Could angel investment finance your business turnaround?

Raising finance can be one of the hardest aspects of buying a business, so you can imagine the added difficulties involved in raising finance for a distressed acquisition. But having the right information and resources at your fingertips can significantly increase your chances of success.

Buyers will know that there is a range of potential sources of finance available for a conventional acquisition of a profitable, trading company. But finding one or more for a distressed business opportunity is another matter. Bank finance is an obvious source for a simple or secure investment. But unless there are substantial capital assets like property included in the sale, getting a bank to agree finance for a distressed venture is almost impossible without a track record of successful turnarounds as a seasoned entrepreneur.

You might already have considered looking into the possibility of releasing other investments or explored using your own cash savings as an alternative. Organising loans from family or friends is another option, but these solutions can't always provide access to sufficient funds for a successful turnaround. There are short-term, small loans available from companies like Wonga For Business, though the amounts are often capped i.e. in Wonga’s case at £15,000 and interest rates are relatively high at around 26% AER.

There is another route. It doesn't work for every distressed purchase, but for the right kind of business, angel investors could be a heaven-sent answer to funding problems. There is a right and a wrong way to go about seeking their help, however, given the range of challenges facing entrepreneurs and business buyers, learning the best way of gaining access to finance is essential.

A difficult economic climate has brought the issue to the fore. A shortage of employment opportunities has seen more and more people turn to alternative business opportunities, such as buying their own business or starting up an entrepreneurial venture; while at the same time investors are increasingly reluctant to pour money into a venture unless they are sure they will see a return on their money. Profectus is a company that was born out of this situation, mentoring entrepreneurs through the process of winning finance from angel investors.

We spoke to Ian Barratt, partner at Profectus, to discuss the various things that business buyers need to keep in mind when pitching for finance. Asking for investment is an art in itself and it's worth investing some time and effort in building up your pitching skills, which can differ to those used in management. Here are three points to start thinking about if you're considering approaching an angel investor.


Preparation

A lot of people rush into asking for finance, thinking they know enough about the general direction of their business to dodge any difficult questions that might be asked. But according to Barratt, the biggest problem he has seen during his time in business is “people being totally unprepared”.

He stated: “You've got to know what you want the money for and what an investor's return will be within the first three years because that's exactly what people will want to know … 'What am I going to invest in?' 'Where's my money going?' and 'What sort of return am I going to get?'”

An entrepreneur needs to have this information at his fingertips to reassure an angel investor that his money will be in safe hands.

A point that ought to be added here is the need to be intelligent about approaching potential investors. Do your homework on the angel. If he/she has a particular interest in biotech, don’t waste their time (and yours) trying to flog a slice of your clothing company.

Remember, most angels do not have catholic investment tastes. Like their bigger private equity cousins, they will be considering the potential exit at the time of their investment. But without the research resources of PE houses, angels are likely to want to stick to industries that they are familiar with. Treat that as a very good thing, because the right angel will not only bring money to the table, but also industry experience and commercial nous. Over time, these can be more valuable than the capital injection.


Point of View

When your days revolve around setting up your business it can be easy to get lost in your company's requirements. However, approaching investors with the right point of view and remembering to see things from their perspective is one of the most important things you can do as a business buyer. It's essential to keep in mind that they will want reassurance that their money will be looked after and returned with interest.

One way of achieving the right balance when you approach an investor is to ask yourself: “If you were using £100,000 of your own money what would you expect to get back?” Barratt observes that many people think about things in “an entirely different light” when you ask them this and their focus starts to shift to the fine details off the business budget.


Planning

The importance of laying out a precise financial plan before approaching an investor cannot be underestimated. You must be totally familiar with the forecasted P&L metrics and the competitive horizon. It is useful to note at this point that angel investors are not there to cover your initial set-up costs. This shouldn't be a problem for somebody looking to buy an existing business but do remember that angels are investing in the next stage of your enterprise – i.e. the bit where it starts to turn a profit - so don't frustrate them with requests to cover your stationery bill.

If you're wondering how long you have to deliver a return on your investors' input, Barratt suggests aiming around the three-year mark: “If I was investing in a business … I would almost certainly want something back in years one and two and the bulk of it in year three because I think it's very easy to just take in a load of money and do something with it knowing that you've got 36 months to justify it.”

A key area to cover in your financial and marketing plan is the difference you will make to the business. You are proposing to resurrect a company that has just gone belly-up. What are the solid and believable reasons that the same thing will not happen this time round?

Rileys Sports Clubs have just been rescued from administration by a group of venture capitalists. But the company had previously collapsed into administration just three years ago. So this latest group must have been presented with some very convincing data and reasons to believe that there is an underlying profit centre. Perhaps, by shutting down a quarter of the clubs, they are left with a solid-performing core group with a sizeable, loyal customer base. A very different financial plan will have been created, one that no doubt includes other cost-cutting measures and new product initiatives.


In Profectus' view, there are three key aspects to approaching angel investors: sales and marketing, financial management and pitching, presentation and communication. Profectus runs conferences and seminars to help individuals to gain a balanced view on the whole process. Barratt says that the main area where entrepreneurs seeking angel investment often fall short is communication. “They need to acknowledge the importance of essentially charming someone with a business idea. People buy people,” Barratt explained. “You've got to know your stuff.”

Ultimately, to raise purchase finance for your distressed acquisition, you not only need to have total belief in your plan, you need hard information to back it up. With a sound plan that includes viable growth and profits, convincing somebody else to invest will come down to how you sell the concept and impart your enthusiasm – communication and presentation.

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