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A good time to enter the Dragon’s Den?

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Thursday September 13, 2012 at 9:00am
Although few would welcome recent reports of a stagnant economy, the resulting government incentives for small business investors could help entrepreneurship to thrive.

Certainly the government continues to introduce some attractive proposals for SMEs. Just this week Chancellor George Osborne unveiled plans to launch a bank for small businesses, saying they would be able to gain access to 'multi-billion pounds' of funding.

Investing in a ready-made business can be appealing for entrepreneurs who want to access equipment, a skilled workforce, product ranges and, perhaps, an established brand and customer base – all of which would take years to build up from start-up.

And so perhaps now is a good time for would-be entrepreneurs to consider sitting in the dragon’s chair themselves and invest in a business, or for current business owners to seek further investment to move to the next level. There are certainly a few worthwhile incentives around at the moment.

Tax incentives for qualifying investments, such as those available via the Enterprise Investment Schemes ("EIS"), which were increased from April 2012, make this a very generous relief for those willing to invest in small trading companies.

And for those who have built their business and want to exit, the Entrepreneurs Relief lifetime allowance stands at £10 million, having doubled last year. This relief is generous in the current economic climate as it allows entrepreneurs to pay capital gains tax at a rate of only 10% on the first £10 million of qualifying gain.

Recent government incentives could well kick-start entrepreneurship but for anyone tempted it is vital to have a robust understanding of the big financial picture of any business you own or plan to invest in.

Forecasts based on reality and sound research are the key to securing the best deals. As anyone who follows the BBC’s Dragon Den series knows, entrepreneurs who haven’t prepared and simply speculate about their business are doomed to failure (as suggested in an earlier blog Do you pass the Dragon’s Den test).

Here’s a reminder of some of the key things to cover when preparing:

Performance - anyone seeking investment will need to show they have a clear idea of how the business is performing currently. They will also need to forecast expected profitability for this year and next, ensuring that any suggested gross margin is realistic.

Cash flow - can you show that your bank balance will be within a comfortable margin of the overdraft limit at the end of each month? Cash flow in turn is a function of profitability for the month and how quickly customers pay you and how soon you pay suppliers. The crucial KPI’s of debtor days and creditor days will answer these questions for you.

Operational and fixed costs - what are the variable costs and how will they be managed? What are your monthly fixed costs and are they truly fixed? The surplus after deduction of fixed costs leaves profit. Tax efficient extraction of this surplus is the main motivator for most business owners, as it is what they are able to pay themselves when efforts turn into profits and cash.

Business strategy – investors need to take into account how an investment fits with their existing business, if they have one, which is where a clear business strategy and plan comes into play. Do they have the knowledge and expertise to make a success of the business going forward? Is their scope for synergy with existing operations perhaps, maximizing the profit from any merger?

Growth potential – investors are keen to see a good return and will want to know the monthly sales forecast, plans for how this is going to be sustained and how growth will be achieved. Here a clear understanding of your customer, your business’s Unique Selling Point, the current market for your products and potential new markets is key, as well as a defined plan to seek them out. You will also need to show that you have monitoring in place to ensure sales activity is maximizing Return on Investment.

With Dragon’s Den making a return to our TV screens it will be interesting to see how many of the entrepreneurs that enter are fully prepared to answer the Dragon’s questions.

Andy Parker
Chartered Accountants, Birmingham

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