John McGuckian, a partner in Tughans corporate team, shares some practical advice for any SME considering equity funding.
Q1. What are the top three things that a company can do o make an equity funding round as smooth as possible?
In our experience, those companies who go into a funding process with a really well-honed business plan and financial pack find it quicker and easier to attract investment and close the round. The company’s requirements for, and challenges to, growth will therefore be clear. It allows the company to target the right investor who can provide not only the initial funding requirement, but also desired connections or experienced non-executive directors and additional money for follow on funding etc. It also allows the investor to quickly analyse the company and see the potential for realising its investment.
The second recommendation would be to ensure that, as far as possible, the company’s affairs are all in order before the funding process commences. It is relatively common for funders to discover issues in due diligence that need to be dealt with prior to completion of an investment. These are often ‘paperwork items’ that can be easily remedied, but can have significant legal consequences if unresolved and therefore add delay and cost to the deal. Beyond that, the importance of choosing the right investor (that the management team is confident about working with) and having experienced professional advisors (who can provide advice on ‘industry norms’ and help to find workable compromises in deal negotiations) is essential.
Q2. Does equity investment equal a loss of control for existing shareholders?
This perception is often a major inhibitor to family / owner managed businesses looking for equity investment, but our experience is that in the normal course of trading it is definitely not the case. The most successful equity investments that we see are those where the investor has a great working relationship with the company’s management team from the outset, and an alignment of interests that helps to fuel the company’s growth.
Most investors would agree that regardless of what the legal documents say, real control lies with the people who run the business day to day. For that reason most investments are heavily based on the investor’s faith in the management team. In the event that the relationship does sour the protections granted to both parties in the investment documents should provide a road map for resolution, and so require careful consideration at the outset.
Q3. Are equity investors only really interested in high tech companies?
Our experience is that while high tech companies are often good candidates for equity investment, local and other funders are actively looking to diversify their portfolios and are very happy to consider companies across all sectors where there is high growth opportunity and good exit potential. Many of the equity funds who are active in Northern Ireland would describe their funds as generalist (as opposed to sector specific)but networking can be key here, as often professional advisors and other intermediaries are aware of what sectors are of particular interest to particular funds or investor syndicates from time to time.
While great care has been taken in the preparation of the content of this article, it does not purport to be a comprehensive statement of the relevant law and full professional advice should be taken before any action is taken in reliance on any item covered.