26/02/2015

By Christian Schosland, Director (M&A), Smith & Williamson

Taking external equity into your business is a huge step, with potentially irreversible consequences. Below are some issues to consider before taking the plunge.

1. Ownership determines outcomes. Consider whether you really need to raise external equity or if there is a better solution.

2. Plan your fundraising carefully and be fully prepared. You only get one chance to make a good, first impression.

3. Be clear about the amount and purpose of your fundraising. Set out clearly how the funding will be used and allow for contingencies. Don’t look to raise too little – think long term.

4. Think about your exit from the outset. How will you and your investors get your money back?

5. Research your potential investors carefully to ensure they are a suitable fit for you and your business. Consider their objectives, preferred investment size, sector preferences and investment style. What do you want them to bring to the business beyond money?

6. Make sure your management team is up to scratch. If you identify weaknesses in your line-up, make the necessary changes or be prepared to explain how these will be addressed.

7. No business is perfect. Be ready to explain the challenges and weaknesses of your business and how you plan to overcome them.

8. Hire experienced advisers who care. This may be your first equity fundraising, but it won’t be theirs. Listen to their advice to help you achieve your goals.

9. Understand your financial position and forecasts. Be familiar with regularly used phrases and financial ratios that might be important in your business. It’s not enough to leave this to your finance team or your advisers.

10. Work with your advisers to establish the value of your business. Use a recognised methodology and don’t be tempted to overvalue your ideas and achievements.

11. Be prepared for investors to carry out detailed commercial, financial and legal due diligence on your business. And remember to do your own due diligence on your preferred investors. Talk to their other investee businesses to find out how they interact with and help them.

12. Put an investment agreement in place to document what rights you and your new fellow shareholders will have to influence both the operations of the company and your eventual exit.

13. Remember that investors back people. Be likeable and believable, not arrogant or overconfident.

For further information on raising external equity for your business please call Andy Pedrette on 020 7131 4365 or email andy.pedrette@smith.williamson.co.uk.

Disclaimer
By necessity this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Article correct at time of writing.

Smith & Williamson Corporate Finance Limited
Authorised and regulated by the Financial Services Authority. A member of the London Stock Exchange. A member of M&A International.