How to get ready for equity investment

23rd January 2018

By Matthew Cushen

From HMRC’s advanced assurance to your business plan, Worth Capital’s Matthew Cushen covers the steps to take before approaching SEIS investors

January, February and March are when the thoughts of those lucky enough to have to pay a large amount of tax start to turn to saving some of that burden; January being the deadline for self-assessment and April 5 being the end of the tax year.

The first quarter sees a pronounced uptick in interest in the Seed Enterprise Investment Scheme (SEIS) – where investors can use the government’s generous tax reliefs to reduce either their current or previous year’s tax bill – so it is the most fertile time for small businesses to raise investment in return for equity.

This also means that anyone talking to investors in the first quarter is likely to be asked when the investment will close. It is the date of the actual equity transaction that drives qualification for reliefs, hence you see many SEIS transactions completed on 4 and 5 April to qualify for the current tax year.

Therefore, an entrepreneur talking to SEIS investors now can make themselves more attractive by making sure they have one piece of administration in place…

Getting advanced assurance from HMRC

Very few investors will complete an SEIS investment until the business has received ‘advanced assurance’ from HMRC. This is just a letter from HMRC which gives their view that the company has satisfied the criteria for qualifying for SEIS reliefs, and most critically, that they are satisfied that the company is trading in a qualified trade.

HMRC’s advanced assurance also attests that a business has been trading for less than two years, has less than £200,000 in gross assets and fewer than 25 full-time equivalent employees, along with criteria around the share issue.

Although not statutory, HMRC will consider itself bound by the advanced assurance as long as it considers that the company has been truthful, and as long as the company does not change to a non-qualifying trade. Therefore, it satisfies investors that they will be able to claim their reliefs back from their tax bill (worth 50% or more of the investment value).

It is a simple online process, filling in the imaginatively named HMRC form EIS/SEIS (AA)along with providing a simple business plan, any financial accounts and details of a prospective share issue. Given it takes 4 weeks, or often longer, for HMRC to respond, it is worth getting this in as soon as the thought crops up of raising equity investment.

Fine-tuning your investment proposal

Beyond this bit of logistics, it is the normal story of being as prepared as possible for impressing potential investors. In the first quarter’s semi-frenzied investment climate, you may not get a second chance to impress before an investor moves on to a more complete investment proposal. So it is worth remembering:

1. Your marketing plan

A clear sense of how, where and when you will communicate your offer to your potential customers, including a sense of budget and return for each different marketing activity.

Marketing is often missing, or very vague, in business plans that we see. This article might help illustrate what investors are after.

2. Your revenue and profit projections

A clear sense of how and when you expect the business to grow, break-even and start to make money. Along with – and this is the important bit – what you have assumed and the logic behind those assumptions.

3. What the investment will be spent on

After all, you shouldn’t expect someone to give you any cash without them knowing how it will be invested. Expect some reticence if it is all going on salaries, or if a large chunk is to be spent on marketing without a clear breakdown of the plan.

4. Your cashflow

Your revenue, cost, expenditure and profit projections should also drop into a cashflow, which will illustrate how long you would expect an investment to last – your ‘runway’.

5. Proof points

Any research, experiments or conversations you’ve had that will give investors some sense of confidence in your proposition and your revenue projections.

For example, if you have a product, how far have you got with potential retailers? What indications are they giving you about their likelihood of taking the product at a sensible cost price?

6. Raise and valuation

It’s not a time to be shy about how much you are raising and how much you think your business is worth.

Entrepreneurs are reticent to be explicit about their valuation aspirations, but if not included in the first thing an investor hears about a business, their first question is inevitable. So it’s better to be up front and see if you are in the same ball park.

It’s a great time of year to be raising, but the market will dip on 6 April. It is worth being prepared now if you’ve aspirations of raising SEIS cash soon.

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