I have blogged in the past on the methods used to identify suitable SME businesses. I spoke last week about ways of identifying acquisition targets for companies, and now I will focus my attention on individuals who would prefer to invest in – rather than buy – a business. These individuals are generally referred to as ‘Business Angels’, a more sanguine term than ‘Dragons’. The general approach taken by such investors is somewhere between the two.

Investment in SME businesses

There are two main options for an investor – do you invest in a syndicated / pooled fund, or do you go it alone? 

A fund will make a series of regular investments, co-ordinating Due Diligence and other issues. The distinct advantage is that costs are pooled, and the syndicate will have well connected and experienced management. The latter carries more risks, but for the canny entrepreneur it can also generate greater rewards. The investor has increased autonomy, and can directly influence the day to day running of an investee company.

* Syndicated investment opportunities

There are several syndicates in the UK. The main private investment networks I am aware of are :

• Beer & Partners - www.investmentforgrowth.co.uk/opportunities.php. Network of around 1,700 private investors.
• Hot Bed –Slightly different model – see www.hotbed.uk.com
• CSS partners www.csspartners.co.uk/index.html Advisory firm – will align their interests with yours

There are many others – just enter something like ‘private investment network’ in Google or look at the British Business Angels Association www.bbaa.org.uk which covers some of the networks.

* Individual investments

The internet also provides many opportunities for private investors looking to go it alone. This takes a lot more effort by the investor, and as such opportunities are less ‘polished’ than those presented by the private networks mentioned above. 

Sites such as www.angelnews.co.uk any others through Google are a good starting point.

Before taking any investment decision, is important to take the appropriate advice, by an individual or body regulated by the FSA. It is also important that sufficient ‘Due Diligence’ is performed on prospective investments to ensure that representations made are factually correct.

Good luck!

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In my last blog, I talked about the confusion and concerns regarding traditional investment methods, and the (current) low rate of return from cash. This may lead to a rise in SME transactions.

People looking to buy SME businesses need to look at a variety of sources, as they are not listed in the Financial Times like stock exchange businesses! I will break it down into acquisitions and investments (my next blog):

Acquisition of businesses

In these purchases, the buyer will take a management role in the business (as opposed to an investment, where the involvement will range from ‘none’ to a sporadic / non-executive role). The current owner will hand over the reigns to the buyer, although he or she may be tied in via an earn out.

A Corporate Finance advisor can perform a search on your behalf, and this will be the most productive method of identifying suitable businesses. There is generally an upfront cost involved, and this reflects the advisors’ experience and ability to add value to the process.

For someone outside of corporate finance, one of the most common sources of such businesses are website directories – essentially databases of businesses. It is usually a case of entering parameters – location, size, amount etc, and the sites will then provide a list of suitable possibilities. 

Probably the best known site is Daltons  – the website of the well known Daltons Weekly publication. Daltons have over 30,000 businesses for sale. 

Businessesforsale.com, is an international site, with opportunities in a number of countries. It has a useful mid-market section, which includes businesses at the upper end of the SME market. There are many other sites, as you will find from entering ‘buy a business’ or a similar term in Google.

Another source of businesses for sale are professionals – speak to your lawyer and accountant – they may be able to consult their ‘black book’!

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With depressed asset prices, across all classes, traditional investment policies are being questioned. Cash? Interest rates are at an all time low, and are expected to decrease. The stock market? Not exactly a safe haven – too volatile and prone to the irrational movements caused by agitated city investors. Property? Possibly, but who knows where that will end up…? 

A number of people are now looking at investment in private companies. Why? In my experience people traditionally invest in small businesses for one or more of the following reasons:

• Many investors are entrepreneurs, who have run their own successful companies. This makes you aware of the issues – financial, commercial and otherwise that businesses face in this sector.
• Small companies are transparent. They can be ‘touched and felt’ and are not a ‘black box’ like their stock market relatives. Even a minority investor in an SME company can help manage and influence the future of the business.
• Investment in private companies has distinct tax advantages – some will qualify for the Enterprise Investment Scheme, in which HMRC will reduce the income tax liability of the individual for 20% of the investment value, offer capital gains tax / other advantages (subject to conditions). There are also Inheritance Tax reliefs for shares in private companies. 
• Involvement at these private rounds of financing often offers the highest risk/return on investment

I have been asked by clients on a number of occasions where to look for investment / acquisition opportunities in small companies. I will return to this in a blog, later this week or early next week.

It is important to obtain proper investment advice, by an individual or body regulated by the FSA – please speak to one our colleagues at Nightingale Associates if you would like any such advice. It is also important that sufficient ‘Due Diligence’ is performed on prospective investments to ensure that representations made are factually correct.

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