Post COVID-19. Is your business “investment ready”?
As the UK eases out of lockdown and we focus on getting the economy back on track, Corporate Partner, Christine Dubignon, considers five steps that businesses can take to be “investment ready”.
Many businesses have been fortunate enough to benefit from the various forms of Government assistance which have been made available over recent months. These schemes have allowed many businesses to survive the initial crisis triggered by the lockdown, but many will now be considering how they need to evolve and adapt to weather the impending economic storm which is predicted by many. For some businesses, such as those in the travel and hospitality sector, it will be a case of welcoming the continued relaxation of restrictions. Others however, may want to take a more pro-active approach - whether by way of continuing to enhance and build on a successful online offering, or expanding a COVID-19 resistant business line (hand sanitiser, PPE, a new delivery option, are all examples that spring to mind).
Many businesses, regardless of their sector and future plans, are likely to need a cash boost and although the usual commercial debt avenues continue to be available, they should also bear in mind that the reserves of many private investors will have built up over the past few months. That said, many potential investors continue to remain cautious, and seem to be less concerned than usual about missing the bottom of the market. They will now be carefully considering which businesses are most worthy of their cash and other resources (whether access to particular contacts and networks, or relevant experience) and which offer the most lucrative and least risky return on investment.
Given the likelihood of tough competition for investment, what are the top five things that businesses should be doing now to ensure that they are “investment ready”?
1. Prepare your business plan
Any investor will want to understand the business they are investing into, and how their funds will be used. It is important to demonstrate a clear understanding of your offering (including your “USP”), your market, and the competition (from both existing players and disrupters), and that you are able to provide detailed objectives for increased revenue and profit. Although these may seem obvious, all too often the exercise of actually preparing a formal business plan is overlooked or poorly executed. This can create a very unfavourable first impression, with owners left looking ill-prepared.
2. Consider investment terms
Although an investor will propose terms of their own, it is worth considering what parameters would be acceptable to the business and its founders. How much dilution are the existing shareholders willing to suffer and how much day-to-day control are they willing to relinquish? What is the business actually looking for in an investor – a cash injection from a silent partner, or an active participant who will help shape and grow the business? Should any guarantees be given to key staff members, and would the business founders accept being tied to the business for an extended period of time? Although the detail of these issues will be negotiated as the investment transaction progresses, an understanding of what the key commercial points are likely to be will help avoid time wasted on aborted discussions.
3. Check your financials
Although it should be a given for any successful business, now is the time to ensure that all financial information is up to date. Any genuine investor will undertake a detailed financial due diligence exercise – reviewing audited and unaudited financial information, scrutinising any forecasts or projections in the business plan and carefully testing any underlying assumptions. If not done already, now is the time to engage a quality firm of accountants to ensure that everything is in order.
4. Tie in your key people
The success of many businesses is often directly dependant on their people – whether the founders themselves, or key employees. In many cases, informal, ad-hoc arrangements will have been relied upon to document the functions undertaken by people, and/or their remuneration. Whilst such arrangements are extremely common, from an investor's perspective, they are inherently risky. It will be necessary to demonstrate that key individuals have entered into formal employment contracts, which in appropriate cases clearly explain incentive arrangements and the consequences of their departure. Where know-how or professional networks are of significant value in the business, key employees should be subject to appropriate restrictive covenants which protect the goodwill (and therefore value) of the business in the event of their departure.
It is worthwhile remembering that investment brings change and this can unsettle some people. If possible, speak to your key employees who may be affected and bring them on-board, although consider any confidentiality obligations you have with a potential investor before doing so.
5. Formalise arrangements
It's not just employment arrangements which aren’t always properly documented. Businesses which have undergone significant growth often fail to revisit agreements entered into when they were start-ups. Contracts continue to be performed despite having formally expired and people complete deals on a handshake. As the value in some businesses will be a function of their anticipated income, care needs to be taken to ensure that everything is appropriately documented. Whilst it is worth businesses undertaking an internal commercial audit to identify whether anything needs to be attended to, it is well worth engaging lawyers to review matters from a legal perspective. Common pitfalls include key commercial contracts or property assets which are in the name of the founders rather than the business itself, and reliance on key intellectual property assets which belong to employees. Compliance issues should also be properly reviewed. Is the business compliant with GDPR and Modern Slavery legislation, for example? Although issues like these can seem administrative, they will all be considered by an investor as part of its due diligence process, and will contribute to the overall picture of a business' maintenance and management.
Many businesses are going to be seeking investment in the coming months. Although the terms on which people invest can vary hugely, the fundamentals considered by investors and the key “sticking points” in negotiations are often quite similar. Businesses should act well in advance of seeking investment to ensure that they look as attractive an opportunity as possible to an investor. Pre-empting legal and commercial issues now will also reduce the risk of delays or even the collapse of funding opportunities.
Christine Dubignon is a Partner in the Corporate team.
This note reflects our opinion and views as of 2 July 2020 and is a general summary of the legal position. It does not constitute legal advice.
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