Slides from the Equity into an SME: The Investors Perspective breakfast event held on11th Feb 2015 at Francis Clark offices, Truro.

1. Finance in Cornwall 2014 follow up
events
11 February 2015
EQUITY INTO AN
SME: THE
INVESTORS
PERSPECTIVE

2. Equity into
SMES, the
Investors
perspective:
introduction
(including some housekeeping..)
Richard Wadman – Corporate
Finance Director

3. www.francisclark.co.uk
Administration
Admin
Timetable
Questions at the end and over breakfast
Interaction – Compulsory
Slides – See pack

4. www.francisclark.co.uk
Speakers and topics
Speaker Topics being covered
Richard Wadman Francis Clark What is “equity”
Sources of equity
John Acornley Get Set for Growth What attracts an Investor? (and what puts them off?)
• Angel or passive investor (and impact on
investment route)
• Appraising the opportunity (incl valuation?)
• Realising value (the "exit")
Henry Maples Murrell Associates Securing the investment – clauses that the Investor will
want to see (and related legal matters)
• Legal matters
• Documentation and DD
Daniel Orasnjak Francis Clark Enhancing investment return “the tax carrot” - EIS/
SEIS

5. www.francisclark.co.uk
Francis Clark – who are we?
• 7 regional offices: Taunton, Exeter, Torquay, Plymouth, Tavistock,
Salisbury and Truro
• UK Top 25 Firm (Accountancy Age 2014)
• 49 Partners and over 390 staff
• Identified in December 2013 by the London Stock Exchange as one of
the ‘1000 Companies to Inspire Britain’
• Largest range of specialists located in the South West
• Awarded ‘Best VAT consultancy’ at the Taxation Awards 2014
• Awarded ‘Tax Award of the Year (non global firm)’ in the British
Accountancy Awards 2012
• Awarded ‘Best Tax Practice in a Regional Firm’ at the Taxation Awards
2012
• Awarded ‘Auditor of the Year – Mid Tier’ at the national Financial
Directors’ Excellence Awards 2011

6. www.francisclark.co.uk
Francis Clark – who are we?
‘Top 50
Corporate
Finance Team
of the Year’ at
the 2014
British
Accountancy
Awards.

7. www.francisclark.co.uk
Equity?
• Investment in a limited company in exchange for
shares
• Simplification 1 - “Ordinary” shares
• Simplification 2 - Investment into the company
• Simplification 3 – Investment in cash
• Return from investment generally in the form of
dividends or capital only on “exit”
• Valuation needs to agreed – X% for £Y
• “Emotional”

8. www.francisclark.co.uk
Sources of Equity for the SME
• “Friends, Families and Fools”
Include related businesses?
• Networks e.g., SWAIN, OXIN (Business Angels),
Get Set for Growth
• Conduits e.g., UEC Enterprises, GAIN?
• Virtual Networks e.g., Crowdcube (direct or via
managed funds)
• Venture capitalists and Private Equity e.g., Piper
Private Equity, Altitude Partners LLP or Business
Growth Fund
• The Public (direct) – BrewDog “equity for punks”
£1m in 24 hours

9. www.francisclark.co.uk
Equity... “under-used”
• CBI made similar comments re under-utilisation of equity
• http://www.francisclark.co.uk/news-views/blog/cbi-in-favour-of-
increasing-equity-funding-for-and-into-smes/
“It is worth noting that external equity funding is significantly under-used by
smaller UK businesses: only 3% of small businesses ’use equity finance,
whereas 55 per cent use credit cards. Equity, along with alternative channels
for debt capital, can potentially benefit these businesses in the early stages of
their development. These smaller businesses often need significant capital
injections to achieve their potential and may often be deemed inappropriate
for bank finance alone due to their innovative nature. Whilst equity is not the
subject of this review, it is important to create a framework to stimulate
investor appetite for equity and lower the cost of raising such capital.” –
Boosting Finance Options for Business, March 2012

10. 10

11. 11
EQUITY INVESTMENT – THE
INVESTORS PERSPECTIVE
John Acornley
Business Equity Finance Advisor
Get Set For Growth
john.acornley@getsetforgrowth.com
11th February 2015

12. 12
• Clear, concise and exciting business plan
• Capable management team
WHAT INITIALLY ATTRACTS
AN EQUITY INVESTOR

13. 13
• Track record of the business
• Assessing management
• Testing of assumptions in the business plan
• Reviewing the exit strategy
• Looking at the exit value versus the initial value
APPRAISING THE OPPORTUNITY

14. 14
• Unrealistic growth assumptions
• High initial valuation
• Issues in the business
• Exit strategy with limited return
WHAT CAN PUT OFF AN EQUITY
INVESTOR

15. 15
• Alignment of interests
• Delivering the business plan
• Nurturing potential acquirers
• Planning the exit
• Good advisers (corporate finance, tax, legal)
REALISING THE VALUE – THE
‘EXIT’

16. 16
• Need/want external support and limited equity (Angel)
• Can’t deliver the business plan without the equity
investment and the external support (Private Equity)
IS THERE IS A REAL CASE FOR
EQUITY INVESTMENT?

17. 17
EXAMPLE – HIGH GROWTH - AROMA CHEMICALS
• Angel invests £30k for 3% of business
• Business initially valued at £1m
• Angel takes Board seat (Chair)
• Business grows and is sold for £20m four years later
EXAMPLE OF ANGEL INVESTMENT

18. 18
EXAMPLE – ACQUISITION & HIGH GROWTH
RAINFORD GROUP PLC (RG)
• RG raises £1m equity for 25% of RG
• RG buys GEC division for £750k cash and £750k deferred
• RG grows combined business and sells five years later for £80m
EXAMPLE OF PRIVATE EQUITY
INVESTMENT

19. Legal considerations
Murrell Associates: An introduction
Speaker
Henry Maples
Associate
Murrell Associates
henry@murrellassociates.co.uk
DDI: 01872 226998 Mobile: 07539278903
Other members of the corporate & commercial team
1
Hugh Murrell
Director
Chris Wills
Associate
Rebecca Anforth
Associate
Daniel Wingfield
Trainee Solicitor
Harry Perrin
Solicitor
3rd - WMN/Francis
Clark Deals Review 2015

20. Legal considerations
Legal due diligence
• Identify key assets e.g.
– Founders/senior management
– Intellectual property
– Commercial contracts
• Targeted legal due diligence enquiries
• Co-ordination with financial and commercial advisers
1

21. Legal considerations
Legal documentation
• Investment agreement
– Key equity (default) thresholds – over 50% and 75%
– Share capital structure
– Board rights
– Key veto matters
– Management warranties
– Exit strategies
• Consultancy arrangements
• Ancillary documentation (articles of association, minutes, shareholder resolutions, statutory books)
1

22. Cornish Acquisition & Investment Network*
A concept…
• For those involved in or interested in the acquisition of, or equity investment into, SMEs in Cornwall
• To assist the Cornish business community & encourage growth in local businesses
• Members only online area to share ideas and opportunities and access technical resources
• Regular networking events
• Expressions of interest & ideas please to Henry Maples (henry@murrellassociates.co.uk)
*working title
1

23. SEIS/ EIS
Daniel Orasnjak, Tax Manager

24. www.francisclark.co.uk
Why are SEIS and EIS important?
Important to the Investor
• De-risks an investment
• Improves ROI
Important to you
• As above
“Businesses raised £1,017
million through EIS in the
year to 31 March 2012, up
from £545 million raised in
2010-11”
“More than 2,000
companies have raised
around £2 billion in
equity cash from
investors, according to
HM Revenue &
Customs (HMRC),
which monitors SEIS.”

25. www.francisclark.co.uk
Enterprise Investment Scheme
• Rate of income tax relief – 30% up to maximum per investor of
£1m per year
• Capital Gains tax relief – Hold Over relief. Exemption for gains
on EIS investment if income tax claimed
• Mandatory investment period – 3 years
• Qualifying investment
• Cash for Ordinary shares in unlisted company
• < 250 employees
• Net Assets < £15 million
• Carrying out permitted activity
• Not controlled by another company
• No connection to the issuing company

26. www.francisclark.co.uk
Seed Enterprise Investment Scheme
• Rate of income tax relief – 50% up to maximum per investor of
£100k per year
• Capital Gains tax relief – 50% relief on capital gains realised on
asset disposals used to make SEIS investment. Exemption for
gains on SEIS investment if tax relief income tax relief claimed
• Mandatory investment period – 3 years
• Qualifying investment
• Cash for ordinary shares in unlisted company
• < 25 employees
• Net Assets < £200k
• Carrying out permitted activity
• Not controlled by another company
• Trade < 2 years old
• No connection to the issuing company

27. www.francisclark.co.uk
SEIS/ EIS Qualifying activities
Trade carried on on a commercial basis with a view to profit
Not permitted activities include:
• Dealing in land, shares and other financial instruments
• Banking and other financial activities
• Dealing in goods, other than ordinary retail or wholesale activity
• Letting or leasing assets on hire
• Legal and accountancy services

28. www.francisclark.co.uk
SEIS/ EIS: Practicalities – pre investment
Get HMRC clearance re “permitted activities”
Non-employees (Directors deemed not be employees)
State aid – interaction with grants
Forms/ paperwork to HMRC within set deadlines
Amount raised - limits

29. www.francisclark.co.uk
SEIS/ EIS: Practicalities – post investment
Maintain qualifying company status for 3 years
• Holding Company
• Control of all subsidiaries
• Permitted activity
Investor returns and control – care

30. www.francisclark.co.uk
Breakfast is served!

31. www.francisclark.co.uk
Upcoming events
• “Secured non-bank lending” on 11 March 2015
• Finance in South West (Exeter Racecourse) – 25 February 2015
• Finance in Cornwall (Newquay Cinema) – 12 May 2015

32. www.francisclark.co.uk
Business support
Get Set for Growth
Growth Accelerator
- Mentoring / 7 days coaching
- Companies with 1-4 employees – £600 plus £700 VAT
- Companies with 5-49 employees – £1500 plus £700 VAT
- Companies with 50-250 – employees - £3000 plus £700 VAT
- Leadership (subsidised assistance with projections for example, £2k per member of management
team)
Growth vouchers
- 50% subsidy up to £2k for advice on:
- Managing cashflow, late payments and negotiating finance
- Developing skills and taking on staff
- Improving Leadership and Management
- Marketing, attracting and keeping customers
- Making the most of digital technology

33. Cornish Acquisition & Investment Network*
A concept…
• For those involved in or interested in the acquisition of, or equity investment into, SMEs in Cornwall
• To assist the Cornish business community & encourage growth in local businesses
• Members only online area to share ideas and opportunities and access technical resources
• Regular networking events
• Expressions of interest & ideas please to Henry Maples (henry@murrellassociates.co.uk)
*working title
1

34. www.francisclark.co.uk
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