Finance in Cornwall 2014 follow up

events

11 February 2015

EQUITY INTO AN

SME: THE

INVESTORS

PERSPECTIVE

Equity into

SMES, the

Investors

perspective:

introduction (including some housekeeping..)

Richard Wadman – Corporate

Finance Director

www.francisclark.co.uk

Administration

Admin

Timetable

Questions at the end and over breakfast

Interaction – Compulsory

Slides – See pack

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

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

Francis Clark – who are we?

‘Top 50

Corporate

Finance Team

of the Year’ at

the 2014

British

Accountancy

Awards.

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”

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

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

11

EQUITY INVESTMENT – THE

INVESTORS PERSPECTIVE

John Acornley

Business Equity Finance Advisor

Get Set For Growth

john.acornley@getsetforgrowth.com

11th February 2015

12

• Clear, concise and exciting business plan

• Capable management team

WHAT INITIALLY ATTRACTS

AN EQUITY INVESTOR

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

• Unrealistic growth assumptions

• High initial valuation

• Issues in the business

• Exit strategy with limited return

WHAT CAN PUT OFF AN EQUITY

INVESTOR

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

• 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

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

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

Legal considerationsMurrell 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 MurrellDirector

Chris WillsAssociate

Rebecca AnforthAssociate

Daniel WingfieldTrainee Solicitor

Harry PerrinSolicitor

3rd - WMN/Francis

Clark Deals Review 2015

Legal considerationsLegal 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

Legal considerationsLegal 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

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

SEIS/ EIS

Daniel Orasnjak, Tax Manager

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.”

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

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

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

Breakfast is served!

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

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

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

www.francisclark.co.uk

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