Companies need cash for a variety of reasons but in today's challenging investment market it can be difficult for companies to attract investors.
So what should companies seeking investment be doing to stand them in good stead? Below we have set out our top ten tips for making your company investor ready.
There are multiple sources of investment funding available. If equity investment (i.e. offering shares in your company in exchange for a cash investment) would best suit your business, consider whether you would benefit from approaching venture capital firms, high net worth individuals, angel syndicates or the investment arms of public agencies.
The choices open to you will depend on factors specific to your business (such as the stage of the company, what area it operates in and the size of the investment required).
In addition to the funds you need, investors often have a particular area of expertise and having access to this experience and their contacts could be as valuable to your company in the future as the cash on offer today.
However, if you would prefer to retain total ownership of your company, debt funding via loans or overdrafts may be more suitable (though you would need to ensure your financial projections show that the company would be able to service any such debt).
There are also other options available such as funding grants, online lending platforms, and entering into collaborations or joint ventures.
In short, shop around and seriously consider what would suit your business needs best.
Be clear why you want investment
Having a clear idea of how and why your company would benefit from investment is important for encouraging investors to invest in your company.
Avoid vague or generic reasons of wanting investment to 'grow' or 'expand' the company as these are unlikely to convince investors.
Tell potential investors exactly how their investment will be used to benefit your company over the next 1-5 years, for example that the investment will be used to fund working capital for a specific purpose or to buy a particular asset which is crucial for the company's growth.
Know your market
Demonstrating a good understanding of your target market and thorough research into your target customer base is essential for persuading an investor that your company is worth investing in.
Being aware of domestic and international market segments shows that you clearly understand what your competitors are doing, and what it will take for your company to be successful in its sector.
Prepare a business plan
Not only will investors be interested in the current status of your company, they will also want to see where you plan to take the company. A comprehensive business plan will set out your company's objectives, strategies and financial forecast.
Demonstrating clear growth ambition supported by evidence is essential in giving confidence to your investors that you know the direction your company is heading.
Prepare for due diligence
Potential investors will want to carry out due diligence into your company's affairs to ensure these are all in order, which will likely involve reviewing material contracts, business plans and finances.
They will also want to check that your company holds good title to key assets including any intellectual property rights.
Having basic documents in order at an early stage could highlight practical issues not previously considered. If they do, then you can address these early which should give your potential investor confidence in you and will also help your business to avoid those problems in the future.
If any issues arise, contact your lawyer to address these as early as possible.
Plan an exit
Your company might be your passion but it is typical for an investor's involvement in a company to be temporary.
Investors will be thinking about how they will exit your company in future in order to maximise their return.
For example you may need to decide what would happen in the event that a third party wanted to purchase the company and whether you should have the ability and/or right to buy out your investor at a specific price and time in the future.
Can you work with the investor?
Once the investment is made, you will be working closely with the investor so it is important that you can have a good working relationship with them. At a minimum, an investor will usually want:
- oversight over strategic and key financial decisions;
- the right to be a director (or appoint their own director or observer to the board);
- a requirement for investor's approval for company expenditure over a certain value.
Before accepting the investment and committing to working together, consider if there will be a clash of personalities and decide if you are comfortable with the level of shareholding and control you are giving the investor.
A shareholders' agreement between you and the investor is essential to protect you both post-investment.
The agreement documents the relationship between you and your investor by setting out rights, responsibilities and obligations. It will usually also cover governance matters, key decision-making, information rights and board composition.
Entering into an appropriate shareholders' agreement will minimise the risk of disputes, which will save both parties time and expense.
It is also a private document which does not need to be filed publicly at Companies House, unlike the company's articles of association which are available for public viewing.
An investor will expect you to provide warranties confirming the accuracy of the information provided to them.
Warranties will usually cover the key aspects of the company, ranging from the finances to the share ownership, as well as disclosure of key contracts and assets.
You therefore need to be able and willing to stand behind the information you provide to the investor, albeit that there are customary limitations on liability you should be able to negotiate.
Take professional advice as early as possible
Taking advice from professionals such as accountants and lawyers at an early stage is crucial. It will help you avoid common errors, and to document the arrangement on which your investor and you have settled.
Having the reassurance that the investment has been reviewed by professional advisers and properly documented will allow your investor and you to concentrate on making your business a success, which will benefit both of you.
For advice or information about preparing your company for investment, please get in touch with your usual Brodies contact.