Investment can come in a lot of different guises, but generally will fall into either debt or equity.
- Debt: where a lender, which can be institutional such as a bank, or private money from individuals, will lend money to the business, usually secured over the assets of the business by way of a debenture, and often with personal guarantees from the individual directors, particularly if the business is in an early phase.
- Equity: where an investor, or group of investors, provide funds in exchange for shares in the capital of the company. These shares can take many forms, which is outside the scope of this email.
A debt investment will tend to be more straightforward in terms of the steps that need to be taken in order to prepare the business for investment, whereas with an equity investment, as the investors are to be essentially acquiring part of the business, the investors will usually want to take a closer look behind the curtain.
A lot of the same issues when preparing your business for sale will arise where you are preparing your business for investment, as a due diligence exercise will likely be undertaken by the investors in order to ensure they know what they are getting into.
With that in mind, here are five pointers to think about if you are considering seeking external investment:
Not the classic Quadrophenia soundtrack you have on vinyl, but accurate and easily accessible financial and other business records, preferably all kept digitally/online.
The easier to access and provide these records, the more straightforward everything will be as and when an investment opportunity presents itself.
2. Employment documentation
This is one of the key areas of frustration and delay in the investment or sale of a business.
Not to be too much of a lawyer about it, but it is a legal requirement for all employees to have a set of written terms of employment.
If you do not have any written terms in place at the outset of an investment, it is quite likely you will by the end, and a legal bill to go with them for their preparation.
3. Contracts with third parties
An easy way to deal with this, is any time a contract is entered into, a copy goes in a file, preferably electronically (see point 1, above).
This is not just good for preparation for an investment, but good practice in any event.
Alongside this, it is an excellent idea to diarise key dates from those contracts – renewal or cancellation dates – as these will often present an opportunity to negotiate on extensions with the counterparty.
This applies to all contracts, whether yours or those of the third party.
4. Shareholders’ agreements and articles of association
This point merits an entire article in its own right (please see my earlier works), and I do not intend to go into a huge amount of detail here, but wherever there is more than one person involved in a business, there should be some form of documentation dealing with a variety of matters such as these, in order to ensure that decisions can be made.
That being said, where obtaining external equity investment, there is a very good chance that the investors will require a new set of corporate governance documentation be put in place to protect themselves.
5. Engage professionals
This may seem like an obvious point, particularly given the occupation of the author… but it is more to say engage the right professionals at the right time.
The lawyer who prepared your will or sold your house may not be the right person to assist you in selling your business, and the accountant who digs through the bag of receipts every January may not be best suited to assist in a significant investment.
However, those people will either work with, or at least know, a fellow professional who can help, so be sure to ask.