As we are all working towards reducing the health impact of Covid-19 by complying with the lockdown, businesses are starting to look into the future and attempt to forecast the possible economic impact of this crisis on their business.
Various business support schemes have been launched over the last few week.
Enterprise Ireland launched the Sustaining Enterprise Fund
(see https://globalambition.ie/supports/innovation-support/sustaining-enterprise-fund/ ) that offers a repayable advance of up to €800,000. This is repayable within 5 years with up to a 3-year grace period.
This advance incurs an annual administration fee of 4%. This fund has some strict guidelines and requires the applicant to submit a detailed Business Sustainment Plan. This will require a detailed business plan (including financial projection) that addresses the various elements of the guidelines.
I can assist you with the business plan, financial projection, the Business Sustainment Plan and the Enterprise Ireland application. This exercise will help you plan for the future as well getting access to much needed funding.
Furthermore, you can avail of Enterprise Ireland supports to assist you in funding my consultancy costs.
Thanks and keep safe
This is the first of a series of 6 articles aimed at Owner Managed Businesses addressing various issues that they face through the complete business cycle from Start-Up, through expansion to final exit. By Frank Coombes, Coombes Corporate Finance
The climate for new start ups and company expansion has been very healthy over the last few years. In respect to Start-Ups, Venture Capitalists (VCs) invested €28m in 48 start-ups in 2004 versus €33m in 106 start-ups in 2003. Equity is also being invested into companies expanding with VCs investing €33m in 42 expansions/other type companies in 2004. The consensus is that this will continue, with a recent survey carried out by IBI indicated that almost 30% of privately owned businesses expect to see some acquisition activity in the next 3 years.
These projects require equity investments. However according to a recent survey by the Irish venture capital Association (IVCA), only 25% of the respondents expect to invest in new projects in 2006 compared to 80% last year. So what are the key weapons that will put you ahead of the pack in the battle for new Equity? The private company needs the following:
An investor’s evaluation will mainly be based on the strength of the company’s team. This is borne out by an IVCA survey with its members, where it stated that the biggest reason why their members turn away an application for funding is the lack of an experienced management team.
This team should include:
The CEO needs to show that he/she has got the vision for the company, clear direction on how to deliver this vision, and a high degree of energy to motivate all those around him/her to achieve the company’s goals.
The CEO should be supported at a strategic level by a well-balanced board and at an operational level by a dedicated workforce. The Board should comprise of executive and non-executive directors. The correct selection of the non-executive directors can add great experience and credibility to the business. Hence ideally the company should select people that are well respected within the business community.
As any start up or early stage company would tell you, the success of the business is very much dependant on its employees. It is important for any start up company to minimise the turnover of key staff so as to maximise the ‘knowledge’ retention within the company. Therefore, it is important to put in place such incentives as Share option scheme(s) and/or a profit sharing scheme so as to maximise staff retention. Investors will look very favorably at such initiatives.
It is also important to employ experienced advisors, particularly in the field of Corporate Finance. Too often the time and energy of the CEO and other key management is sucked into in the process of raising finance and away from their key operational and development responsibilities to the business. Therefore, it is important to employ advisers to reduce the burden on key management during the financing process. Well-established Advisors will also add value to the company through their contacts and experience.
The Investor will look for a clearly defined product, that is market driven and one that is valued by its potential customers. It is a common mistake when developing a product that it is driven by technical abilities rather than being a product or service that the market requires. Hence, in these situations when the product is developed it transpires that the market is very limited, non-viable or at worst does not exist at all.
In defining the product, the Company should identify the unique selling point (USP) of its product, i.e. what will differentiate it from any competing products. Ideally from an Investors point of view a new product should have a defined market and where possible have intellectual property rights attached.
The company should have a strong marketing plan that will form the blueprint for marketing and distributing the company’s products. In many investors’ eyes, a clear route to market is second only in importance to their assessment of the strength of the management team. Too often a company is very enthusiastic about a product but does not consider how to target the specific market. Channel management is key to the company’s strategy, as the investor will evaluate how quickly and efficiently the company can sell its product to its customers in an ever-changing market environment.
Ideally, the target market should be one that has great growth potential. Most Investors will prefer a market with growth potential in favor of a product that endeavors to capture market share from existing suppliers.
The importance of a good Business Plan cannot be under estimated. The Business Plan will be the key selling tool for your company in the process of raising finance and often it is the first view a potential investor will get of your company.
A good Business Plan needs to be informative, clear and to the point. The plan should focus on the unique selling points of the company and highlight the key ingredients looked for by investors, namely a strong management team and a well-established marketing strategy. Every business plan should be supported by a robust financial model, which highlights the business drivers and the potential return to the investor.
The competition between companies for investment funds in the present environment is fierce due to the high supply of quality investment opportunities. Hence the company that gathers together the key weaponry is well prepared for the battles of raising finance. Just remember that winning or losing any one battle does not necessary mean the end of the war!
Frank Coombes – Coombes Corporate Finance 021 4943944
Privately Owned Businesses in Ireland have performed well over the last five years or so and M&A activity in the sector is strong. We have also seen many companies investing in opportunities away from their core businesses, for example the Sisk Group acquired a number of companies in the Health care sector over the last two years and the Bandon based Fleming Group investing a reported $32 million for a controlling stake in a bio-energy company in the American state of Iowa. Furthermore, we are seeing an increasing number of acquisitions outside of Ireland. This is highlighted in the Ion Equity M&A Tracker Survey, which shows that 56% of the number of M&A transactions for the first 9 months of 2007 was foreign acquisitions by Irish Owned companies, up from 48% of transaction for a similar period in 2006.
So what of the well documented “credit crunch” and how has this impacted on M&A activity? The Ion Equity M&A tracker Survey shows that value of M&A in the first nine months of 2007 increased by 82.5% over a similar period in 2006, an indication that the Irish M&A market has remained strong to date and indeed is growing. However experts believe that the credit crises has not yet impacted on the M&A figures as most of these deals were in the ‘pipeline’ when the crises emerged. Therefore, they believe that the credit crunch is likely to impact in 2008 with an anticipated slow down in M&A activity. This will have a greater impact on the Private Business sector as they rely heavily on debt financing in their M&A transactions.
There is no doubt that the feedback from the banking community is that they are open for business but that “caution” is the underlying sentiment. Caution translates into more security required, lower loan to value lending and more robust business plans. In other words, banks in general will remain supportive of expansion but your business plans need to be stronger, the acquisition case more compelling and it is likely that the portion of debt to equity required will be much lower, and therefore a greater requirement for non debt finance.
Will this ‘cautious’ debt financing cause M&A activity to slow down in the Private Business sector? The answer is probably yes, but it need not be the case as there are alternatives. A number of these alternatives could be summed up in a word – “Partnerships” and these partnerships can come in different disguises.
Take an example of a Family Business where the Owners have no succession plans for their business. According to the recently published PWC report, 66% of Irish Family Businesses have no succession plans and this compares to 51% across Europe. In this situation the business is probably key to the locality and so it is difficult for the Owner to let go with fears of the impact of a sale might have on loyal workers, etc. Similarly a buyer may find it difficult to acquire due to the credit crunch.
A solution for the owner and the buyer is to form a “partnership” whereby the buyer acquires between 60% and 75% of the Family Business and enters into an option to acquire the balance at some point in the future. This allows the vendor to reduce his or her involvement in the business, receive funds from the sale yet remain involved to ensure that the business is transferred safely. The buyer on the other hand does not have to come up with 100% of the acquisition price on day one, yet have sufficient control to allow borrowing to be secured on the assets and cash flows of the target company. Furthermore the buyer retains the goodwill and knowledge of the seller for the all important hand over period. This is particularly important where the buyer is entering a new market or is diversifying away from their core business.
Another partnership solution that will assist in these credit challenging times is to partner with private equity investors. Private investors, who have traditionally invested in property, are seeking alternative investment options with the decline in the property markets in Ireland and the UK. Some private investors have turned to investing into private business transactions to assist acquisitions and/or expansion.
The “equity” investment can take many forms such as an investment instrument with a fixed rate of return that is secured behind the bank debt. This can either be a preference share or loan note that can be redeemed at a premium at some point in the future. Further security may be gained by having the preference share/loan convertible into equity shares if the preference share/loan is not repaid. An alternative is to issue ordinary shares in the company whereby the investor owns an minority share. The buyer will have the option to acquire this back from the investor at some point in the future. Sometimes the investment term can be a combination of both of the above, i.e. a preference share/loan note with a fixed rate of return plus a small equity share, thereby allowing the investor a share of the growth of the company.
A further partnership option is where two or more like minded Private Companies come together to invest in an expansion strategy. For example, where two similar companies who share a common key supplier, may come together to acquire that supplier. This will secure the supply of the key materials or services as well as enhance the return of both entities. Alternatively, like minded businesses may come together to enter into a new market. This will allow all parties to pool their resources and knowledge there by increasing the likelihood of success. The banks will feel more secure as the risk is diversified between two or more parties and so a higher proportion of debt to equity may be available. Finally the participating companies may be able to leverage the equity off of the assets in their own companies and the burden will not be as much as it is split between two or more parties.
Therefore in summary, the credit crisis has not materially affected M&A activity to date. However it is widely believed that it will have some negative impact in 2008 due to a ‘cautious’ lending approach by banks. This challenge can be overcome through creative structuring of the transaction using ‘partnerships’ or similar arrangements. These partnerships will not only help secure the required funding in cases where debt funding may be tight, but partnerships may also bring industry knowledge, management skills and commercial security to the investment. Hence they can bring to a transaction valuable non finance investment in addition to capital, the combined I refer to as ‘smart money’.
Frank Coombes is founder and director of Coombes Corporate Finance, a corporate finance house that focuses on the Privately Owned Business sector.
Contact Frank at 021 2427185
or email me @ email@example.com