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Prepare your business for investment

By Richard Cobb, co-head of private wealth, Michelmores law firm

Selling your business or seeking later-stage investors might not be the first thing on your mind in the early days of building a business, but like any good structure it pays to lay the foundations right from the beginning.

Seeing the big picture, and which step you are on, can help the planning process and get you ready for turning the next corner. 


There are around 350,000 new business start-ups in the UK each year and, while many fail, the potential to quickly move through this stage is boundless if you get your planning right. 

Key steps in the start-up phase beyond the big idea include raising finance from friends, family, business angels and grants (and pensions); creating and protecting intellectual property (IP); and forming and securing a team. When funds and resources are scarce, it is vital to prioritise elements that really form the foundation of a successful business, such as a sensible shareholders’ agreement, employment contracts and IP protection. 

Tax planning is another key element, particularly as various tax incentives such as the Enterprise Investment Scheme and research and development tax credits can be easily overlooked or lost. For the over-55s, borrowing against a pension pot rather than drawing down the cash itself should also be considered to save income tax.

Scale-up and beyond

This is the key stage of a business destined to grow beyond a handful of employees, leading to sustainable profitability. The Scale-Up Institute defines a scale-up as having more than ten employees, with average growth in employees or turnover of more than 20 per cent per year over a three-year period. There are currently around 9,000 scale-ups in the UK. 

A great report by the leading university spin-out group, SetSquared, identified the different needs of scale-ups over start-ups. Staff numbers grow to a level where real management, often multi-site, is required, and more specialist positions replace the multi-tasking roles typical of the start-up phase.

All the resources required to make profits are needed here, and the risks and costs of doing business are multiplied. Moving from early-adopter customers to mass market growth (with the more complex sales cycle, and supply chain involved) is another big step, and one when sales forecasts, which supported investment, are really tested. 

Growth capital, bank lending, employee incentives such as Enterprise Management Incentives Option Schemes or long-term incentive plans, acquisitions, international expansion and commercial disputes figure in this stage. Corporate governance becomes important and, in spite of the challenges of being a scale-up, succession planning is essential so that you can move beyond this business stage and open it to the option of investors. 

Partial exit corner

Although business owners do occasionally get approached ‘out of the blue’ to sell up, for most shareholders there is a stage where good succession planning leads to a partial exit. This can be a sale of less than 100 per cent of the shares, or a sale of all the shares but with deferred consideration that pays the cash later, such as the vendor loan notes usually used in a management buy-out. 

I would put an initial public offering in this corner as well – most require ‘sellers’ to hold on to the newly listed shares for a year or two and, after that, it is still hard to sell a large stake without participating in a full PLC takeover. Professional advice will help you negotiate this important step.

Exit and reinvestment

Eventually the loan notes are repaid, the IPO shares can be sold, or out of the blue a buyer turns up, although none of these outcomes are guaranteed. Fully and finally converting an investment in a trading business into liquid cash gives huge opportunity to spread future risk and realise other personal ambitions.

Once family needs are properly secured and vital steps such as updating wills have been taken, if there are still funds available, it may be time to explore reinvesting in high risk/reward assets. Shares in early-stage companies where SEIS or EIS relief are available to act as an additional incentive might be appropriate. Or you may prefer to let your pensions or financial advisors pick funds or investments which cover this essential area of the economy. 

Either way, having transitioned through the business lifecycle, you are now in the position to enjoy the fruits of your labour and turn your hand to a new stage as the investor.