Your business has taken off, with sales showing there are plenty of customers for your products or services, and now you want to take things to the next stage by expanding.
However, now there’s the question of how to fund that growth. For many companies, the answer lies in raising money through private equity (PE) or venture capital (VC). There’s certainly a lot of potential funding available: equity invested in smaller UK businesses rose 5% to £6.7bn in 2018, the highest amount recorded, according to the British Business Bank’s annual Small Business Equity Tracker report.1
Raising capital this way can be quite daunting if you’re a business owner who’s never done it before, so below is some insight into what’s involved.
Crawfurd Walker, Chief Revenue Officer with business growth advisor Elephants Child, says the first move should be finding the right professional advisers, which will help a business owner “maximise value and increase the certainty of completing the deal”.
He stresses a typical deal could take six to nine months and requires “real commitment from the management team and owners, a clear sense of purpose for the funding and a realistic expectation of what the investor will expect – during the process and in exchange for the funds.”
Rodney Appiah of private equity firm Foresight Group warns it’s critical to match your business with the right investment partner. Do you want an investor who will take a minority stake and play a supportive and strategic role, or are you ready to sell a majority shareholding with the possibility that your investor will be more involved in shaping the way the company is run?
In early meetings an investor will look at the products and services your company offers, your point of differentiation, your customer base and your growth plan. There will also be discussion about the money you want to raise – which could be anything from £250,000 to a multi-million-pound sum – and about valuation expectations.
However, one of the most important things that an investor will focus on when assessing a business for investment is the quality of the management team. Rodney explains: “When an investment underperforms, nine times out of 10 the key determining factor is the quality and experience of the management team. Are they in the right roles and have the right support? Are they clear about the growth opportunities that are in front of them? Are they aware of their weaknesses – and are they happy to address them?”
Potential investors will also ask if your company is operating in a growing market, improving your chances of successful expansion, and whether your product or service has a high profit margin to demonstrate the value that is being added. An investor will also want to see that your product has enough of a unique selling point to see off competitors.
When due diligence checks have been completed, often under a confidentiality agreement, there will likely be a more detailed interrogation of your company’s growth plan and financial model before the investor is ready to make a formal offer.
For those companies that succeed in getting an injection of much-needed investment, it can be a real springboard. Operam Education Group, an education recruitment agency, received funding earlier this year from BGF, which is the most active investors in growing businesses in the UK and Ireland. That funding supported the company’s expansion through acquisitions. Company CEO Eddie Austin says: “BGF is a minority investor so we retain control of the business, which appealed to us.”
But he also stresses the importance of BGF understanding and sharing his company’s vision for the future. “The advice I’d give any business owner looking for investment is to appreciate the importance of a strong business plan and good investor relationship. This can’t be underestimated.”
1UK smaller businesses receive a record £6.7bn equity finance investment, published by the British Business Bank, June 2019.
This article is written for the St James’ Place Entrepreneurs Club newsletter. The opinions expressed by third parties are their own are not necessarily shared by St. James’s Place Wealth Management.