Can business angels help?

<p>In the midst of the grimmest recession that most of us will have lived through, with belt tightening the order of the day, expansion might be the last thing on the mind of most in the book trade. But history shows that tough times often lead to the gestation of new business ideas and opportunities, particularly for small and medium-size enterprises (SME).</p>
<p>The difficulty in a downturn, of course, is not just having the nerve to expand, but finding the resources. In the current financial crisis, it may be easy to believe from media reports that banks have closed their doors and there is no point in knocking, no matter how exciting your plan is.</p>
<p>Fortunately for those with a good idea, that story seems to be somewhat overdone. &quot;We are living in interesting economic times but we have to get it in proportion. It's not Armageddon,&quot; says John Grange, an adviser for government-backed-advisory service Business Link. &quot;Business life is still going on and my plea to businesses which have expansion plans is, don't start with the assumption that this can't happen.&quot;</p>
<p>Indeed, the govearnment is putting pressure on banks to lend to small businesses and supporting that through the enterprise finance guarantee which backs lending to businesses which are finding it hard to stump up the necessary security. Under the scheme, loans worth up to &pound;1m are 75% underwritten by the government, reducing risks for banks. The scheme will run until March next year and is open to businesses with a turnover of up to &pound;25m.</p>
<p>The measures seem to be working, at least to some extent. The Bank of England reported last week that lending to businesses rose in March, after months of stagnation, with UK banks doling out &pound;17.4bn, up from &pound;13bn the previous month. The Bank of England pre-dicted lending would continue to grow in the next three months. Barclays Bank, for one, says it aims to loan 15% more to small business this year.</p>
<p>Meanwhile, private individuals and venture capital houses are still looking for interesting investments which they can ride into better times.</p>
<p>First of all, however, any business which thinks it might need to find new cash should consider whether it really needs to look externally at all. Grange suggests that a thorough review looking at stock flow, suppliers' terms and conditions, and everyday costs might lead to the discovery of enough funds to back a new project.</p>
<p>Another source of funds for small businesses is obviously local contacts, friends and family who might be convinced by a great idea. Of course, mixing family or friendship with business can get messy, and might not be suitable for all eventualities, so the bank is often the next port of call.</p>
<p>Grange admits that banks are asking more questions and may be levying higher charges on potential borrowers, but he says that those who have a clearly defined business plan that demonstrates how they will pay back a loan are in with a strong chance of getting the money they need.</p>
<p>Preparation is the key, Grange says. &quot;Now's not the time for woolly thinking and not well thought-out proposals. People should view money as a tool, a means to an end and ask themselves what are they going to achieve with that money?&quot;</p>
<p>Potential borrowers also need to be very careful about checking over the deal they are being offered and whether they can really afford it. They should &quot;probe&quot; and not assume that the base rate followed by the bank is the same as the Bank of England's base rate, for example, as well as checking they are aware of all the fees involved.</p>
<p>&quot;You need to be very clinical when asking about a loan,&quot; he says.<br />
<b><br />
Angling for an angel</b><br />
If the bank manager is unhelpful, another option might be equity investment via a venture capital firm or a &quot;Dragons' Den&quot;-type business angel, who tends to be a high net worth individual (i.e. someone rich), often with a wealth of experience in business, who is keen to invest time and money in new ideas.</p>
<p>More established and larger businesses might want to approach a venture capital firm. Chris Allner, head of private equity at Octopus Private Equity which has a stake in publisher The History Press, says it is prepared to invest as little as &pound;200,000 to &pound;300,000 in a small business if it can see capacity for dynamic growth in future.</p>
<p>He says often the investment decision will boil down to the quality of the management as much as the financial information offered. &quot;We want to know what makes this special in the market. There are an awful lot of publishers and retail businesses and you have got to establish why people should buy your product.&quot;</p>
<p>Those same mix of strict criteria, track record and clear-eyed business plan applies to smaller businesses looking for investors.</p>
<p>One independent bookseller in south-east England, which did not want to be named, found a local entrepreneur was the answer two years ago when it overstretched itself with borrowing during a period of difficult trading. The company, which has two shops, was bought out of administration by a customer of one of its shops, who has since been happy to keep a low-key eye on the business, which is now trading healthily and wanting to expand.<br />
The shops' operations manager says the backer was prepared to invest because&mdash;despite the store's funding issues at the time&mdash;the business could show it had a strong track record and had been very profitable until several rival bookstores opened nearby, and it attempted to make up lost sales by wholesaling to other independents.<br />
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<b>Nationwide networks</b><br />
That shop was fortunate to find a local partner, but there are thousands of business angels in the UK. Indeed, with savings interest rates with banks so low and many investors becoming frustrated by low&mdash;or even negative&mdash;returns on mainstream investments such as shares, the number of angels is on the rise.</p>
<p>Groups such as Business Link, the trade organisation British Business Angels Association, specialist firms like Beer &amp; Partners, as well as local networking associations can help put you in touch with the right investor. Rod Beer, operations manager of Beer &amp; Partners (B&amp;P) whose business angel members jointly invest &pound;14m every year in small businesses, says there is still investment interest in retail and publishing.</p>
<p>He says angels will typically look to invest between &pound;25,000 and &pound;100,000 for three to eight years, although they might invest as much as &pound;1m. Most angels also want a seat on the board to go with their stake and want to see the management team committing some of their own funds to the project. He adds: &quot;The more likely an exit route is when they invest, the higher the valuation is likely to be on the company. It's all about balancing risk and reward.&quot;<br />
For the company seeking investment, reward can outlast even the first flush of equity from a business angel because of the future finance it can attract. It will strengthen a company's balance sheet down the line and you will become more attractive to other lenders, such as banks.</p>
<p>Peter Coen, a business angel affiliated to B&amp;P who has invested in a number of retail enterprises, is a typical investor looking for commercial ideas in a field he is familiar with.<br />
Coen attends the two events held annually by B&amp;P which try and match potential investors to enterprises needing finance. He likes to invest using B&amp;P because the specialist firm vets all the potential businesses thoroughly before they are allowed to exhibit.</p>
<p>Beer says the businesses that are most likely to attract investment will not only be able to present a strong business plan and have their financials in order, but have researched their market thoroughly before trying to pitch. &quot;It's important to remember that the investor will probably know a good deal more about the market than the management team because they have made their millions out of it already,&quot; he says.</p>
<p>In terms of retail enterprises, Coen says typically he would not consider investing in a business with less than three outlets. &quot;If they have managed to get the money to get to three outlets it proves to me the starting proposition must have something,&quot; he says. But equally important for him is that he has a rapport with the management team who he is likely to work closely with, at least in the early days of the investment.</p>
<p>He says: &quot;It's not only the money that's involved&mdash;it's also the expertise and the experience you can bring.&quot;<br />
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<b>Loss of control?</b><br />
Of course, this type of investment is not for everyone.</p>
<p>The loss of control is something SME owners need to contemplate. Change can reinvigorate a company, but losing even partial control may not necessarily be welcome, particularly if the business has been started from scratch by the owner/operator. As Business Link's Grange says: &quot;When you borrow money, as long as you pay back the bank what's due when it is due they will leave you to run the business. When you move into offering equity, the business has to understand that the business angel is putting in money and will want some involvement and that could upset the dynamics.&quot;</p>
<p>Another issue is that it can be quite difficult to offer an exit to one large investor, as that would typically involve finding another bigger equity investor to replace them in future. Such major potential upheaval might not suit every growing business.</p>
<p>The London-based independent publisher Beautiful Books is trying to avoid the pitfalls of linking up with just one major investor with a &pound;600,000 rights issue that is likely to lead to it being listed on the Plus junior stock market.</p>
<p>The company hired City One Securities, a finance firm which specialises in such share issues that take advantage of the government's enterprise investment scheme, which offers tax breaks for investors if they keep their money in a business for three years.</p>
<p>Simon Petherick, managing director of Beautiful Books, says: &quot;Firms like us are not necessarily that attractive to a venture capitalist, we are still small beer to them and we didn't particularly want to go down the route of one big investor.&quot;</p>
<p>Although Petherick admits that the route he has chosen is more expensive than looking for a business angel&mdash;about one-third of the capital is likely to go on fees&mdash;it offers more independence and the opportunity for its 75 to 100 individual investors to buy and sell their stakes more easily.</p>
<p>He says: &quot;We know most of our shareholders but they don't want to come in and tell us how to run the business.&quot;</p>
<p>The downside is that the shares have been slow to sell. Having launched the offer in November, it is not expected to wrap up for several more weeks. Still, Beautiful Books' experience does show that a gloomy economic climate doesn't need to dampen your hopes for the future.</p>