Equity for SMEs

Finance in Cornwall 2014 follow up events

22 October 2014

EQUITY FOR SMEs

Equity for SMEs: introduction (including some housekeeping..)

Richard Wadman – Corporate Finance Director

www.francisclark.co.uk

AdministrationAdmin

Timetable

Questions at the end and over breakfast

Interaction – Compulsory

Slides – See pack

www.francisclark.co.uk

Speakers and topics

• Focus on practicalities for SME

Speaker Topics being covered

Richard Wadman Corporate Finance Director, Francis Clark

Sources of equity, including 3F’s and “the crowd”Investor readySEIS/ EIS

Christian Wilson Partner, Stephens Scown What is “equity”Legal documentation

John Acornley Get Set for Growth Business Angels Network of Investors looking to invest in Cornish businesses

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

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What is Equity? o the provision of equity capital o by financial investors o over the medium or long term o to non-quoted companies o with high growth potential

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What does equity finance mean?

Founders

Company

Investor

Company

£ Shares

Founders Investor

Company

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Is Equity Right for You?• Are you prepared to take on the responsibility of being an

entrepreneur? • Are you prepared to give up part of your company’s capital

to a private investor? • Does your business operate in a growth market? • Are your company’s development prospects sufficiently

ambitious? • Is your team prepared to follow you? Does it have the

necessary experience?

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Is Equity Right for You?• Does your company have a certain technological or

competitive advantage that can be developed or exploited?

• Are you prepared to share certain strategic decisions with shareholders outside your “inner circle”?

• Is there a realistic exit strategy for all shareholders?

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What are the options?

Friends / Family – may be willing to help...

Business Angels – typically £10,000 - £2,000,000 - early

stages of development or established companies looking

to expand

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What are the options?

Venture Capital – look for businesses with USPs /

competitive advantage

Private Equity Funds – look to invest in established

companies with high growth potential

Crowd Funding – a means of raising capital by appealing to a

large group of people for small contributions

Equity for SMEs: sources and investment readiness

Richard Wadman – Corporate Finance Director

www.francisclark.co.uk

Sources of Equity for the SME

• “Friends, Families and Fools”

Include related businesses?

• Networks e.g., SWAIN, OXIN (Business Angels)

• Conduits e.g., UEC Enterprises, GAIN? Get Set for Growth?

• Virtual Networks e.g., Crowdcube

• 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

Crowdcube: The equity solution?

Crowdcube: Success so far

£37 millionfunded so far…

£250,000largest single investment

+90,000members

145+£1.9 million

biggest deal

£2,600average investment

Successfully funded deals

£220,000average deal

Stage of Growth

By Category

Crowdcube: Case studies

www.francisclark.co.uk

Investment ready

www.francisclark.co.uk

The Readiness Process

• When, why and what funding is needed

• Communicating the business proposition - Business plan and projections

• Viable plan and credible management

• Compliance (VAT and IPR etc)

• Identifying and Building the relationships

www.francisclark.co.uk

Investment Readiness: The Business Plan – A Guide

• Executive summary

• The Business –history and present: Where you are now, including historic financials, ownership, awards, accreditations etc.

• The market and the opportunity  

• Future strategy/ plans/ risks

• Operations (changes + practicalities)

•  Financial – summary of projections

• Finance required

• The team

• Environment, Equal Opp and Local Economy etc - Depending on the type of finance sought may have to consider these issues

The opportunity and how you will exploit it. Why you will

succeed.

Financial implications and finance required.

www.francisclark.co.uk

Investment Readiness: Projections – “How to”

• Excel and/ or Sage Winforecast (other programmes)

• Approach

• Annual P&L to Monthly P&L

• Cash flow assumptions

• Capital expenditure (profile)

• Other non-P&L items e.g., loans

• Opening balances

www.francisclark.co.uk

Investment ready – general housekeeping

• Compliance and Legal

- Licences / contracts/ legal title?

- IPR ownership in the company?

- Statutory Accounts/management accounts

- VAT, PAYE/NI, Books and records in order?

www.francisclark.co.uk

Investor readiness: Equity

• Exit route and returns to the investor

• Investors expertise vs. loss of independence?

• Be prepared to discuss valuation

• Emotional!

• Be aware of FSMA regulations

• SEIS/ EIS

www.francisclark.co.uk

Investment readiness (equity): 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.”

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

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

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

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

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

www.francisclark.co.uk

Investor Ready - Conclusions

• Appropriate funding / understand the funder and their requirements

• Business Case: • Funding to fit with and presentation of

• Should override emotions?

• Know the ‘deal breakers’ / Plan B?

• Build in extra time

www.francisclark.co.uk

Business support

Get Set for GrowthGrowth 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

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How does it work?

Think of Dragons Den as being the first of three critical

phases:

Phase 1: “the Den” – heads of terms agreed between the

founders and the investor

Phase 2: legal and financial due diligence

Phase 3: completion – legal documents signed off, cash paid

into the company and shares issued to the investor.

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Legal Documents?

The Investment Agreement:

o Agrees funding levels and drawdown

o Warranties and more warranties!

o Company owns IPR

o No litigation

o No liabilities

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Legal Documents?

The Investment Agreement:

o Combines Shareholders agreement

o Reserved Powers

o Compulsory Sale

o Potential Loss of original owner control

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Legal Documents?

The Articles of Association:

o Share rights

o Share classes?

o Binding on all shareholders

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What does private equity bring to you? – Long-term capital, solidly underpinning your company’s

growth; – increased visibility with bankers, suppliers and clients; – a partnership, sharing the risks and the rewards; – an investment fixed within the framework of a

negotiated contract;

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What does private equity bring to you? – the adoption of high-performance management

standards; – strategic and operational support along with financial

advice in times of crisis; – assistance with subsequent financing operations; – alliances due to the investor’s network of contacts and

portfolio of investments; – a partial or total exit strategy.

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The information in this presentation is intended to be general information only and should not be interpreted as legal advice.

English law is subject to change so whilst Stephens Scown LLP seeks to ensure the information contained in this presentation is

up to date and accurate, the law can change quickly and no guarantee is made as to its accuracy which means the

information should not be relied upon. Presentation slides should not be viewed as an alternative to professional advice

and Stephens Scown LLP does not accept liability for any action taken or not taken as a result of this information.

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EQUITY INVESTMENT

John AcornleyBusiness Equity Finance Advisor

Get Set For Growthjohn.acornley@getsetforgrowth.co

m

22nd October 2014

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• Angel Investment• Private Equity/Venture

Capital• Equity crowdfunding

• We are building a network of equity investors who wish to invest in Cornish businesses

EQUITY – MAIN TYPES

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• Individual or small group of individuals• Looking to invest money • May or may not want a Board seat• Want a return from their investment

ANGEL INVESTMENT

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• Firm set up to invest equity into businesses

• Can usually invest larger amounts of money

• Will probably want a Board seat• Have resources to help growth

PRIVATE EQUITY/VENTURE CAPITAL

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• Need/want some money and external help (Angel)

• Can’t deliver the business plan without the money and the external help (Private Equity)

WHEN SHOULD EQUITY BE CONSIDERED

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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

WHEN SHOULD EQUITY BE CONSIDERED (ANGEL)

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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

WHEN SHOULD EQUITY BE CONSIDERED (PRIVATE EQUITY)

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• Strong management team• Credible high growth Business Plan • Sensible initial valuation• Exit strategy• EIS/SEIS approval (for Angel

investment)• Good advisers (corporate finance, tax,

legal)

WHAT EQUITY INVESTORS LOOK FOR

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

www.francisclark.co.uk

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