Financing a Business

1
Financing a Business

• 24 March 2003

PwC
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Financing a Business

• Sources of Finance
• Selecting suitable source
• The fund raising process
• Current Funding Environment
• Practical Issues Dos and Donts
• Business Plan
• How can we help

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Sources of Finance

• Friends and relatives
• Business Angels
• Enterprise Ireland and other government agencies
• Business expansion scheme (BES)
• Venture capital

• Joint ventures
• Bankers loans and overdrafts
• Invoice Discounting
• Term loans/commercial mortgages
• Finance leases/hire purchase

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Factors to Consider in Selecting Finance Source

• Stage of business development
• Match the Finance with the Need e.g. Finance
  for growth vs working capital
• Security
• Personal guarantees

• Key man cover
• Track record
• Repayment capacity
• Cost
• - interest
• - equity/control

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Sources of Finance Business Angels

• High worth individual
• Wide-ranging advice
• Usually want an input in management
• How to find?

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Government Agencies

• Enterprise Ireland
• Grants/Equity on matching funds basis
• Other Grants
• Shannon Development/Udaras na Gaeltachta
• FAS, Bord Bia, Bord Failte
• County Enterprise Boards
• Eligibility criteria (job creation,viability,expor
  t focus)
• Application process

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BES Finance

• Why go for BES finance?
• Cheap source of finance, with potentially good
  return to investor.
• If shares bought back after 5 years for say 1.20
  (issued at 1.00), the effective cost of finance
  is 3.7.
• The return to the investor is around 15 (IRR).

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BES Finance

• Steps Involved
• Qualifying trade, qualifying company etc
• Apply to Revenue for approval (RICT Outline)
• Prepare prospectus/get a fund involved
• Advertise/contact investors
• Issue shares when funds received
• Continue qualifying trade for at least 3 years
• After 5 years buy-back the shares.

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Finance Leasing / Hire Purchase

• Bank or other financial institution finances the
  purchase of an asset
• Generally plant, machinery, equipment, computers,
  motor vehicles
• Repaid in periodic instalments generally 3 to 5
  years
• Option to purchase outright at end of finance
  period
• Ideal for assets that depreciate over 3-5 years

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Term Loans / Commercial Mortgages

• Secured loans for fixed period, for a specified
  purpose e.g. purchase of property
• Typically secured by property or other assets
• Repayable by agreed amounts in a fixed timeframe
• Advantages
• - Retain Equity
• - Fixed repayments planning
• - Some flexibility in payback terms

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Venture Capital

• Seek investment opportunities that offer high
  return based on growth during investment period
• Take equity holdings is risk based
• No security for investor gt generally seek double
  their investment in 3 to 5 years
• Venture capitalists can provide funding for
• - Growth
• - Expansion through acquisition
• - Management buy-outs
• - Replacement capital
• Accept risks not acceptable to other finance
  providers

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Venture Capital

• How does it work?
• Venture capitalist acquires an equity stake in
  the company for cash
• Cash used to grow the company and increase its
  valuation
• After 3-5 years, VC cashes in their investment
• Generally appoint non-executive director and
  receive monthly information

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Venture Capital

• Which Venture Capitalist?
• Are a number of funds in operation
• Specific market sectors
• Critical to get a good match
• Professional advice critical
• Investment can range from 250,000 to 6,000,000
• Risk/return balance

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Venture Capital

• How will Venture Capitalists Assess Your
  Business?
• Key attribute ability to achieve significant
  growth
• Strength of management team
• Managements understanding of the VC aims
• Ability to adapt to change
• Willingness to give away portion of equity

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Venture Capital

• What of Equity?
• Key valuation of your company
• Commonly used methods
• - asset values
• - multiple of historic earnings
• - combination
• - cash flows
• Risk ie. uncertainty as to cash flow and growth
• Professional advice critical
• Higher cash flow faster growth less
  uncertainty higher value

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Venture Capital

• Exit Strategy
• Must be clear at outset
• How will VC cash-in after 3-5 year period?
• Implement strategy

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Raising Finance
The Fund Raising Process

• Presentation
• Circulate information memorandum and/or business
  plan
• Road-show presentations
• Non-disclosure agreements

• Completion
• Finalise due diligence
• Complete legals
• Sign
• Funding received

• Preparation
• Develop business plan
• Financial projections
• Preliminary financial and tax structure
• Identify investors
• Prepare road-show

• Negotiation
• Discuss main terms
• Consider financial and non-financial issues
• Heads of Agreement
• Due diligence
• Detailed legals

Be prepared select your audience
Dont rush - focus
Takes time dont take eye off ball
Weeks
6
10
?
Time line will vary depending on both project and
current capital market conditions
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Current Funding Environment

• Good news Is still money available
• But gt
• Caution increased scrutiny evident. Finance
  providers going back to basics
• Emphasis on sustainable business models and
  experienced management team
• Spread risk not sole investor
• Lower valuations
• Focus on post revenue stage projects

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Current Funding Environment

• Move investment rounds of smaller amounts
• More emphasis on board representation
• Drawdowns linked to milestone achievement
• No reliance can be assumed on the support of
  existing investors

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Key Musts for Obtaining Funds in Current Market
Conditions

• Ensure you have adequate cash resources
• Arrive via a strong referral
• Have a focussed and well thought business plan
• Demonstrate that your business model works
• Strong management team is critical
• Look for joint venture/strategic partnering
  arrangements

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Key Musts for Obtaining Funds in Current Market
Conditions

• Ensure you can sell your story
• Realistic financial projections
• Look after the business
• Identify potential exit strategies

Businesses that address the right points at the
right time during the planning and fund raising
process will maximise their chances of success
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Requirements for a successful finance raise
Clear and defined exit strategy
Investment threshold level
Realistic valuation expectations
ATTRACTIVENESS
Clear route to profitability and positive
cashflows
Robust, identifiable and scalable business model
Strong and experienced management team
CORE ATTRIBUTES
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Finance Raising/Early Start-Ups- Practical
Issues

• Protection of intellectual property
• ? Employment contracts
• When to incorporate
• Corporate structure shareholders directors
• Management team
• Corporate compliance

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Raising Finance

• DOs
• Address the concerns/wants of investors
• Be realistic about valuations and financial
  projections
• Achieve milestones and projected numbers during
  investment process.
• Use non-disclosure agreements
• Keep legal and share structure agreements as
  simple as possible
• Clarify main terms and agree contentious issues
  before signing Heads of Agreement.

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Raising Finance

• contd DOs
• Agree a deal that allows the company operate as
  planned ie. Screen the venture capitalist for
  strategic fit.
• Use reference or introductions from sources
  respected by venture capitalists
• Select professional advisers based on quality and
  scalability of service
• Drive the business development/exit process
• Focused and well thought-out business plan

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Raising Finance

• DONTs
• Make road-show presentations to window-shoppers
• Allow immaterial matters arising from due
  diligence to alter of equity given away
• Be inflexible on valuation or investment terms
  negotiate
• Miscalculate the amount of time the process will
  take
• Under estimate the amount of support you will
  require both professional and from
  family/friends
• Assume support of existing investors
• Take focus away from underlying business

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Finance Raising Your Business Plan

• Prepare a business plan
• First step in convincing investors you have the
  experience to build a business
• Provides measurable financial and operational
  objectives against which you can benchmark
  progress

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Finance Raising Your Business Plan

• DO
• Set out clearly what business you are in
• State the companys objectives
• Describe the tactics and strategy to meet your
  objectives
• Cite clearly how much money is required and over
  what period be realistic
• Clear Exit Plan
• Executive summary is critical

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How Can PricewaterhouseCoopers Help?

• Assist in preparation of
• - Business plan
• - Financial projections
• - Information memorandum
• Identify appropriate sources of finance
• Structure your approach to potential
  financers/introduction to VCs/Other equity
  investors
• Valuations
• Negotiation assistance
• Corporate compliance

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www.pwcglobal.com/ie
30
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