the market – who are your potential customers, and is there a large spread or small concentration of buyers? 2 Do you understand your market – is I Give a precis of the business’s history, it expanding or shrinking? What are progress and financial performance to date the constraints? I Highlight market opportunities, identifying your customer and why your product or 3 What barriers face market entrants, service will appeal; you need an enduring and is the product easy to reproduce – any copyright or patent issues? customer proposition. But see the investor’s viewpoint – focus on the business opportunity 4 Have you suffered difficult trading I Cover your balance sheet, cashflow, historic patterns or loss-making periods? profitability, trends and projections. Justify 5 Which staff are critical, and how can targets with graphics such as pie charts you encourage them to stay? I Keep figures realistic. A common mistake is to exaggerate demand, sales and so on I Do a Strengths, Weaknesses, Opportunities What presentation tools should I use? and Threats analysis [for more detail, visit If confident, use a visual aid to supplement]. It shows the presentation. PowerPoint is popular, but you have made a sensible, honest and check the investors have the equipment; considered study of potential flaws even if they do, take a back-up paper copy. I Offer investors a best and worst-case Use graphics, but keep demonstrations scenario of how your business may perform short. For a sample presentation, visit I Conclude by repeating important points I Meetings about the details of the deal come For a directory of business training, visit later, so don’t attempt to discuss terms “There’s a risk of irking an investor if you try to do this,” warns venture capitalist, Norman Should I do a rehearsal? Yarrow of Northern Venture Managers Do at least one practice run with your team, and read through your proposal so you don’t Who should present the pitch? contradict what’s written in your plan. Agree Take a team of around three – the owner- key information so you don’t produce manager should cover the areas outlined conflicting figures, and familiarise yourself above, with your sales specialist detailing the with financial jargon. I opportunity, and your finance manager the figures. Glenn Hooper, financial adviser at Business Link, advises: “Keep it simple. Don’t get sidetracked or too technical. They want Where to go next a hard, factual presentation.” Gauge your Further advice on pitches can be found audience – the occasional light-hearted at: comment might help, but jokes can backfire. 33
  • 38. SECTION 2 Funding options and process Agreeing the terms of the deal Interested investors will issue a provisional contract called a ‘term sheet’. Be prepared to ask some probing questions to ensure it’s right for you A fter a successful professional advisers, go to pitch, investors will pages 6-7. Deals are often issue a ‘term sheet’, made up of a combination of stating the terms with equity investment (finance which they expect to go for ordinary shares) and debt ahead. It will set out the (a loan arranged by the key points of the final investor). If you have a choice contract, including a of backers, the term sheet description of what is for will help you decide who to sale, the amount they go with and what terms propose to invest, the you’ll accept. By signing it funding method, their you will have agreed to deal expected return and an exit exclusively with that investor. plan. It is not legally The deal must work for both binding and is open to parties, so you should negotiation. Your legal adviser should help consider the following questions: you with the jargon [for tips on finding a solicitor visit Is the investor offering enough? solicitor] and a corporate finance adviser or Be clear about this, you are selling a part of specialist accountant can show you where your business and the value of it will underlie there is scope for manoeuvre. Ensure you hire all of your discussions. There is no ‘right’ price advisers who are experienced in dealing with and no right or wrong way to value it, which this level of transaction. For more on often means you and your potential investor disagree. Valuations depend on what the buyer IN BRIEF NEGOTIATION will pay and what you will accept. However, the present value of expected future cashflow is G Businesses needing immediate one figure often used [for other ways to work capital will start from a weaker position out the value visit G Chemistry is often more important valuations]. You are in a stronger position if than raising the full amount you have more than one offer on the table. Be G Younger businesses, or less profitable confident. This is a meeting of equals; you ones, may have to give up more equity aren’t simply asking for a handout – you have G Exits can be determined by the something they want, too. investor; try to retain your rights here G You’ve a right to know who’ll be on How does the investor assess their risk? the board and what powers they expect The risk the investor is prepared to take is hugely important and depends on a series 34
  • 39. Where next? SECTION Pages 37-38 To find out how to manage investor relationships 2 of factors, including the overall state of the market, the maturity and financial track CASE STUDY Martyn Dawes, record of your business, and the ability of managing director of your management team. During the due unmanned coffee bar retailer diligence process, where investors request Coffee Nation, raised £100,000 in March information about your company’s past, 1999 and £4m in June 2000 with business present and future status, you will need to angels, first, then a venture capital firm hand over a lot of intimate knowledge about “When negotiating, it sometimes pays your business. “Due diligence was tough. We to stick to your guns. I’d read that to raise faced a barrage of questions for six months,” £100,000 you should offer up to 70 per cent says Eren Ali, MD of restaurant chain Las of your business, but I didn’t want to dilute Iguanas, which raised £3m in venture capital my stake, so I told the business angels and bank debt. It is important to be upfront it was 20 per cent. More than 20 angels and honest about potentially deal-breaking agreed to invest around £5,000 each. The issues, such as a law-suit against the next day some had cold feet, but I was company, a tax investigation or just gaps in firm with them, and they stayed with us. management. If they unearth things they feel We attracted three offers from venture increase their risk you may have to accept capitalists, and we plumped for the one we less favourable terms or lose the backer. felt most comfortable with. You don’t want a bad relationship with your investors.” Are they the right investor? No investor is perfect. One you feel most comfortable with may not be offering the full accelerate growth may be in their interests amount, while another may be prepared to to hasten their eventual exit.” back you all the way, but on terms you can’t accept. Personal relationships are very How long should the investor guarantee important – you are going to get very close, to wait before seeking an exit? so you should like and trust each other. A typical exit period is three to five years. Some backers may want a clause in the Will they offer further fundraising? contract to force an exit, while others are Investors may not like companies asking for happy to wait until the most appropriate more money without prior warning, so if you moment for company and investor. Ensure plan to seek second-stage funding, discuss you have similar ideas of how to realise this now. Also discuss bringing in other value in the business, then work towards backers at a later date, what kind would be that target. For more on exit strategies, appropriate, and how you can prevent the see the box on page 28. original investor’s stake being diluted. Try to retain as much flexibility as possible. Venture What is their track record like? capitalists may even agree to provide further Every investor has a different house style, finance in future without taking more equity, and it is useful to know what this is. Ask to according to Baker Tilly’s Rob Donaldson: speak to other companies in their portfolio, “Where the VC is a big shareholder they won’t as they will know better than anybody how want to dissuade the management team by the backer works. Find out what type and diluting their stake more, and funding to frequency of reporting they expect, how 35
  • 40. SECTION 2 Funding options and process BEFORE YOU GO HEADLONG INTO NEGOTIATION nter negotiation with caution. The small I How badly do you need the money? E print is arduous and stacked to dilute the risk for the investor, who may propose I What terms would you accept? I Could the company survive without to structure a deal in an unexpected way. investment and, if so, could you grow it at So, before you enter negotiations, ask a slower rate and seek finance at a later yourself the following questions: date when better terms can be agreed? involved they like to be in the running of the impose somebody on a business. Ask business, and how often they like to meet. about: their background and why the VC has put them forward; what skills, contacts What is negotiable and where are the and knowledge they can add; their intended potential pitfalls? scope as a board director (are they The value of the business, amount of equity monitoring progress or will they be hands- you give up for the money, the interest on on?). Don’t assume it’s for the investor to any debt element and legal issues are suggest a non-executive director. You may essential areas to discuss and negotiate. know the industry better and be able to Confirm when you will be able to access suggest a candidate who will add value to funds, which may be structured and the business, although investors will still released in tranches, and what conditions appoint one of their own too. are attached. Find out in what form it will be offered. “Nine times out of 10 investors will How serious are they? structure it (or much of it) as a loan, leaving Before you sign the term sheet you need a you having to pay interest, but still giving strong belief that they’ve thought about the away equity. Businesses often don’t realise deal and will complete the process. Serious that. Earlier stage companies are less able investors will start due diligence the day to service debt though, so are more likely to after you sign. “Be warned, some hand out a receive pure equity, although they will have term sheet to knock out the competition, to sell more of the business in return,” says but will then slow the process, which could Donaldson. He adds that interest on a loan weaken your hand in future negotiations. It’s note can range from 3 per cent to 15 per not unreasonable to make them show they cent and is an area to negotiate on keenly – are serious,” says Donaldson. Make it a you could give up more equity, for example. condition of signing that they immediately If you have more than one offer, ask your start due diligence in return for exclusivity. I corporate finance adviser to run a financial model for you to see which method will cost you more. Where to go next Can you vet a proposed board member? For more on the terms of a deal, visit: Yes and you can ask almost anything you the BVCA website like. Venture capitalists are reluctant to 36
  • 41. SECTION 3 After the event Managing investor relations Investment from angels, VCs or a flotation brings certain obligations – but understand them and all parties can enjoy a rewarding relationship nce you successfully secure finance, O you’ll need to manage the relationship with the backer according to the terms agreed. Most backers expect feedback from CASE STUDY Managing director of IT business Equiinet Bob Jones raised regular reports, such as monthly accounts. £2.75m from venture capitalists (VCs), Equity investors may expect the minutes of business angels and trade investors board meetings and input into your business “VCs and private investors have had a too, including the right to veto [for more on positive impact. Monthly reporting is a the typical rights investors expect, go to good discipline that helps us focus. But page 28]. Investors will also offer the benefit they shouldn’t interfere too much. You of financial advice, strategic guidance and know your business better than they do. help with recruiting management, as well as Private investors sometimes want to get contacts and market information. involved in the business, but that can cause Delivering what you promise on profit confusion over who’s running things. Our revenues and customer volumes is crucial VCs appointed a non-executive director with all backers. It builds confidence, and, if who attends the monthly board meeting. you floated, the performance of your shares We report figures and he asks probing depends on it. Post-flotation you will rely questions and gives advice.” heavily on your nominated adviser [for more on NOMADs see pages 6-7]. audited annual accounts. They may also What information do backers expect? look for some aged-debtor analysis I If you have taken on debt, backers expect I Venture capitalists (VCs) will also expect to see monthly management accounts and in-depth coverage of your profit and loss, balance sheet, and cashflow. IN BRIEF INVESTOR RELATIONS An analysis of your company’s performance compared to G Keep communication personal, whether by phone or budget is often necessary. face-to-face – a good relationship can benefit you both In addition, commentary on G Ask your backer what information will be required, progress made against stated how often, in what format, and by whom goals at the point of fund- G Funds can boost your business, but may be withheld raising, and the forthcoming if targets are not hit, and deals can even be vetoed year’s budget is required G Make realistic projections; be honest about bad news I Active business angels may want similar levels of 37
  • 42. SECTION 3 After the event QUESTIONS TO ASK INVESTORS, TO MAKE THE RELATIONSHIP WORK 1 What information do you require 4 In what format do you expect it (e.g. us to provide (e.g. accounts, forecasts, Word document, PDF, Excel or other analysis, commentary)? spreadsheet, PowerPoint presentation, 2 What areas do you expect to have a perfect bound document)? input on (e.g. management pay rises, 5 How do you like to receive it (e.g. acquisitions, appointments, new service email, post, phone, face-to-face)? or product launches)? 6 Who should provide our business 3 How often will we need to provide you information to you and manage the with the required information (e.g. relationship (e.g. the owner-manager monthly, quarterly, annually)? or another board member)? information; passive ones will be happy Venture capital firms, by contrast, will with monthly or quarterly reports typically expect a seat on the board, usually I Quoted companies’ shareholders must as a non-executive director. Your relationship have equal access to formal information, with them will determine their influence. such as trading updates, profit warnings Some angels want occasional contact, and information on takeover talks others phone daily. The input you accept I Expect frank questions from institutional largely depends on their stake. Baker Tilly’s shareholders. Don’t bury bad news. Investors Rob Donaldson says: “If they are a minority will be far more supportive if you are honest shareholder with, say, a 20 per cent stake, and may be able to offer good advice you should listen to their views but you don’t necessarily have to follow them. An investor How should information be provided? with a larger stake has more influence.” The more personal the better. Investors Remember, your backers’ aim is similar to expect to feel valued, while lenders want yours – to see a healthy, profitable and well to know their money is safe. Try to combine run business. Keep them on-side early on, sending financial information with meetings manage expectations effectively and the level or phone calls, even if this has not been of influence expected will gradually diminish stipulated in the shareholders’ agreement. as trust in your management team grows. I In general, management and annual accounts are sent electronically as Excel or PDF documents for ease and convenience. Where to go next For further advice on financial and How much input should be expected? management accounts, visit: Lloyds TSB Commercial Finance's James Cullen says that it is worth discussing decisions with lenders. While they don't have For more on investor relations, visit: shareholding powers, they will offer as much input as possible: The lender can act as a investorrelation.html very useful sounding board. 38
  • 43. SECTION 4 Government resources Getting support for your business The Government runs a number of schemes to help businesses grow. The kind of support your business is eligible for will usually depend on your location, the type of business or the specific project you’re working on he Government is committed to European Union, Regional Development T helping small businesses in the UK. It supports them with tax credits and allowances, loans, training, events and Agencies, local authorities, Chambers of Commerce and County Enterprise Boards. To find out whether your company is eligible grants. A few are outlined here but for for grants in your local area, search the further information and for help with your Business Link grants database at application, go to a Business Link adviser. Getting a grant Grant eligibility For most businesses grants sound appealing Grants are almost always for specific because you get an influx of cash that you purposes or proposed projects, not probably won’t have to repay. But in reality activities already under way. Projects may finding relevant schemes can be tricky, the include opening up a new division or branch application process can be slow and in an area regarded as being in need of competitive, and the criteria are stringent. economic regeneration, or could be tied to new activities in existing businesses such Who hands out the money? as exporting goods or investing in research There are a multitude of UK business grant and development. There are even grants schemes available from the Government, the available to help companies benchmark their business against their competitors. Often the IN BRIEF GOVERNMENT SUPPORT grant will go towards G The Government has a range of schemes to support covering the cost of a companies; these include grants, loans and allowances consultant to come in and G Grants might sound ideal but eligibility criteria are assist with these projects. stringent and the application process can be long. They’re There are strict terms usually only allocated for a specific project or purpose and conditions that are G Regional Development Agencies run schemes, often applied to grants. If they are focussed on innovation, to support local businesses not followed you may have to G Businesses can also make use of subsidised pay back the money. consultancy offered by experts in given fields Grants rarely meet the full G Some private firms may also offer awards and loans costs of a project – you can to businesses at preferential rates typically expect to receive between 15-50 per cent of 39
  • 44. SECTION 4 Government resources Regional Development CASE STUDY Frank Lawrenson, Agencies founder of Boardbug Ltd, secured You should also approach DTI innovation grants in 2002 and your Regional Development 2003, showing the company was Agency (RDA) – these bodies worthy of investment run various schemes to help “We secured a £45,000 award support local businesses. One for a feasibility study, contributing of the main areas RDAs focus £15,000 ourselves. This on is innovation. This means impressed angels, and with helping businesses to develop additional funding we obtained a their skills, processes and further £105,000 grant to develop products using the latest best our product, for which we had to practice and new technology. put in £200,000. The first award raised our profile with For more details on the investors, who knew the government had carried out due support offered by RDAs, visit diligence and so backed our potential.” enterprisezones the total. This means that you will need to Small Firms Loan Guarantees find at least half of the funds that your If you’re having trouble providing security project requires from alternative sources, in for a bank loan you should investigate the order to cover the shortfall. Small Firms Loan Guarantee, offered jointly by the DTI, banks and other financial Applying for grants institutions. The Government underwrites Your local Business Link office will be able to loans for businesses looking to invest in help identify relevant European, national and innovative technologies or those that have local grant schemes. Before you apply, you’ll short trading histories. need to have the following: This scheme guarantees 75 per cent of I A detailed project description loans between £5,000 and £100,000 for I An explanation of the potential benefits companies that have been trading for less of the proposed project than two years at the time of application. In I A comprehensive work-plan together return, businesses pay a premium over the with the full costings standard interest rate of 2 per cent per I Details of your own relevant experience annum. For more details on how the Small and that of other key managers Firms Loan Guarantee works, visit For more detail on grant applications, visit Your proposal will be assessed on its The Phoenix Fund relevance to the grant’s aims, your approach Another funding option worth exploring is and your expertise. Applications usually fail the Phoenix Fund, set up to encourage if the business plan is unrealistic, if there businesses in disadvantaged communities are no matched funds from the applicant, or and groups that are under-represented as if it’s unclear how important the funds are owner-managers, such as women or those to the project’s success. from ethnic minorities. Qualifying 40
  • 45. Where next? SECTION Pages 22-25 For advice about funding from business angels 4 companies can access mentoring services, there’s a range of tax allowances for new capital and loan support, and venture businesses, including capital allowances for capital through specialist business support investment in equipment and premises (so providers and financial intermediaries. you can deduct a proportion of these costs There are also projects intended to from your taxable profits over several years encourage inner city regeneration and and so reduce your tax bill) and stamp duty rural renewal. relief in disadvantaged areas. Visit The venture capital fund, called the to see a Community Development Venture Fund checklist of the tax advantages available for (CDVF), is managed by Bridges Community new businesses. Ventures Ltd and invests up to £340,000, Tax credits are also available for trading with a possible £250,000 follow-on in businesses. Examples include research and businesses located in the most deprived development tax credits, awarded to small wards in England. For more detail, visit businesses that encourage innovation. Visit index.htm Getting support for innovation Innovation is key to achieving successful Support from private firms business growth, and the Government is It’s not only the Government that provides keen to help businesses develop their ideas support and grants for businesses, many by providing funding and support. private firms also offer awards and assisted Particularly useful for small business is the loans. For example the National Grant for Investigating an Innovative Idea. Endowment for Science, Technology and This grant helps small businesses work the Arts (NESTA – for details, visit with outside experts to identify areas where runs the invention and they need help to put their ideas into innovation programme that supports people practice. The grant covers 75 per cent of the with outstanding ideas for new products or costs of employing an outside expert and is services, often at a much earlier stage usually between £2,500 and £7,000. Find out than other funders. more at To find out what other private support is Another scheme is the Technology available to your company, visit Programme which is run by the DTI and or visit encourages research and development and your local Business Link adviser. I the sharing of knowledge for certain technologies identified as critical to the UK economy. Grants are available for Collaborative Research Development and Where to go next to set up Knowledge Transfer Networks. To For a directory of schemes available in find out more about these activities, visit your area and for your business size, visit: Other government allowances For the Community Development Finance Your business could also be eligible for Association, visit: other government schemes. For example 41
  • 46. Think your business needs finance to grow to the next stage, but not sure where you can find it? If you run a successful business and are looking to expand, there are a range of potential finance options. The No-Nonsense Guide to Finance for High Growth Companies can help you locate the most appropriate one for you, and advise you on the best way to secure it. This guide covers: G Drawing up a business plan G How to best utilise bank loans G Investment from business angels and venture capitalists G Deciding whether to float your company G Making a pitch, and negotiating terms G How to manage investor relations Business Link This guide is brought to you by Business Link on behalf of the Department of Trade and Industry. Contact Business Link for a wealth of information and support services to suit your individual needs: Tel: 0845 600 9 006 This publication is available in alternative formats Other No-Nonsense Guides available from Business Link include: The No-Nonsense Guide to Small Business Funding The No-Nonsense Guide to Government Rules and Regulations for Setting Up Your Business For business support and advice: G In Lowland Scotland contact Business Gateway (Scotland) 0845 609 6611 G In Scottish Highlands Islands contact Highlands and Islands Enterprise 0845 609 6611 G In Wales contact Business Eye 0845 796 9798 G In Northern Ireland contact Invest Northern Ireland 028 9023 9090 The material in this guide is for information purposes only and is not intended to be, nor does it constitute, legal and financial advice. No user should act or refrain from acting on the information in this guide without first verifying the information and as necessary obtaining legal and/or other professional advice. Users are recommended to consult their own independent advisers in relation to their own circumstances. Every reasonable effort has been made to ensure the information contained in this guide is accurate, but neither the DTI nor Business Link accept any responsibility for any errors or omissions. Printed in the UK on recycled paper with a minimum HMSO score of 75. First published January 2005. Department of Trade and Industry. © Crown Copyright. DTI/Pub 7597/30k/04/04/NP. URN/05/501.