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A Guidebook & Directory, 1989

Web Version (2011)

This version – a scanned copy of the original – has been made available
primarily as a reference for SME researchers, although others may find
the content of interest.

Much has changed since it was first published. For instance, the
government’s Small Firms Service (p.210) subsequently evolved into the
Small Business Service, although it, too, was later replaced.

But enterprise support in the UK is again under review – with the

prospect of delivery via Local Enterprise Partnerships – and at the time
of writing, the various services are managed by:

England - Business Link

- Regional Development

Northern - Invest Northern Ireland


Scotland - Scottish Enterprise

- Highlands and Islands

Wales -

The enterprise agency network now has the National Federation of

Enterprise Agencies – founded in 1992, And
the popular Dragons’ Den BBC TV series – first broadcast in 2005, – has followed in the footsteps of
the enterprise agency ‘marriage bureaux’ (p.143, p.223), helping also to
raise public awareness of small business opportunities.

Web Version Introduction /2

Document Configuration

To avoid an overly large file, the publication has been split into two
Acrobat documents, namely:

1) the Guidebook section, including the Chapters, Case Studies, Further

Reading and Glossary (pp.1-205), and,

2) the Directory, including the Chapter References, Directory of

Organisations, and Index (pp.206-347).

They may be found here, and

should find wide compatibility with more recent versions of Adobe
Acrobat – they have been successfully opened with Acrobat v.6 and v.7,
(Windows XP), and v.9 (Windows 7).

To assist readers in tracing text of interest, the main sections are

identified as Acrobat ‘bookmarks’, and the scanned page images have
been converted into searchable text.

N.B. Whilst the optical character recognition (OCR) process is usually

efficient in converting scanned text, it is not flawless. However, the
use of truncated searches – by entering say ‘invest’, when searching
for ‘investment’ – may help to locate content that would otherwise be

David Purdy
Visiting Fellow, Kingston University

January 2011

Web Version Introduction /2

A Guidebook & Directory
- Foreword -
Over recent years, the supply of risk capital for smaller firms in the UK has
increased quite significantly. For example, the members of the British
Venture Capital Association have reported placing some £934m in nearly
1200companies during 1987, whereas, as recently as 1979, it is thought that
the venture capital industry invested perhaps only a tenth of that figure -
most of which was supplied by the forerunner to Investors in Industry.
However, the average BVCA investment for 1987 was nearly £800,000 per
company and, due to the costs associated with the appraisal and monitoring
of investments, companies seeking relatively small amounts of below say
£50,000 in risk capital have tended to encounter almost insurmountable
difficulties in successfully raising finance.
The Business Expansion Scheme has helped partly to redress the balance
for companies seeking smaller amounts of risk (share) capital, and although
800 or so do raise external finance under the Scheme each year, this level of
activity should be seen in the context of well over two million small
businesses in the UK.
In contrast to the relative numbers of small businesses found in competitor
countries, such as the United States, West Germany, and Japan, the UK
fares quite poorly. Although precise comparisons are problematical, we
have approximately 2.5 million, and whilst West Germany certainly has a
greater number, Japan could have as many as 7.0 million. The small
business has an important central economic role to play in any country and
the economic benefits arising from a large base of expanding smaller
businesses cannot be overstated.
The UK needs a flourishing seed-bed of expanding small businesses and
thus I hope that this guide will be especially helpful in assisting such
businesses to satisfy their growth potential.
A sound financial base is a pre-requisite for justifying normal bank lending
and is the key to the survival - let alone the expansion - of any business.
Nevertheless, the injection of external equity capital in order to strengthen
this base is an option which appears to be frequently neglected. However,
with this guidebook and directory to hand, the business ownertmanager can
begin to explore the possibilities both quickly and cost-effectively.
The guidebook's case studies illustrate that, via the sale of a minority
shareholding, a fear of 'loss of control' can be unfounded; indeed, the skills,
experience and contacts that a new investor can bring to a business may be
critical to the further progress of that business.
John Bolton
January, l989
Trustee - Small Business Research Trust
Chairman - Cornittee of Inquiry on Small Firms, 1971
- Contents -

Preface iv
Acknowledgements vii
Introduction ix


Equity Capital - What is it?

The basic features of equity capital and different types of shares; the
relationship between shareholders and directors; why 'risk' capital; raising
External Finance -Equity vs. Loan Capital
How bank lending limits and equity are inter-linked; cashflow - the heavy
demand for finance during early years; constraints on external financing and
possible solutions
Equity Finance -More thanjust money?
Introducing new skills; the benefits of non-executive directors; the benefits of
external equity capital; how equity capital can provide a buffer; 'loss of
control' avoidable
Alternative Sources
Private sector:- venture capital funds, the Business Expansion Scheme,
corporate venturing, individuals. Public sectoc- development
agencies, enterprise boards, local authorities, European Commission (EEC)
The ZnvestoJs Standpoint
Investment criteria; the need for a business plan; techniques for evaluation;
risk assessment; break-even sensitivity; exit routes; public sector sources;
private investors
Raising Risk Capital -How to get started
Timescales; suggested time-saving strategy; the need for assistance; an
overview of alternative types of low-cost assistance; business plan guidelines;
cashflow forecasting; alternative linkages to potential investors; possible
problem areas with non-executive directors; the costs of raising external
equity capital
Problems You May Encounter When Raising Small
Amounts Of Risk Capital
Legislative constraints; 'linking' services; professional advisers and their
~roblems; relativelv high av~raisaland monitoring costs for smaller
$vestme&: usi ink ss Izx~an6onScheme disadvant&es: " vroblems with
S -

start-up bushesses; the funhs and smaller investments

Financing The Next Stage
An overview, including the Stock Exchange markets:- the USM and the
Third Market
Case Studies (companies having successfully raised external equity capital);
Profile -A Public Sector Fund (Yorkshire Enterprise); Profile-The Board Of
A Public Sector Fund (Bexley Venture Capaal); Rev~ew- A 'Marriage
Bureau' Investors Meeting; The Busi ess Expansion Scheme (BES) -
Synopsis, Advantages & Disadvantages; Anance- ~ a t c h i n ~pplications
g To
Types & Sources; Key Ratios; Share Valuation - The Ground Rules; Sample
Non-disclosure Agreement; Sample Investment Offer letter; Possible
'Fund'-type Business Plan; 'A' Scores - Qualitative Company Assessment;
Bank Lending Criteria; Further Reading; PracticalGlossary.


Overview of advice agencies & linkage services; Regionalised UK directory
of:- (1) Local low-cost advisory services to assist with business plan
development; (2) Linkages to potential investors; and, (3) Sources of
equity capital (funds); Guidebook and Directory References.

- Liability Disclaimer -
Due care and attention has been paid to the collection and
selection of the information and advice contained herein, and
as such, this information and advice is offered in good faith.
The Small Business Research Trust regrets, however, that
neither the Trust, the project sponsors, the author, nor any
contributors to this publication, are able to accept any liability
for losses or damages which could arise for those who choose to
act upon the advice or information contained herein.
The Trust would be pleased to receive any comments or
suggestions for improvements for future consideration. A
'tear-out' page for this purpose is included at the rear of
the book.

fQ Small Business Research Trust 1989

ISBN: 1 871672 15 5
- Preface -

This guidebook and source directory is intended for the owner(s), or
prospective owner(s), of businesses in need of an injection of up to &50,000
in equity capital to help hislherltheir respective business to:-
i) commence trading (with a lower than average risk of early
ii) expand; or,
iii) prevent cessation of trading - with due regard to potential
It is anticipated that the guidebook should be of greatest benefit to those
owners who wish to retain control via a majority shareholding, and it
should be appreciated that the figure of £50,000 is, to a certain extent,
arbitrary. Indeed, much of the information contained within the guide also
relates to investment activity above this figure.
Any such business should be of the type which would be permitted by its
own articles and statutory legislation to raise external share capital. In most
circumstances this is likely to be a limited liability private company. An
incorporated partnership is also allowed to raise such capital, although the
possibility of a liability which extends beyond the investor's subscribed
share capital may render it unattractive to an outside investor.

In this book, the words 'risk' and 'equity' are intended to be synonymous
with the word 'share' (although some would refer to 'equity' in the
sometimes narrower context of 'ordinary shares'; and some understand
'risk capital' to include unsecured borrowing). 'Venture capital' is a broader
term which can include both share and loan-based finance, but, again, it
may be open to different interpretation. A glossary of various terms is
included as an appendix.
The aim of this guidebook was to provide such information as would allow
readers to: -

1) Explore all or most of the main benefits that additional (external) equity
capital could bring to their business;
2) Improve the likelihood of any viable business in successfully finding
and ultimately raising amounts of up to £50,000 by:-
a) drawing attention to ihe main criteria by which different types of
prospective investors are likely to evaluate investment proposals,
b) suggesting practical methods to help develop a suitable business
plan which would satisfy likely investment criteria,
c) identifying the main sources of risk capital or potential 'linkages' to
such sources, and,
d) illustrating a possible strategy, which, if followed, could help
minimise any delays in finding and raising external risk capital.
The guidebook and directory should also be of assistance to small firms'
advisors in general e'g. bank managers, Small Firms Service counsellors,
accountants, local enterprise agency directors and counselIors, solicitors,
In certain regions of the U.K., the existence of risk capital sources andlor
effective and efficient 'linking mechanisms' to potential investors are
relatively undeveloped. For any area where this condition prevails, the
guidebook a i d directory should illustrate what has been possible elsewhere,
and it is sincerely hoped that it will provide some encouragement to those
who are well placed to develop and implement, with the support of others,
suitable plans to improve the flow of risk capital into viable businesses
within their own locality.

Some readers will be motivated at the present time by a sense of urgency and
perhaps by a general feeling that the injection of some extra capital could
represent an immediate panacea for today's (and tomorrow's) problems.
However, the issues which affect a smaller business in need of finance are
rarely capable of being reduced to a single factor for consideration; nor are
they usually best resolved after only a brief deliberation.
Given, also, that any subsequent decisions could result in very profound
- -
consequences either one way or the other it is strongly recommended
that professional advice be sought to assist with a fulI investigation of the
advantages and disadvantages of any proposed plan IN THE LIGHT OF
recommended that some time be spent in exploring the possibilities for
alternative and contingent plans.
Moreover, readers should be aware that the tremendously diverse nature of
business owners, their businesses, and their markets, make it impractical
for a guide of this nature to accommodate every different set of
circumstances or eventualities.
Notwithstanding these problems, this guidebook and directory should
enable the reader to familiarise him or herself with the main principles
concerning the raising of external equity capital. It is hoped that it will
engender realistic expectations, allowing an increased measure of
confidence when discussing the subject with:-
* a professional adviser,
a business counsellor, and,
a potential investor.
The process of raising venture capital has been described as 'imperfect',
and, given the absence of a readily accessible and well-defined market at the
lower end of the financial spectrum, such sentiment is probably well placed.
But having said this, the businesses used as case studies- not to mention the
several hundred companies each year which successfully take advantage of
the Business Expansion Scheme - demonstrate that the task for a smaller
business need not necessarily be insurmountable.
Thus, by helping to save a greater amount of time and money (and
frustration and discouragement) than would have been possible without the
benefit of this guidebook, it is hoped that its acquisition will represent a
worthwhile investment in its own right.

"The trouble with opportunity is that it always comes disguised

as hard work" (Anon.)
- Acknowledgernents-

Barclays Bank plc, Small Business Group, for project sponsorship and
printing costs; the Small Business Research Trust for project support
(especially Gillian Barker); Peter Love11 (Barnet Enterprise Trust) and Paul
Duffin (Smith Cooper & Partners) for t h e i ~assistance and suggestions
during the preparation of drafts.
For the supply of case study information: - Colin Barrow (Cranfield School
of Management); Venture Capital Report; London Enterprise Agency
(LEntA); David Boult and Ron Halford (Community of St. Helens Trust);
Clive Lewis & Kenneth Roy (re. Transit Publications); Peter Brown (re.
Tripos R & D); Derek Brooks and Edward Wilson (re. Fibre Composites);
Arthur Young & Co. (re. Microdisk); Michael Downey (re. Comic Arts);
Steve Parsloe (re. Motaplas).
And also: Leslie Livens (Moores & Rowland) for his piece on share
valuation; Ray Horner and Patsy Smith (Kent Economic Development
Board) for general assistance and the supply of information for the Motaplas
case study and the sample investment offer letter; Peter Quine (Businessin
the Community) regarding Chapter 7; Ian Menzies (Investorsin Industry),
Tony Wilson (Welsh Development Agency) and Paul Beard (Business in
the Community) for their general assistance. Peter Clark (Barclays Bank
plc, Small Business Group) and his Secretary, Mrs Alison Barot, for the
considerable work involved in preparing the final drafts and providing
general advice.
Clive Lewis - for permission to reproduce the item on LEntA's Investors'
Meeting; Brian Warnes (Business Dynamics Ltd.) - for permission to
reproduce extracts from 'The Genghis Khan Guide to Business', 'Cash
Flow Notes' and for the supply of suggestions and his personal notes; Tony
Lorenz (Equity Capital for Industry) - for permission to reproduce an
extract from 'Venture Cgpital Today'; Andrew Davison - for permission to
adapt his article on the venture capitalist's viewpoint; the Confederation of
British Industry - for perfission to extract terms from 'A share in the
action'; Kogan Page - for permission to extract terms from 'International
Dictionary of Management'; Macclesfield Business Ventures - for
permission to extract tables from 'The Small Business Action Kit';
Investors in Industry - for permission to extract terms from 'An a-y of
venturespeak'; Venture Economics - for permission to reproduce research
Keith Hayton (Planning Exchange) - for help with the distribution of an
enquiry letter via their Local Economic Development Information Service
and for permission to reproduce the LEDIS review of Yorkshire
Enterprise; Peat Marwick McLintock - for the supply of details from their
venture capital database; National Economic Development Office - for
general permission to use extracts from several reports; the Bank of
England - for general permission to use extracts; the Institute of Chartered

Accountants in England & Wales - for general assistance; the Department
of Employment - for suggested improvements; the Inland Revenue - for
the supply of statistical information.
Professor Kevin Allen (Strathclyde University) and Keith Isles (Bank of
Scotland) - for permission to reproduce information from the GAINS
database; Prelude Technology Investments - for permission to reproduce
portfolio details; the Centre for Product Development, Nottingham - for
the supply of the sample non-disclosure agreement; Bexley Venture Capital
- for the supply of board details; the Welsh Development Agency and
Coopers & Lybrand for permission to reproduce the extract on BES
advantagesldisadvantages;and the many others - especially the sources of
equity capital - who supplied various information.

Prepared and compiled by:

David Purdy, Derby. Completed January 1989


"We asked borrowers what, with hindsight, they wished they

had known prior to startifig up. Not surprisingly, the most
signifcant and constant theme was the consequence of uder-
financing. "
[Report in 1984 on the Loan Guarantee Scheme by
accountancy firm Robson Rhodes]

The rate at which money flows in to and out of any business - in relation to
its capital base -governs the extent to which that business will, or will not,
On a day-to-day basis, the actual proportion of money tied up in running a
business will vary from firm to firm; but, as Brian Warnes emphasised in
'The Genghis Khan Guide to Business', " a typical, tightly controlled,
manufacturing company will need to arrange funding of around £27,000
for every £100,000 of annual turnover, just to finance that turnover
itself". That is, an amount greater than a quarter of a year's sales. Note, too,
the qualification "tightly controlled".
So, whilst the opening quotation from the Loan Guarantee Scheme report
may, at first sight, seem a little negative, it is intended to foreshadow the
notion that the raising of risk capital should be considered as part of a
broader issue, and one of paramount importance: namely, the subject of
business fmancing (or under-financing)in general.

Owners' funds, borrowed money, trade credit, and retained profits (if any)
are the normal ways of financing the smaller business; yet there exists
another form of finance which would appear to be significantly
The limited liability private company is a very common form of business -
in genera1 terms, there are around 1,000,000 registered companies in the
UK - and one of the major benefits of this type of business is an entitlement
allowing its owners to raise share capital. Share (or 'equity' or 'risk') capital
confers upon its owners the potential benefit of almost an unlimited return
on investment, but, in the event of investment failure, restricts their
maximum liability to the extent of the money they have agreed to
This share capital may be supplied from the founders' own funds and from
outside sources - that is, from friends or other contacts, business owners,
investment funds or other companies.
Needless to say, these investors will be seeking something in exchange, and
this would usually be any combination of:-
* a regular income - via dividend payments on profits, fees, or (in the
case of a private investor) a salary or management charge;
0 capital gains - realisable when selling the shareholding for a profit;
or ,
a say in the running of the business - to a greater or lesser extent,
via voting rights related to the respective investment in some
The shareholders, as owners of the business, also have a certain entitlement
to the company's assets in the event of liquidation, and the exact provisions
associated with each type or 'class' of share can be almost as simple or as
complex as the shareholders desire. The different types of shares and the
relationship between shareholders and directors are outlined in Chapter 1
('Equity Capital - What is it?'), whilst the general constraints imposed by
shareholders' funds on bank borrowing are covered in Chapter 2 ('External
Finance - Equity vs. Loan Capital').
The apparent underexploitation of raising external equity capital - though
some might argue against such an idea - is difficult to describe in a precise
manner, but the recent experience of the Business Expansion Scheme
(BES) may help to support this view.
This scheme was introduced in 1983 to help improve the flow of external
capital into smaller UK businesses by offering investors tax relief when
taking minority shareholdings in BES-qualifying companies. Although
about half of the BES investments in any one tax year (around 400
companies) are for amounts below £50,000, debate has continued
a) the perceived lack of availability of smaller amounts of venturelrisk
capital - from any source;
b) the effectiveness of the scheme - with reference to the absolute
number of recipient companies and the capital requirements of a
million or so registered companies; and,
c) the apparent 'overlunder' supply (or demand) in somkegions.

If, as some suspect, the demand by small businesses is weak, then it is

possible that the wider benefits of external equity investment are not widely
appreciated among their owners. The potential benefits are explored in
Chapter 3 ('Equity Finance - More than just money?'), and the main
problems which afflict the lower end of the investment spectrum are
identified in Chapter 7 ('Problems You May Encounter When Raising
Small Amounts Of Risk Capital'). A synopsis of the Business Expansion
Scheme and some of its main advantages and disadvantages are included as
an appendix.
Smaller businesses are usually unable to carry a management team having a
good balapce of knowledge and experience in each of the critical areas. This
basic constraint results in many an ownerlmanager developinginto a 'jack of
all trades'; and while many are able to become a master of some, most small
businesses are disadvantaged, to a greater or lesser extent, in one or more
important management functions. Such shortcomings are perhaps most
evident in the areas of marketing or financial control.
This fundamental 'skills' problem, where it exists, will usually be
recognised by an institutional investor, and one solution would be the
appointment of a suitable part-time non-executive director. A suitably
trained and experienced private investor could also provide similar
assistance, and so an approach of this kind does not exclusivelybelong to the
domain of the privatelpublic sector funds. The appointment of
non-executive directors appears to be gaining favour and their potential
benefits are examined in Chapter 3 ('Equity Finance - More than just
money ?').

'Institutional' investors (those managing some form of investment fund), in
the main, tend to seek minority shareholdings in investee companies, and
from a general standpoint, therefore, the day-to-day control of the business
rests in the hands of the holders of the majority of the voting rights (subject
to the conditions governed by any statutory legislation or company
'Loss of control' is frequently cited as a reason why many businessmen steer
clear of selling a stake in their business: their desire for independence being
a powerful countervailing force. Nevertheless, several studies touching on
the subject of outside investors have reported that the fear of loss of control
often proves to be unfounded in practice. Indeed, some investors have
actually been criticised by business owners for a lack of involvement after
having once made their investment. This topic is broached on several
occasions; notably in Chapters 2 ('External Finance - Equity vs. Loan
Capital'), 3 ('Equity Finance - More than just money?') and 5 ('The
Investor's Standpoint'), and also in the various case studies.

'Venture capital' and 'risk capital' are terms which have both enjoyed a
certain degree of popularity in the business press during the 1980's. But for
those to whom such a term is unfamiliar, it might be helpful if venture
capital is thought of as a certain type of investment finance - share and
loan-based - which is seeking a considerable appreciation in value over an
investment period of several years.
Considerable appreciation' means a growth of, say, 25% to 50% a year, and
the venture capitalist seeks to make his money by selling his shareholding,
at a profit, some 5 to 10 years after first placing each investment. The extent
of any involvement in the management of the investee business will be
governed by the fund managers' preferred mode of operation. Venture
capital has been described as 'patient money', and while the public sector
sources are seeking to help viable and growing businesses too, their
priorities differ from those of the private sector.
Risk capital, in a similar fashion, may be taken to represent money invested
and looking for significant gains, and also, with some real risk of loss -
unlike, for example, a secured loan. Some would also include unsecured
loans in this category, but in the context of this book, 'risk capital' is taken
to mean share capital. The different types of risk capital sources are
described in Chapter 4 ('Alternative Sources'), and the accompanying
directory contains a Iisting of those having indicated an interest in placing
smaller investments.


It has been suggested that there is a surplus of money in the UK looking for
good propositions, However, the managers of such finance are highly
selective in their investment behaviour (venture capitalists are reported to
accept only between 1 in 30 and 1 in 60 of the proposals put to them), and
what constitutes a sound proposition is very subjective. The investor's
standpoint is discussed in Chapter 5 ('The Investor's Standpoint').
Certain fundamental aspects of investment decisions focus on quantifiable
factors - such as the expected return on investment - but others dwell on
rather more qualitative considerations. For example, it was stated in 2
recent National Economic Development Office (NEDO) study, 'External
Capital for Small Firms': "What is sound to the businessman in terms of
t6chnical a& market critert'a is unsound to the investor if he lacks confidence in
the businessman's ability to exploit his opportunities".
The NEDO authors also recognised the difficulty in the case of young
companies where their owners do not possess a track record of successful
business management and felt that "ahe way forward is then for entreprtneurs
to acquire traitting in management skills and to demonstrate their experrise to
investors, prima* through the medium of the business plan".
For readers who ultimately choose, therefore, to seek external risk capital,
this view, and the latter point especially, brings out the main theme of the
guidebook: namely, that a successful strategy lies in: -
@ the development and presentation of a convincing business plan,
and in
a recognition that the compilation of such a plan will need to rely
upon information and advice gleaned from a variety of external
Such a strategy is suggested in Chapter 6 ('Raising Risk Capital - How to
get started').
It will take some time to gather and prepare the necessary information for
inclusion in the business plan - months, rather than days - and some
guidance will be needed on specific issues: on financial structuring and
share valuation, and similarly, on taxation planning and contractual


In certain respects, the seeking of professional guidance would seem to be
an essential requirement. However, the acquisition of such advice, on a
purely speculative basis, can prove to be an expensive undertaking -
especially when any initial ideas are still relatively undeveloped. In such
circumstances, it may be useful and cost-effectiveto utilise the services of
one or more of the local sources of free or low-cost business advice which
exist throughout the country.
One such service is offered by the Department of Employment's Small
Firms Service (SFS), and another by the Rural Development Commission
(formed in 1988 by merging the Council for Small Industries in Rural Areas
- CoSIRA - with the Development Commission). In addition, there are
some 270 local enterprise agencies with business counsellors who will be
able to provide assistance.
Each organisation strives for a high standard of confidential business
counselling, and they can often provide an invaluable 'sounding-board'
against which preliminary ideas may be tested.
An overview on the main sources is contained in Chapter 6 ('Raising Risk
Capital - How to get started'), but specific details of local contacts and other
information (including a glossary of terms, sample investment offer letter
and non-disclosure agreement, description of local enterprise agency
'marriage bureaux', and profiles of public sector sources) can be found in
the appendices and the directory.
In spite of the earlier point suggestingthat the absolute demand for e x t e k l
risk capital is not as high as one might imagine, the trend may be changing.
An investigation into the Business Expansion Scheme (by Peat Manvick
McLintock in 1986)also surveyed a number of venture capital organisations
and the authors noted:
"Approximately two-thirds of those sutveyed noted an
increased demand for equity capital from unquoted companies
over the last 5 years and attributed this to changing
entrepreneurattitudes with regard to relinquishing a proportion
of equity in return for the prospect of sharing in a much larger

"To be alive at all involves some risk."
Equity Capital - What is it?
In the context of an incorporated limited liability company, a 'share' is
an indivisible unit of capital, often having a face (or 'par' or 'nominal') value
of £1. And, in general terms, the total share or 'equity' capital represents
that money which has been subscribed or promised by the shareholders
(known as the 'members'). In exchange, each shareholder will enjoy an
entitlement to a number of rights and privileges, including some
combination of:-
1) a corresponding proportion of that business's distributed profits -
usually paid, as and when declared, in the form of a dividend
(calculated as a percentage of the nominal share value);
2) a corresponding proportion of the voting rights in connection with
major decisions of principle on the size, shape and scope of the business
(i.e. an element of control)- sometimesallocated in direct proportion to
each shareholder's contribution towards the total amount of money
subscribed or promised, but not necessarily so; and,
3) a corresponding proportion of that business' net assets (i.e. the total
assets less any liabilities) in the event of it being liquidated, voluntarily
or otherwise.
For any given company, the specific entitlements conferred upon the
shareholders are described in its Articles of Associatjon and Memorandum
of Association.

The longer-term strategic control of a company is vested in a board of
directors who will normally exercise this prerogative through resolutions
passed at duly convened board meetings. For the smaller company, the
directors (or director) will also be responsible for much, if not all, of the
shorter-term operational management, i.e. the daily running of the
Although shareholders have the power to vote directors on and off the
board, the directors of a business are responsible for the control of policy
and management, and they act as representatives, rather than delegates, of
the shareholders- in much the same way as members of parliament do for
the general public. I

A shareholder (or shareholders) with more than 50% of the voting rights
has the day-to-day control of the company; whereas a holder of 75% of the
voting shares has sufficient power to pass a special resolution to put the
company i ~ t liquidation
o or to sell the business as a going concern.
If the directors control a majority of the voting rights, then they have a duty
not to discriminate against the remaining minority interests. The subject of
voting rights is discussed in further detail in the appendix entitled 'Share
valuation - the ground rules'.

However, not all potential shareholders may have identical sets of
preferences: some, for example, may prefer to forgo the prospect of large,
but unpredictable, gains, if a lower, but more certain, annual return is
Hence, shares are categorised - in 'classes' - according to their respective
entitlement to distributable profits and voting power. Usually, their names
provide some clue as to their role e.g. 'redeemable', 'preference',
'non-voting' and so on. The profit and voting entitlements often vary
inversely, i.e. the higher the priority of their claim to any profits, the weaker
the voting power.
In general, the main types are designated as ordinary or preference
shares, and instead of being a rather general term for share capital or
shareholders' funds, 'equity' may take on a narrower meaning to cover only
the 'ordinary' class of shareholdersor shareholders' funds.

The usual class for a single-share class company.
Voting Rights - usually one vote per share, but these can be varied.
For example, a company could have 2 classes of
ordinary shares: with 1votelshare for one class, and
the other - with no voting rights at all - designated
'A' Non-voting Shares. Alternatively, the 'A' shares
could carry a 5 voteslshare entitlement (in
comparison with the 1 votelshare of the other
ordinary class).
The following prefixes may be used singly, or sometimesin combination, to
denote the different entitlement features (and constraints) associated with
the basic ordinary share.
'Redeemable' - ordinary shares are traditionally considered as a
permanent feature of the capital structure of a
business, however, redeemable ordinary shares can
be issued and repaid later allowing the original
owner(s) to regain full control. In limited
circumstances, a business may buy back and cancel
a proportion of its standard ordinary shares, but on
such occasions, professional guidance should be
'Deferred' - similar to ordinary shares except that they are not
entitled to a dividend (or a vote, in some instances)
until some future date or until the company's profits
or dividends on its ordinarv shares have reached a
certain level.
- Comparison of Different Types ofSkares -
Reward Degree of Wao buys Whoissues
hvestment Earned Risk them them
'Equal share' of Carry the main risk (a)WeIl-to-do Pkivare and pubk
profits - hence investors who wam companies
'Equity Shares' goodrenuns;
(b) Institutional
investors, for a
(C) People interested
in capital gains, rather
than revenue profits

Defemd Shareof profits after Sameas Ordinary They axe taken by the Public companies
Ordinary Ordinary Shareshave Shares vendor of a business ChiefFyrbut also
had some proft when he sellsit pnvafe
(Founder'- (W 10%) to a company, -m
as a tokeaof

Preference Deffite rate of Lower than Ordinary Investors see- Private and public
dividend (say 7%), but Shares as they d l y security rather companies
onlv if ~rofits have a ~riorright than large
aknkde I torepaym& I dividends

Cumulative As above - but if As above

Preference profits are not
earned in one
year the dividend
is not lost

After taking the fixed As above h above As above

Preference rate (say 7%) these
shares earn e m
divident if the
Ordinary Shares
get more than 7%
Adapted from 'Commerce Made Simple' Whitehead G W. H. Allen 1979

'Preferred' - in contrast. to deferred a~dinaryshares, these are

normally entitled to a minimum dividend (perhaps
calculated as a percentage of available profits) even
when the company is not yet paying a dividend on its
ordinary share capital. They often enjoy full vothg
Once the company pays a dividend on its ordinary
shares above this minimum, the preferred
shareholders may receive the same dividend as the
ordinary shareholders, thus benefiting fully from
the growth of the business.
As an example of the way in which the above features can be combined in an
'ordinary' class of share, see the 'Rider' shown in the appendix entitled
'Sample Investment Offer Letter' (describing Cumulative Participating
Preferred Ordinary Shares).

These shares rank first in their claim upon profits and provide a fmed
percentage return out of taxed profits. This return (dividend) is usually
limited to a specified percentage e.g. 8% of their nominal value - even if the
profits increase tenfold.
Voting rights - none usually, unless the company has fallen into
arrears in its dividend payments.
Variants on the basic preference share include:-

'Cumulative' - entitles their shareholders to any arrears on

dividends - with a priority over ordinary
shareholders- when a company has been previously
unable to produce sufficient profits.
'Redeemable' - will be repaid at some fixed future date.

'Convertible' - may be converted into ordinary shares at some

future date, according to a pre-arranged formula.

'Participating' - entitled to a fixed minimum dividend, but may also

participate in the growth of profits, usually when the
profits exceed a stipulated threshold.

'Cumulative Redeemable Preference Share' (used by the Scottish

Development Agency) is an example of the way in which 'preference' share
entitlements can be combined. Examples of different modes of
shareholding can be found in the appendix entitled 'Case studies'.


When a company is being wound-up and claims are being made on its
assets, some may like to think of the shareholder as an unsecured creditor,
but this is not the case.
For example: although the ordinary shareholder perhaps stands to gain the
most when the business is doing well (the entitlement to profit participation
is limited only by the overall level of the profit itself), he or she falls towards
the end of the queue when it comes to the distribution of profits or to the
repayment of capital arising from a liquidation.
In many small companies, the shareholdersand directors are often one and
the same people, and, in such instances, it should be noted that some
additional individual liability may be incurred, where, say, a company
director has offered personal guarantees in support of a loan from the bank,
or where he or she has acted illegally.
Thus, the usual ranking of any claims on a firm's assets would be (from
highest to lowest priority):-
Highest Priority Secured creditors (eg. the bank)
Preferential creditors (eg. Inland Revenue,
Customs & Excise)
Unsecured creditors (eg. suppliers)
Preferred shareholders (eg. institutional
Ordinary shareholders
Lowest Priority Deferred shareholders
For a company owned and managed by its founder(s), this would perhaps
seem acceptable, but to some investors, an investment in shares would
represent an unacceptable degree of risk. Hence share capital is also known
as 'risk capital'. Some, however, would also place an unsecured loan in the
same category.

Company shares, with their various entitlements to dividends, voting rights
and business assets, are a potentially marketable commodity. And in
principle - subject to any constraints dictated by statutory legislation or the
company's Articles of Association - shares can be sold to outsiders for the
benefit of:-
1) the shareholder or shareholders concerned - for direct personal
.gain, or,
2) the business itself (and, ultimately, the remaining shareholders) -
to strengthen the company balance sheet.

Their marketability would also be dependent upon the relative strength of

the company's trading condition, and such a sale may be achieved by
'private treaty' with an incoming investor, with the existing shareholders,
or by the shares being 'listed' on a stock exchange.
It should be borne in mind that the existing shareholders may have a
statutory right to a 'first refusal' when existing shares are transferred or new
shares are issued, although such rights can be varied by the company's
Articles of Association.
"To learn the value of money, it is not
necessary to know the nice things it can get for
you, you have to have experienced the trouble
of getting it."

External Finance - Equity vs. Loan Capital

Although this guide concerns share capital, the subject is almost
inseparably linked to that of loan-based finance.
For example: you probably are familiar with the normal requirement to
offer the lender some form of collateral (security) when seeking a business
loan. This ensures that the lender, if necessary, is able to recover the initial
loan should the interest andlor capital not be repaid as agreed.
Assuming that the firm is seeking to pledge business assets (rather than,
say, some of the owner's personal assets), the extent to which a banker will
lend is usually made with reference to the firm's capital gearing. A
generally accepted definition would be:-
CAPITAL GEARING - the ratio of a company's borrowed funds
to its shareholders' funds ('equity').
'High capital gearing' denotes a high
ratio of borrowed funds to shareholders7
funds within a business.
The generally accepted maxirnum ratio in the UK is where the borrowed
money does not exceed the shareholders' funds, and this particular limit has
arisen from the basic need for banks to be able to guarantee, beyond all
reasonable doubt, that depositors will get their money back. The reasoning
and associated consequences are explained below (adapted by the author,
Brian Warnes, from "Fast-growing companies can slip and fall" -
'Accountancy' November 1985).
"In order to do this, the bank must be certain of getting its
money back from the companies to which it lends. It is the need
for this absolute certainty of getting its (depositors') money
back that has led to banks, over the years, arriving at the ' l : ]
gearing' concept to guide their actions and judgement i.e.
10ciizs:eqthy = I : ] ."
''A bank will normally lend only up to half of the value of
assets (like stocks and debtors), not the full value, so as to
provide what has been found to be, by long experience,
adequate asset backing to 'cover' borrbwings - and then only if
the other half is already present as equity,"
"Thus i f a company acquires an asset worth, say, £1,000, the
maximum 1:I gearing equation will be as follows:
Gross value of asset £1,000
Less borrowings £500

Net value of asset - £500

" I f the same technique is applied to the whole company, total

borrowings (including hire purchase etc.) must not be allowed
to exceed the net asset value of the company, after deducting
such borrowingsfrom the assets being funded."

Brian Warnes continues:

"This net asset value, of course, is known as the 'worth', or net
asset base, or net capital resources (to a banker) or net tangible
assets, or net equity base, or net shareholders funds - many
(confusing)termsfor the same thing- the borrowing base of the
company. "
"Hence the banker's dictum that 'a banker prefers not to
have more in the business than the shareholders
themselves'lguidebook emphasis]: this enshrines the 1:l
loadequity gearing concept. "

"This fundamental gearing concept, which is necessary to
protect depositors, is simple and straightfortzard. Yet problems
arise, which can have most damaging consequences, if
company managements and their professional advisers fail to
understand the forces at work. Most people think the concept
k W the full value of the assets - they
means that the b a ~ will
don't realise that very different principles are at work. It is
not the full value of the asset which is regarded as the cover,
but the value after deducting the lendings. "
"Thus a company can only grow a t the rate a which its
equity base is growing [our emphasis again] - through
retained profits and external injections of share capital."
Though having said all this, the 1:l capital gearing ratio represents an
idealised state of affairs. In practice, however, a branch manager may
choose to exercise a degree of discretion and allow a higher gearing limit
under favourable circumstances.
Given less critical conditions, as in the case of an established business, it
may be possible to agree a ratio of, say, 1.5 to 1 (loans to equity). But for a
start-up business, having secured a loan using personally-pledged assets,
this ratio could even exceed 5: 1 (though borrowers and lenders alike should
always be mindful of the maxim: "Security never made a bad proposition

REWARDS AND RISKS: mixing equity and loan capital

By financing a company solely out of share capital the risk associated with
external borrowing can be eliminated. For example, if no loans exist, there
is no chance of an untimely call for a loan repayment when cash is tight.
However, a 100°h equity funding of a business would not show the best
return on the owners' investment. Consider the following two identical
companies - 'A' and 'B' -requiring £50,000 to set up in business.

Profits £10,000 £10,000

Less: Interest @ 10% - £2,500

& Return on equity

Investment -
- 20% 30%

Company 'A' has been wholly financed out of shareholders' funds, whereas
company 'B' has obtained half of the necessary finance in the form of a loan
requiring 10% interest. As you can see from the above calculation, company
'B' produces a significantly greater return for its shareholders on their
investment - half as much again - than company 'A'.
Of course, it might be possible to achieve an even better return (60%) if the
equity element were to be reduced to £10,000 and the borrowing increased
to £40,000 (assuming that anyone would lend under such conditions). In
this instance, the interest as a proportion of profit, has become greater -
£4,000 interest compared with £10,000 profit - but since the interest has to
be paid irrespective of whether there is any profit, the business is now more
vulnerable to changing circumstances eg. lower profits or rising interest
Hence, as the level of borrowing increases - in relation to the shareholders'
funds (the equity) - so too does the risk to both lenders AND
From the standpoint of borrower and lender alike, another consideration
concerns the ability of a business to service the interest element of a loan,
and this falls under the heading of 'income gearing'.
This is a measure of the extent to which a firm's liability to interest
repayments relates to its profit level (pre-tax and pre-interest). It is used as a
guide to the risk dlending and proiides a measure of a business's exposure ,'
to changing interest rates and its ability to pay interest charges when profits'
fall. 'Interest cover' is another name, and reflects the number of times the
interest charge is 'covered'. It improves, from the lender's standpoint, as
the 'cover' increases, i.e. as the profit becomes larger in relation to the
interest. A generally acceptable limit allowing sufficient lee-way for
shareholders' dividends (if any) and deteriorating profits would be a ratio of
Further details on capital and income gearing (plus other management
ratios) are described in the appendix entitled 'Key ratios'.


Most businesses require an early investment in various items - such as plant
and machinery, stocks and debtors and 'non- tangible assets' (like research
& development) - which must be paid for before the sales can get past the
business's break-even point and subsequently generate sufficient profits to
cover day-to-day costs. In 'high-technology' investment circles, firms
requiring relatively large initial levels of investment (upwards of several
hundred thousand pounds) are sometimes described as being 'hard'
companies, and those requiring lesser amounts, 'soft' companies.
If, however, these early losses are not foreseen, they can completely
debilitate the business's borrowing base, quickly turning a potentially
profitable business into a likely candidate for receivership and
The example shown overleaf (the 'Death Valley' curve) has been developed
from a real-life business, and it illustrates the rapidity with which the
owner's initial £20,000 is absorbed by the need to finance the company's
working capital.
It has been estimated that a typical manufacturing company needs working
capital of about 27% of its turnover to- finance its day-to-day running (for
'net current assets' i.e. debtors stocks minus creditors and sundry items).
On top of which, should be added:-
start-up and company formation costs;
capital expenditure (less depreciation);
research & development expenditure (to the extent that it is
not written off against the item listed below); and,
cumulative operating losses.
In the example shown below (the 'Death Valley' curve), the company is
loss-making by the end of year 1, with worse to come by the end of year 3. In
I I I ~injection of £120,000 if it wishes
fact, the business requires an ~ M ~ equity
to finance the remainder of its capital requirements - by borrowing -
without operating on a gearing ratio of worse than 1: 1(in this case, the peak
capital demand occurs towards the end of year 4).

Company S performance E000 S

Year Sales Prof~t/(Lossj
1 50 (25)
2 150 (30)
3 250 (7)
4 400 20
5 650 63
6 l 000 100

'The Genghis Khan Guide to Business'
Wames B.
Osmosis Pubtications 1984
Many people running a small company have a not unnatural desire to
'strengthen' their business, and correspondingly, the solution is
represented by a simple increase in turnover. However, this apparently
justifiable desire can easily prove a means to an end, but perhaps more often
than not, the terminal type of 'end'.
In accepting the generalisation that a significant proportion of a
manufacturing business's annual turnover (around a quarter or more) is
needed to finance its day-to-dayactivities, then a growing low profit-margin
business will not be automatically 'self-financing'.
For example: contrast the 2 possible outcomes for the same hypothetical
business after the coming 12 months:-

'C' 'D'
Turnover £100,000 £200,000
Fixed Assets £10,000 £15,000
Net Current Assets £27,000 £54,000
(27% TIO)
Finance Needed -
- £37,000 £69,000

The bank will finance HALF the requirement, provided that the other half
is present in the form of equity (i.e. shareholders' capital + retained profits
less intangibles like research & development).
Assuming the present owner has supplied £5,000 in share capital, and that
the after-tax profit margin is £6,500 for turnover of £100,000, increasing to
£16,500 at £200,000, then:-

Owner's Shares £5,000 £5,000

Retained Profits £6,500 £16,500
EQUITY BASE £11,500 £2 1,500
Matched by Bank + £1 1,500 +£21,500
Loan (1:l)

Total Available £23,000 £43,000

Under these conditions, an expansion of turnover is more likely to

exacerbate the external financing requirement; the business is not
'strengthened' at all - quite the opposite.
Therefore, one may conclude that a company's ability to borrow from a
'High Street' bank is NOT related directly to the full extent of its financing
requirements (such as increased stocks, debtors and fxed assets), but is
limited to the rate of growth of its equity base (share capital + retained
profits less intangibles).
All is not necessarily lost though, since there are several possible ways in
which the problem can be tackled.

Possible solutions:
Each of the following solutions need to be evaluated - prior to any adoption
-for their immediate and longer-term suitability. The list is not intended to
be exhaustive.
Increase the share capital via an outside investor. An external
source may be prepared to supply several times the present 'share
capital, whilst holding a minority share of the voting rights.
a) Preference shares offer one possibility.
For example: a business which presently has £15,000 in ordinary
share capital, may be able to persuade a fund to provide a further
£45,000 in preference share capital (or in loans, either
interest-bearing or interest-free) such that the voting rights would
Existing owner £15,000 Ordinary Shares
New investor £45,000 Preference Shares 30%
b) External investors may be prepared to pay a premium - that is,
an amount over and above an agreed purchase price for shares
which would not unduly dilute the original owner's control.
Eg. Each '£1' share purchased by a new investor could carry a
premium of £2.
Existing owner £15,000 Ordinary Shares (£1) 60%
New investor £10,000 Ordinary Shares (£1) 40%
£20,000 Premium (Mlshare)
Increase prices to reduce the growth in turnover but increase the
profit margin and, in turn, the retained profits. The ultimate aim
would be to ensure that at least half of any additional asset need is
being met by additional retained profits.
[Relatively small price increases on low margin goods or services
can produce disproportionately larger increases in profit margins.
E.g. for a given number of items retailing at £10 each, and with
each producing a profit of £1; the overall profit will double to £2
per item when the price is increased by lP/o to £1 1 - assuming the
same total number of items. Even when such an increase causes the
overall volume of sales to fall, they usually need to fall much
further than you might imagine before this possibility can be ruled
Introduce better controls to reduce the relative size of net current
Find a source of loan capital which does not require security to the
same extent as your usual source e.g. consider the suitability of a
loan under the 'Loan Guarantee Scheme'. A source providing a
loan of what would appear to be 'last resort' may encourage another
source to help as well.
Consider the suitability of factoring (which results in up to 80% of
debtors being financed, rather than 50%). N.B. This may be
uneconomic for some smaller businesses.
Evaluate national and local schemes for grant-aid support.
"There is only one way of seeing things
rightly, and that is, seeing- the whole of

Equity Finance - More than just money?

The founder of Dorset-based Membrain (manufacturers of
computer-controlled test equipment, now trading under the Factron
banner) and who now controls a &30m turnover computers and
communications systems business was asked: 'to what did he owe his own
relative success ?'. In reply, a mixture of ingredients were cited,
"...a willingness to give up total control of his companies
(owning only about 35% of his existing business) as a way of
gaining new sources of investment and of management
Financial Times 11/6/86

Explaining to the owner of a small business (or, for that matter, to the
manager in a larger firm) that he or she is likely to have one or perhaps
several weaknesses in his or her managerial skills is, of course, a subject
requiring a measure of tact (or armour plating). But if, for example,
someone is running a small business and the general managerial functions
may be broken down into, say, the following main areas:-
Marketing & Selling
Financial Control
Personnel management
Production .
And they then care to contrast (frankly) their own knowledge and
experience (e.g. training, qualifications, work experience - scope and
duration) against those of someone they know (or know of), and whom they
consider to be a skilled practitioner in an area listed above, it will be highly
probable that, unless their background and training have been specifically
tailored to cover each subject to some reasonablestandard, the skillsin some
areas will be appreciably stronger than in others. (N.B. No assumption is
made here about the level of competence needed to carry out satisfactorily
any of these functions in a small business; the exercise is suggested simply to
help explore the argument).
As a business grows, many a small business owner will appreciate that it is
physically impossible to do everything himlherself, and so certain functions
will be delegated to others. But having recognised this need, it still can be
difficult to assemble (or afford) a balanced management team.
Accordingiy, this fundamental difficulty wilI be recognised by most
investors - investment funds especially - and as a condition of investment,
they may wish to appoint a non-executive director to help complement the
existing management team.

A board of directors may comprise both fuI1-time and part-time directors.
The former usually act as executive directors and will be responsible for the
following primary functions:-
* representation (regarding shareholders' interests);
* policy-making; and,
In contrast, the latter - where appointed - would normally act as
non-executive directors and would be involved mainly in the representation
and policy-making aspects, although such directors may be charged with
special assignments too.
For the smaller company, a non-executive director should possess one or
more of the following attributes:-
A more detached and independent standpoint
Full-time directors, by definition, spend virtually all of their
available time and energy on the company's business, so when a
company begins to expand, an increasinglynarrow personal view is
likely to develop as each director concentrates on his or her limited
areas of responsibility e.g. production, sales &c. Moreover, the
development of a business will depend upon a proper recognition
of the varied interests of many different groups, including: -
shareholders, customers, suppliers, lenders, employees and so on.
Thus a non-executive director should be able provide a more
balanced view to help compensate for any bias.
Special skills
A move into an area of business for which the limited experience of
the existing director(s) would have significant implications could,
again, be compensated by a non-executive director having certain
knowledge and experience e.g. as an engineer, accountant, lawyer
or banker.
New contacts
These could include:-
new sources of finance (whereby, for example, the standing of
the non-executive director might be able to influence more
favourably an important outsider's view of the company - such
as its bank);
potential customers or suppliers;
central or local government departments; and,
professional sources of advice.
An investigation which included a detailed survey of 120 companies having
received investments under the Business Expansion Scheme reported on
the role of the non-executive director. [The BES is a special scheme which
was introduced to encourage equity investment in smaller businesses by
offering tax relief to investors - this scheme is covered in further detail in
Chapter 4 and in the appendix entitled 'The Business Expansion Scheme'.]
It found:
"The ability of the companies surveyed to survive and prosper
in the future depends primarily upon the exercise of good
commercialjudgement in the day to day management of their
businesses. Typically the companies surveyed were at an early
stage in their development, i f not start-ups, and such
companies generally did not have the balanced, experienced
management teams which the more mature companies and the
management buy-outs possessed."
"Typically the young companies would have been founded by
one or two entrepreneurs who had developed the business,
largely on their own, to the stage at which B E S finance was
raised. B y this stage in the company's development it had often
become clear that the ffounders' were being very stretched in
performing the functional role which they had in the company,
as well as managing the business. The process of raising
finance in particular placed additional strains on the
management of the business, in view of the time required to
produce and discuss business plans with outside sources of
finance ."
"In producing and discussing their business plans with outside
sources of finance it often became clear that changes in or
expansion of the management team would be necessary i f the
business was to be able to function efficiently at new levels of
activity which the outsidefinancing would support. Most often
the deficiency was in the finance area, but attention was also
drawn in a number of cases to deficiencies in marketing or other
"In many cases a weakness in the management team was
resolved through employing a replacement or additional
member of staff. In other cases, particularly where the BES
Funds were involved, an attempt was made to ensure that the
non-executive director who would monitor the BES Fund's
involvement also had exaerience and skills relevant to the
particular company. Individuals investing directly have rarely
provided support in this way. [* see thefollmingparagraph]
The extent to which non-executive directors became involved
in each company varied considerably. Some simply attended
board meetings, others were almost constantly involved and
ofen visited the company concerned, while others were called
upon for specific advice as required."
'The Peat Marwick Report on the Business Expansion Scheme'
Inland Revenue 1985

(*) It should be noted that BES investors are not allowed to receive
remuneration in connection with any services supplied to their own
investee companies (although they may claim expenses and still enjoy
the benefit of full tax relief). It seems likely, therefore, that this feature
would discourage some BES investors from pursuing any significant
involvement with their own companies.
With reference to the annual fee paid to them, the study also indicated that
some non-executive directors were not viewed as good value for money.


However, in the light of the experience of the businesses themselves, the
benefits of non-executive directors which were mentioned most often
access to an impartial and critical view of the company's
progress and plans; the ability to 'bounce ideas' with the
non-executive director was thought to be particularly
provision of expert advice onfinancial and other matters
advice given on methods of raisingfurtherfinance and dealing
with existing sources
contacts with other companies and institutions,for examplefor
introductionsto potential customers or suppliers
Of course, there can be no guarantee that the appointment of a
non-executive director(s) will necessarily prove to be a 100% success and
examples of criticisms raised by the study, are broached in Chapter 7
entitled 'Raising Risk Capital - How to get started'.
The same report also emphasised the benefits of investment under the
Business Expansion Scheme as viewed by the owners themselves when
alternative sources of finance were available, but were rejected. Clearly, the
fmdingswere made in the context of the BES, but with a few exceptions, the
arguments and benefits can be taken to embrace the whole area of equity
financing, and not just the activity faIling within this scheme.
Some of the main benefits of the investments were seen as being:-
absence of a 'running yield'
provision of a 'breathing space'
supply of valuable monitoring and other advice together with
access to a wide range of contacts (for companies obtaining finance
from BES Funds)
Explaining the first two points in further detail:-
I. Absence of running yield:
In comparison with loan finance, this referred to the absence of interest
charges and capital repayment requirements, and likewise, the absence
of dividend payments which could result from other types of
shareholdings (the BES tax relief applies to ordinary shares only). The
study said:
"Companies with existing debt capital were generally
reluctant to raise more debt as it would have increased their
gearing and restricted their flexibility in the future,
particularly in the event of u n f m e e n cash requirements."
"Those companies whLh realistically could have raised
finance in the f m of a medium term b a n or,for example,
cumulative preference shares, would, in many cases, have
s u f f d from lower profits and reduced growth potential; the
drain ofcash from the business to support theyield would have
denied them the opportmity to expand capacity as quickly as
they have been able under the BES."
Depending upon specific circumstances, it is possible, when relatively high
interest rates prevail, for an equity-based funding arrangement to be less
onerous, in terms of financing costs, in comparison with an equivalent
loan-based deal.
2. Provision ofa 'breathing space':
In the event of the original projections on profitability and cash flow
proving over-optimistic ot too advanced in build-up, many owners
feared that their companies' survival would be risked by the heavy
initial payments that other types of finance would attract. Thus the new
finance was seen as a form of buffer, and specific examples quoted
a printing firm was given a breathing space to introduce new
technology and expand;
an electronics firm was given more time for continued product
an equipment supply company was able to pay its creditors and, in
time, purchase more tools for expanded production;
a tour operator was able to increase its volume of business by
increasing its working capital;
a food processing company was able to remain in business by
reducing its debt burden, which allowed a year of consolidation.

Reasons for raising equity finance:

Those indicated in the study included:
recovering equity lost through trading losses during product
development or initial years of trading;
providing liquidity for flexibility in future operations;
repaying bank overdraft facilities;
financing increased stocks;
rationalising bank and other loans;
repaying creditors.


A fear of 'loss of control' is often suggested as a reason why many owners of
small businesses ignore the possibilities of raising additional share capital
and whilst it seems likely that such perceptions do prevail, the reality can be
quite different. The Peat Manvick report commented:
"One clear advantage of BES finance, therefore, seems to
have been its ability to overcome part of the reluctance of some
of the entrepreneurs we interviewed to release equity in their
businesses, this reluctance having been removed by reducing
the perceived danger of outsiders taking effective control."
This experience is not isolated; a National Economic Development Office
(NEDO) study of small and medium-sized firms in the electronics sector
reported in 1986 ('Finance for Growth' - using a sample of 43 firms):
"Many companies had found that initialfears of loss of control
proved to be unfounded in practice."

"The difficultyin life is the choice."


Alternative Sources
Share capital investments can be sought and placed by individuals, and
similarly, by workaday manufacturing or service sector companies seeking
to further their shareholders' interests, Such investmentscan also be sought
by financial institutions (whether of the long-established types such as the
merchant or other banks, investment trusts, or the more recently
established specialist venture capital organisations), and by organisations
operating on behalf of central or local government - such as the Welsh
Development Agency or any of the various enterprise boards.
The aim of this chapter is, therefore, to provide an overview of the main
sources which would be interested in providing smaller amounts of risk
capital (below &50,000),and also, to give some indication of the scope and
activity for each type of investor. The key areas of this segment of the risk
capital market have been sub-divided into the following sections:-

Private sector:
(1) Venture capital funds
(2) The Business Expansion Scheme (BES)
(3) Corporate venturing
(4) Private individuals (non-BES)
Public sector:
(5) Central government
(6) Local government
(7) European Community (EEC)
The term 'venture capital' has been used to cover various modes of
investment in unlisted companies, but a useful description would include:
'an input of money (in the form of share andlor loan capital) - usually in
conjunction with business skills - for the purpose of achieving longer-term
capital gains'. Frequently, such investment is introduced at a very early
stage in a company's development, and while the capital growth sought may
be loosely described as "substantial", it will probably be somewhere
between 20% and 50% p.a. over a period of 5 to 10 years.
Investing what NEDO has described as 'patient money', a venture capitalist
may supply a financial package consisting of ordinary and preferred shares,
together with convertible loan stocks and loans. Normally, the investment
stake offered would represent a minor portion of the post-investment equity
capital -often between 5% to 49% -though a few funds will consider taking
larger shareholdings. In return, they will take an active interest in the
running of investee firms; a single manager sometimes handling only 10
accounts. Successfulventure capital investment depends upon the ability of
a fund to establish an expert in-house management team which possesses
the appropriate combinations of financial, technical and managerial flair.
Over a term of 5 years, the previously-quoted annual rates of 20% to 50%
would represent an approximate growth of between 2% and 7% times the
original investment. These sort of target growth rates may seem high, but it
should be borne in mind that each fund will have a range,of investments- a
'portfolio' - to help spread the risk. Out of this portfolio, some businesses
may fail completely, a sizeable proportion will not achieve their target
growth, and only a small minority will achieve (or exceed) the original
expectations. Consequently, the combined annual growth rate of a portfolio
of investments will fall short of the individual target growth rates.
An example of a porfolio of venture capital investments is shown in
summary form below. The information refers to the Prelude Technology
fund (as at May 1987) and 'Holding' refers to equity held in the given
company (i.e. the % ownership of the business assets; the voting rights do
not necessarily correspond directly), and '&'000' indicates the cost of the
investment (the total portfolio cost was £3.0m). Prelude Technology uses
various types of securities in varying combinations; these include:-
ordinary shares; preferred ordinary shares; preference shares - the latter
being cumulative (with regard to dividend payments), participating (in
profits), redeemable, or convertible (into ordinary shares) - and loan
Arun Technology Portable alloy analysis 48.0% 300
Ltd equipment

Creative Logic Expert System shells 9.5% 120


Design Computing Workstation CAD for 50.7% 40 1

Ltd architects and facilities

Elmiet Ltd Full colour continuous 47.6% 600

ink-jet printers for
packaging, floor and wall
coverings and fabrics

George Murdoch Hospital equipment 71.4% 250


Linear Laser interferometers 21.0% 220

Instruments Ltd

Oxytech Inc Ozone Generators 20.7% 399

Procal Analytics Infra-red instruments for 47.1% 162

Ltd process control industries

Qudos Ltd CAD software and 17.1% 460

E-Beam fabrication
service for design of
semi-custom integrated
Epi Materials Ltd Production of EPI GaAs 4.5% 76

Kameleon Ltd Variable colour lighting 50.0% 5

Mosaic CAD systems 50.0% 6

Investments B.V. distribution

Examples of perhaps better-known UK venture capital-backed businesses

(ranging from pre start-up to management buy-out) include: - Sinclair
Research (by Alan Patricof Associates), Ansafone (Equity Capital for
Industry) and Pineapple Dance Studios (Electra Risk Capital).

Recent growth:
In earlier years, such bodies as the former Industrial and Commercial
Finance Corporation (created in 1945, but now part of Investors in Industry
- '3i') and the National Enterprise Board (formed in 1975, but merged with
the National Research & Development Corporation in 1980 to become the
British Technology Group - 'BTG') were set up with official or institutional
encouragement and backing, but it is only in the last decade that the venture
capital industry has started to establish itself on a wider basis.
In terms of professionally managed UK venture capital organisations, for
example, there were fewer than 20 in 1979, yet now, some 10 years later,
there are well over 100. The money raised by these amounted to &30m
during 1979, and to nearly &940m in 1987 (the latest figure refers to
members of the British Venture Capital Association and includes 3i). These
figures, however, should be treated with caution; to obtain a truer reflection
of this type of activity, some &70m- &loommay need to be added to the
1979 estimate to allow for the investment by 33s predecessor. Also, having
invested &537mduring 1987188, 3i still represents a significant proportion
of this investment activity.
Although the venture capital industry covers a wide range of organisations,
2 types predominate: a) the 'captive' funds which are owned and financed
by the major banks and long term investment institutions (such as those
managed by Barclays Development Capital, Citicorp Venture Capital and
Rothschild Ventures), and, b) the independent funds which invite
subscriptions from a wide variety of sources (such as Advent and ECI
According to figures published by Venture Economics, the sources of
capital for the private independent funds in 1986were: - UK pension funds
41%; private individuals 15%; UK insurance companies 15%; foreign
institutions 12%; UK banks 6%; UK fund management groups 5%;
industrial corporations 4%; academic institutions 2%; and, others 1%.
Venture capital growth:
The reasons for the recent growth of venture capital in the UK would
appear to be several-fold. In the case of the Business Expansion Scheme,
this has been as a direct result of a central government initiative; on the
other hand, a change in Stock Exchange requirements in 1981 enabled
publicly listed investment companies to take part in venture capital
provision, where, previously, they had been restricted in the amounts they
could invest in unquoted companies.
In the past, shares in a private company have generally been an unattractive
investment because of their unmarketability. Thus the creation of 'junior
stock-markets' for smaller companies (smaller that is, than the usual Stock
Exchange-quoted businesses), notably the Unlisted Securities Market
(known as the USM, launched 1980), and more recently, the Third Market
(1987), have helped create 'exit routes', thus allowing investors to realise
their investments via an established share-dealingmarket-place sooner than
would have been cost-effective via a Full Listing. Furthermore, the
Companies Act of 1981 allowed both private and public companies to buy
back their own shares on a less restrictive basis than before.


This probably represents one of the most significant pieces of recent
legislation concerning the raising of external equity capital by small
businesses. The spirit of the scheme was encapsulated by David Trippier
MP - the former Small Firms Minister - when he said in 1984:
"The Business Expansion Scheme, like its predecessor the
Business Start-Up Scheme introduced in 1981, is intended to
encourage individuals to invest - on a reasonably long-term
basis - new, genuinely additional and full risk equity in
unquoted trading companies. The Scheme recognises the risky
nature of this type of investment, and the investorgets relief, up
front, at the full marginal rates of income tax."
It was established in 1983 and allows personal tax relief, at the investor's
highest rate, on the purchase of ordinary shares - up to a maximum of
£40,000 per annum - in a qualifying company or companies. As an added
attraction, the disposal of shares issued after March 1986 also qualifies for
an exemption from capital gains tax. To qualify for the relief, the shares
must be held for a minimum of 5 years.
Thus a top-rate (40%) tax-payer purchasing his or her upper Iimit of
£40,000 BES-qualifying shares would be able to claim back £16,000 in
income tax relief, and therefore the net cost of the share purchase would be
£24,000 (plus any incidental expenses).
Tax relief can also be gained on investments made via Approved Investment
Funds, which give investors the additional benefit of portfolio
diversification (by spreading the risk over several investments). The
involvement of BES fund managers in the affairs of the investee company is
typically not as active as in the venture capital case.
BES qualifjring trades:
Many trades are eligible for BES investment, but specific exceptions
include: - dealing in land, shares or commodities; leasing and letting assets
on hire; and banking, insurance and other financial services. For 1984185,
the distribution of companies in receipt of BES investment was:-
manufacturing 39%, service 38%, wholesale & retail distribution 15%,
construction 6%, and agriculture, horticulture & fishing 2%.
The latest Inland Revenue figures (for 1985186- some claims for that year
were still outstanding at the time of release) show that nearly 700 companies
received a total of & W m ,of which, some &27mwas channelled via the BES
Approved Investment Funds.

Regional investment:
Attention has been focussed on the apparent bias of BES investments
favouring businesses in the South East of the country. However, the high
concentration of business activity in this particular region should also be
borne in mind: approximately 32% of all VAT-registered businesses reside
in the South East - see Table A.

BES Investment by Region TABLEA

Direct + AIF Direct Only
No. £m No. £m

South East
East Anglia
South West
West Midlands
East Midlands
Yorkshire & Humberside
North & North West



Number of companieslamount 1984185

'InlandRevenue Statistics 1987' AIF = Approved Investment Fund
Inland Revenue 1988
Scheme 'abuses':
Another area for criticism has been the ability of 'asset-backed' ventures to
find investment under the BES, when the scheme was intended to help,
amongst others, businesses unable to offer the benefit of appreciable assets
to buffer investors should liquidation prove necessary.
Since the Scheme's introduction, however, the Chancellor's annual budget
has witnessed a series of new exclusions and rules to help plug the various
loopholes - to exclude farming, property development, investment in fine
wines and so on. This latter feature has since been replaced by the 'net asset'
rule (in 1986) whereby relief is restricted if companies have more than 50%
of net assets in the form of land and buildings and raise more than £50,000 in
any 12-month period. Whether this makes any more money available for
the smaller (and riskier) ventures is another matter though.
Recent changes (announced in the 1988 budget) include a general £500,000
annual investment limit per investee company (with certain exceptions),
and a specific encouragement now to allow BES investment in businesses
specialisingin letting residential property on the new assured tenancy basis
(the measure is intended to improve labour mobility by helping to increase
the immediate supply of private rented accommodation).
A summary of the Business Expansion Scheme and a review of some its
main advantagesldisadvantagescan be found in the appendix entitled 'The
Business Expansion Scheme'.


Corporate venturing can be seen as a specialised segment of the venture
capital market, whereby a large corporation with surplus cash and
management resources invests in a minority equity holding (possibly
supported by loans) in a small entrepreneurial company which is active in
technical or market areas important to the investing company. As an
alternative to taking a direct stake, funds may be placed indirectly via a
venture capital fund.
It has been suggested that the benefits of corporate venturing can
Small Company Large Company
Access to the technical and Quick access to new or
marketing resources of the unfamiliar markets and
large company technologies
Access to a wider range of Access to new managerial or
management expertise technical expertise
Credibility gained with market More rapid development of
and suppliers new products
Support of greater financial Enterpreneurial outlook of
resources of the large company small company partner
Attraction of additional capital Provision of new career
from financial institutions training opportunities
Original proprietors usually High returns on investment
retain a controlling interest

Corporate Venturing Brochure National Economic Development Office c. 1988

Although the process has not established itself to the same extent as in the
USA, there have been a number of examples in the UK. A better-known
example would be Pilkington Brothers of St. Helens: as well as placing
direct investments in smaller companies, it also runs its own in-house fund,
Rainford Venture Capital, which has &2Sm invested in some 10
The National Economic Development Office has recently studied the
subject and reported (in 'Corporate Venturing: A strategy for innovation
and growth' 1987) that a third of the 350 large companies responding to
their survey claimed experience of corporate venturing. Their 'experience'
covers a broad range of activities and may create an exaggerated impression
of the extent of corporate venturing if taken at only face value.
Indirect corporate venturing appears to have gained a foothold in the USA
(reports suggest that some $400m was invested by 245 companiesin venture
capital funds during 1986, compared with &10min the UK), but reliable
information describing the overall picture in the UK seems to be wanting -
save to say that it is not very advanced in its development. NEDO has been
investigating the possibilities for helping its growth, and one suggested area
which has since come to fruition includes a 'marriage bureau' service to help
link interested parties together (there is more about this in the directory).


It has been estimated that some 20,000 people made investments during the
first year of the Business Expansion Scheme (1983184). However, it is
probable that the vast majority of these made their investments via
approved funds, which tended to avoid the smaller propositions.
In addition, a BES investor may not be an employee, a partner, nor a paid
director in the investee company, nor may helshe receive any remuneration
(apart from expenses), and since some investors are seeking both to invest
and to pursue some form of paid involvement- sometimesknown as 'equity
participation' - then the BES figures do not tell the full story as far as private
investment in small companies is concerned.
There are examples of groups of individuals acting as syndicates - the St.
Helens BES syndicates being perhaps the best known - though, as is the
case with private investors, reliable data describing the extent of this
investment activity in the UK seems scarce.

Linking small firms to investors:

There are some fundamental problems in linking small firms seeking
finance to potential investors (legislativeconstraints, for example) and these
are described in Chapter 7, entitled 'Problems You May Encounter When
Raising Small Amounts Of Risk Capital'. However, these are not
insurmountable, and one method has been pursued by 'Venture Capital
Report' (VCR) for nearly 10 years.
VCR publishes articles on businesses seeking finance and these are
circulated in the form of a monthly journal to around 900
subscriberslinvestors. Each issue includes researched articles on
approximately 10 businesses. After reading about any prospective
investment in which he or she may be interested, a subscriber can then
make direct contact with the business seeking finance to obtain further
In addition, the same problems have been recognised by many members of
the enterprise agency network (some 270 joint public/private sector
agencies offering advice and information to small businesses), and a
relatively small number of these agencies have set up their own 'marriage
bureau' to help provide a cost-effective linking service for small
This service usually revolves around some form of a bulletin (circulated
periodically to subscribers) and an 'investors' club' at which business
owners can present their proposition to an audience of potential
The earliest 'marriage bureau' exponent was the London Enterprise
Agency (LEntA), and, in 1987, a number of local enterprise agencies
banded together to form 'LINC' (Local Investment Networking
Company). Its aims are to provide better national coverage for this type of
service and to channel some of the investment finance based in the South
East out into the other regions. At the time of writing, LINC involved some
25 local enterprise agencies.
A number of organisations have attempted to offer some form of linking
service over the last few years, but, unfortunately, many have since
disappeared - mainly due to a lack of support from investors and small
businesses alike.
The directory section containsfurther information on VCR, local enterprise
agencies and their 'marriage bureau' services, and LINC. A description of
an 'investors' club meeting, entitled 'Talking shop to hardened clients', can
be found in the appendices.

The public sector sources can be sub-divided into 2 main groups:
those promoted and funded by central government; and,
those promoted and funded by local government.
These types of sources usually place great importance on investment for job
savinglcreation and on their ability to attract larger amounts of private
sector financial support alongside their own investments; this is termed
'leverage'. For example, the Scottish Development Agency quotes a ratio of
3: 1 (private sector funds:SDA investments) for small business investments
made during 1986187.


A number of regional development agencies exist to help promote economic
development within in Scotland, Wales and Northern Ireland. Their aims
are frequently described in rather general terms - the Scottish Development
Agency (SDA), for example, describes itself as being established 'yor the
purpose of furthering the development of Scotland's economy and improving its
environment" - but all have more to say about the nature and extent of their
Using the SDA as an example again (extracted from its Annual Report
"The Agency's main priorities are to support and encourage
small businesses; to improve its catalytic investment role with
the private sector, to support new technological development
particularly in the key sectars of electronics, health care and
bio-technology, advanced engineering and energy-related
industries; to develop its area development strategy; and to
encouragefurther development of the services sector."
These agencies receive finance from a variety of sources (e.g. &87mfor the
SDA in grant-aid via the Secretary of State for Scotland - 1986/87), and
after the deduction of the agency's own running costs, a minor portion can
be re-distributed in the form of loans, equity capital and grants to
businesses which match their investment or support criteria.
In the context of risk capital for smaller businesses, the primary sources for
Scotland, Wales and Northern Ireland are:-
Scottish Development Agency (SDA) Glasgow
Highlands & Islands Development Board (HIDB) Inverness
Welsh Development Agency (WDA) Cardiff
Local Enterprise Development Unit (LEDU) Belfast
Their recent investment levels have been (total amounts indicated - for
loans andlor equity):-

SDA &18.6m (includes £10.8m equity { 73 firms - 1986187)

HIDB £5.7m (based on approvals offered - 1985186)
WDA &5.2m (132 firms, including 84 start-ups - 1986187)
LEDU &1.3m (loans; plus equity of &0.15m- 1986187)

Another source of equity capital is the British Technology Group (BTG).

BTG was formed in 1980 as a result of a merger between the National
Enterprise Board and the National Research & Development Corporation
and is a "selj-financing public organisation that licenses new scientific and
engineeringproducts to industry and provides finance for the development of new
technology". Examples of BTG-backed projects include the development of
Sir Christopher Cockerell's hovercraft concept and also laser mastering
equipment for compact disc manufacture by Nimbus Records.
Financial support can be in the form of either an agreed contribution
towards the initial costs (in exchange for a negotiated levy on
product/process sales) or by equity participation. Generally speaking,
BTG's interest starts upwards of £50,000, and for 1985186, an expenditure
of £6.lm was authorised against 45 new projects (for projects and
investments with industry).
Some nationalised industries have created funds to help businesses in areas
which have been, or will be, hit by redundancies or closures. Examples
include British Steel (Industry) and British Coal Enterprise, and the latter
describes its objective: "to assist in the creation of new, alternative job
opportunities in the traditional coal mining areas of the U P . However, the
prime interest from these sources appears to be loan-oriented,and although
British Coal Enterprise has made a handful of equity investments, their
interest in such types of investment is not widely publicised, and when it has
taken place, is understood to have been in amounts above £50,000.
An increasing number of local authorities are now offering financial
assistance to local business. While some may argue against the basic
philosophy of such support, local authorities are empowered to incur
expenditure which is not covered by other specific legislation and which in
their opinion is in the interests of their area or part of it. The extent of such
expenditure is limited to the equivalent of a 2p rate in the pound in any one
year (governed by Section 137 of the Local Government Act 1972). Such
initiatives are frequently established with job savinglcreation priorities in
mind, though the organisations are often at pains to point out that they are
not seeking to support 'lame ducks', but potentially sound and viable
The way in which such schemes materialise is determined by the controlling
political group for each local authority. One example, perhaps of a lower
profile than some of the other variants, would be that of Nottinghamshire
County Council. Under the title of 'Economic Development Initiatives',
this authority offers both loan and equity-based finance, and also grants
towards professional services. The range of support for any individual
business may fall between £5,000 to £0.5m, and in any one year, the total
commitment may be well over £lm (£1.4m in loans for 1984185).

Enterprise boards:
A higher profile alternative is the 'enterprise board' or 'economic
development board'. These have been developed to help counter the
centralised growth of venture capital in the UK.
NEDO estimated that in 1985 the total UK investment level was in the
region of £18m, and an example of an enterprise board which has sought
broad local support would be the Yorkshire Enterprise (formerly the West
Yorkshire Enterprise Board). Yorkshire Enterprise would normally fund
about 25 firms a year, and by April 1986, the average loan was a little over
£100,000 and the average equity investment just under £60,000.
Some boards, like many private-sector venture capital sources, seek larger
investments only of, say, over £100,000, though others have tried to
accommodate lower levels of investments. Examples would include the
West Yorkshire Small Firms Fund with a maxiumum investment of
£15,000 (associated with Yorkshire Enterprise), and also the North West
Regional Fund with a range from £25,000 to £200,000 (associated with
Lancashire Enterprises).
In recent times, the European Commission has displayed a growing interest
in what it terms 'SMEs'- small and medium-sizedenterprises. This rests on
the argument that in a time when large businesses are shedding labour, then
any employment expansion will depend, in the main, upon the growth of
smaller firms.
Its policy has been targeted at regions suffering from declining industries -
e.g. coal-mining, steel-making, and shipbuilding - however, there are a
small number of EEC schemes which have, or will have, a greater degree of
importance for smaller equity investments.
The Commission appears to be less keen on simply supplying cheap finance
for projects rather than looking at ways of helping create more favourable
business conditions. However, a 'Venture Consort' pilot scheme has been
launched to encourage cross-frontier venture capital syndication (being
supported by funds from at least two member states), but, judging by
reports on the scheme's first 18 months, the average investment level (over
£100,000/business into 15 syndicated deals) suggests that it will probably be
biased towards slightly larger investments.
Another equity capital scheme geared to assist with the cost of appraising
small equity investments (usually those below £100,000), is their 'Business
Improvement Services' scheme. This can provide limited assistance -
normally up to £1,500 - in grant form to financial institutions or
intermediaries considering making such an investment in a qualifying
company. Support is limited to manufacturing companies based in certain
regions, but it has been found to be useful by some; the St. Helens BES
Syndicates, for example, have used it to help keep the costs of their
operation to an absolute minimum. (See the Fibre Composites Ltd case
studies for further details).
These schemes, by definition, find limited application, although the
Commission had plans to investigate during 1987-88what further support it
could usefully offer to stimulate the supply and demand of risk capital
throughout its member states.

"By nature, men are nearly alike; by practice,

they get to be wide apart."


The Investor's Standpoint

As a primary objective, a private sector investor offering equity capital will

be looking for a higher than average growth investment, spanning several
years. Having then achieved this aim, the investor - especially the manager
of a venture capital fund - will usually seek an 'exit route' so as to realise
both the original investment and its associated profit, making it available for
re-investment elsewhere. Suitable exit routes could be represented by an
opportunity to sell the shares:- a) back to the original founders; b) back to
the company; or, c) to other investors (perhaps via a flotation on a 'junior'
stock market such as the Third Market).
In addition to the capital growth requirement, certain investors may seek
some form of regular income (often in the form of a dividend).

Risk capital sources display varying degrees of specialisation, and the extent
to which the respective investment preferences or exclusions vary from
fund to fund, or individual to individual, can be quite marked.
In the case of a fund, the process of evaluation will usually be much more
formalised than that of the private investor. On the other hand, a private
individual might seek a greater degree of involvement with the investee
company - in the vein, perhaps, of 'buying a job'. (See the note on
'hands-on' and 'hands-off participation, p. 60).
In many aspects of investment selectivity, the public sector sources should
bear some close resemblance to those of the private sector, although their
priorities may differ in certain areas. For example, such considerations as
job-creation or job-saving will rank higher in the public sector.
The following section has been presented from the viewpoint of the private
sector funds. However, many of the points also apply in the general context
of the public sector sources and can be taken to refer to these too. Any
significant distinctions have been noted.
Most investment criteria will have evolved in the light of the experience
gained by the fund management team. Usually, the team will be relatively
small, and its members will have a range of contrasting backgrounds -
including perhaps chartered accountants, management consultants,
chartered engineers, managing directors of their own companies,
stockbrokers, non-executive directors etc.. They will have been selected to
ensure a complementary breadth and depth of skills (in terms of knowledge
and experience) and to ensure a satisfactory standard of appraisal and
monitoring on behalf of the fund.
The public sector funds often recruit individuals having an extensive
background in the private sector, and sometimes their services may be
utilised by the fund on a part-time basis to help keep the overhead costs
down. An example of the board of one public sector source has been
included as an appendix (Bexley Venture Capital).
In addition to the capital growth target - which some managers are reluctant
to be too precise about - the main criteria may be categorised as shown
below (some feeling for the actual range of investment criteria can be gained
by inspecting the details of the various funds listed in the directory
Investment range, maximum & minimum - £000'~
Equity range - % of capital
Industry preferences and exclusions
Stage of company development (start-up, development &C.)
Extent of participation - 'hands-on' or 'hands-off
Realisation term - years
Geographical preferences
These criteria act as a preliminary filter, helping to eliminate the obviously
incompatible or unsuitable businesses (which, for private sector funds at
least, can represent as many as 95% of all applications), and allowing more
time to concentrate on the better prospeqts.
The satisfactory outcome of any investment appraisal will rest heavily upon
the evaluation of the contents of its associated business plan.

Business plan:
In short, the fund managers will be looking for a realistic estimate of the
business's performance over the foreseeable future.
This estimate will be in the form of a business plan, and this plan should also
take into consideration any major problems which are likely to occur. If any
of these do materialise, the plan will help the company's management to
steer round the problems, thus improving the probability of reaching their
original targets.
A business plan is usually sub-divided into several sections, and while there
is no exact format to suit every type of business, the following example will
help to illustrate the general principle.

Company Description Business type - Principal products or

services, markets and applications -
Distinguishing features which will lead to
Market Analysis & Industry description - Target markets -
Marketing Competition - Reaction from specific
prospective customers - Marketing activities
- Selling activities
Research t
3 Stage of development - Key research and
Development development activities - Future product
development activities - New technology -
Patent or copyright position - Regulatory or
approval requirements
Manufacturing and Product and service procedures - Production
Operations advantages - Production capacity - Critical
parts and suppliers - Costing
Management and Key managers - Employees (recruitment,
Ownership compensation, experience, future
requirements, prior agreements) - Directors
- Shareholders
Organisation and Staff numbers by category - Organisation
Personnel structure - Compensation by category
Funds Required and Immediate requirements - 5 Year
their uses requirements - Use of funds - Debt and
equity capital - Public quotation timing
Financial Data Historical accounts and projections -
Assumptions made - Sensitivity analyses
Appendices Biographical details of key managers -
Illustrations of the product - Professional
references - Market studies, relevant articles
from trade journals - Patents
'Checklist for raising venture capital' Business in the Community/Arthur Young May 1985
Investment process:
Each fund will have its own procedural guidelines to help it appraise
investment proposals in a cost-effective fashion, but a generalised sequence
of events is shown below:-
1. Initial approval of business plan Fund manager
2. Meet the management team and visit
3. Agree outline terms and structure
4. Detailed in-house appraisal of company
and verification of data with customers,
suppliers, competitors etc.
5. Outline approval of investment subject Investment Board
to contract
6. Independent report from accountants1 Reporting accountants1
technical advisers (if required) Technical advisers
7. Agreement of legal contracts Company and Fund
8. Investment Fund manager

'The Peat Marwick Report on the Business Expansion Scheme' Inland Revenue 1986

To provide a further insight, the following view has been included

(extracted from "A capitalist puts money where he feels it will grow" -
'Accountancy' February 1986; by Andrew Davison then Managing
Director of venture capital fund County Bank Development Capital).
The first opportunity that the entrepreneur will have to present
his case to a venture capitalist will, very likely, be by way of an
introduction through a professional intermediary, such as a
solicitor, an accountant or a 'packager'. I t is inevitable that the
messenger is viewed, in part at least, as indicative of the type of

A well-presented business plan is essential. More than half of
the opportunities that come to my company come without a
professional intermediary. They are none the worsefor this and
while their business plans may not always be as skilfully
presented, they are true reflections of the entrepreneuJs view of
his own project: too beautiful a business plan may hide heavy
cosmetic work on the figures.
N o matter how the proposal fist reaches the venture capitalist,
one of the initial impressions will be its visual presentation and
the speed with which the essence of the proposal can be
assimilated. The clarity of the description of the project is a
reflection of the presenter's own objectiveness and leaves a
strong initial impression on the reader, which can be either
corrected, heightened or embroidered by a detailed
consumption of the main plan.

Further investigation
The venture capitalist's initial decision is whether he wishes to
investigate the project further or not. I f the business plan has
portrayed a sure-fire project then it is more likely that the
venture capitalist will commit a sizeable amount of time in
viewing the project 'on the ground'; ifthere is still doubt, then a
venture capitalist may prefer to devote his time more sparingly
by asking for a discussion on the business plan at his own
I n summary, a business plan should be, as far as possible, an
accurate representation of the project, giving a flavour of the
proposal, and, more particularly, the management. The plan
should be effectively summarised with a clear index and it will
probably be viewed as a sample of the quality of thought and
expression that can be produced by the entrepreneur.
First impressionsare important; it will be thefirst time that the
entrepreneur has seen the venture capitalist and vice versa.

Management evaluation
The consensus of venture capital investors is that the
management of their client's business is the key to its success or
failure and most effort will be centred on assessing the key
person or people in the management team.
All sorts of unpredictableevents will occur to blow a project off
course and the venture capitalist will be attempting to gauge,
within the comparatively short period available to him, how
the entrepreneurmight react in unfamiliar circumstances:what
would happen i f a supplier failed or the markets shifted ? Will
additional burdens crush the management team who may
already be at full stretch? Will the management team stick
together in difficult circumstances? What is the motivation of
the management team and, particularly, the leader? Can the
team set and achieve realistic objectives? Do they seem to be
able to trust one another? Can they be trusted? How flexible
are they? How pragmatic are they? How well can they assess
and respond to their own weaknesses? Is the team complete or
will it need supplementing?
To some extent the venture capitalist will become part of the
team and both parties should consider whether they can live
and succeed together. Both should communicate what they
expect j?om the other, under what circumstances and within
what limits.
The entrepreneur will probably be invited to describe his
business plan and to highlight the most relevant points. This
preamble will relax both parties and also identib areas for
further probing. The entrepreneur should take this as an
opportunity to accentuate the positive aspects and to highlight
what is needed from the venture capitalist and what is not.
Time will be important and it is sensible to agree beforehand
how long everybody has - there could be nothing more
frustrating than to have an interesting discussion
This initial preamble will be a first important sample of the
entrepreneur's ability to express himself and to engage people's
enthusiasm. The leading management group member should
also recruit other important members of his team to contribute
their views. The interaction among the team will be a
demonstrationof how they work together, which team members
are strongest or which can contribute least.

Coping with the unforeseen

Whatever the reasons for the fulfilment of the business plan in
thefuture, the success or otherwise will undoubtedly have been
as a result of the management's ability to cope with the
unforeseen, but inevitable, ups and downs of commercial
Each investor willfollow his own ideas -I like people who are
'lucky' - but the entrepreneur should have the ability to be
pro-active, to initiate change and be alert to opportunity, to
co-ordinate and manage, and to assess and take risks.
The venture capitalist's best guide to how a management team
will react will be to understand, fully, their motivation in
addition to making a judgement on their capabilities. It has
often been said by investors that a successful match between
investor and client company is one where they have similar
objectives and motivations.
Entrepreneurial motivation
The motivation of an institutional investor is to achieve a good
return on his investment: either as a capital gain via a public
offiring, or an acceptable sale, or as income or as both, and as
a result, it is likely that he will spend some time in attempting to
analyse the strength and depth of the entrepreneur's
determination to be a financial success in addition to
identifying other motives.
It is not always true that a successful businessman has to be
ruthless; however it is a true generalisation that to be successful
he has to be determined, particularly in the face of demands
which may be made not only on himself but also on hisfamily,
friends and associates.

The investor will certainly look for full disclosure from the
outset. It is frustrating to hear that information cannot be
entrusted to him, particularly until he has promised to put up
money, or even worse, never.
The venture capitalist will be attempting to check information
given during the interview and in the business plan against
yardsticks in which he already has confidence.
These third-party checks may be made in thef m of industrial
research, or, should he know the entrepreneur's company or
industry well, may be against detailed knowledge. It is
possible that the entrepreneur may view some of the questions as
being misconceptions; however they may well be popular and
therefore worth dispersing.

The process of checking may be a forerunner to more detailed
investigations, market research and technical assessments. The
completeness and the accuracy of answers given are important
and indicative of the entrepreneur's grasp of his business.
The venture capitalist will wish to check what the entrepreneur
has told him, perhaps through mutually agreed parties whom
both entrepreneur and venture capitalist know and trust
already, such as suppliers, customers, and even competitors or
This inev;:ac!~process of checking can be helpful not only to
the venture capitalist but also to the entrepreneur. The
weakness of the technique is of course that the venture capitalist
may only be directed towards a satisfed referee. Although the
entrepreneur may feel that inquiries within his markets could
create suspicion, this fear is very seldom realised. O n the
contrary, enquiries by a venture capitalist are generally viewed
as a precursor to future strength and expansion. I t would
appear reasonablefor the venture capitalist to report any major
findings which appear to threaten thefuture business while still
honouring the confidentiality of his informants.

Further enquiries
As the relationship develops between the entrepreneur and
venture capitalist so the depth of investigation will increase. If
the discussion at the venture capitalist's office is successful and
it is agreed to carry the discussions further, then a reciprocal
visit will be essential. A t this stage the venture capitalist will
probably want to see as much as possible within a rather
restricted time allocation.
It is helpful to talk to other members of the management team
and key people on the staff and workforce to get a feel for the
corporate culture and management effectiveness. The venture
capitalist will hope to see the business working and as result the
visit should be made at a suitable time.
Practical demonstrations of unique manufacturing methods
are important and the visit is also an ideal time to demonstrate
the business product. O n occasions there will be areas of a
secret nature, but ifthey are important they should be shown to
your proposed partner i f you intend to take him znto your
confidence and future plans.
It is not unreasonable to hope that a venture capitalist will be
enthusiastic about the business and just as he has tested the
entrepreneur's motivation there is no reason why the
entrepreneur should not judge the venture capitalist's support
for his business and way of conducting it.

Heads of terms
Ajier further discussions the venture capitalist will be prepared
to give some heads of terms on the type of deal that he expects to
be able to deliver. These will of course be indicative and
non-contractual but should give the entrepreneur time to
consider whether he wishes to continue to negotiate and spend
the inevitable costs of third party investigations that probably
will follow in the next steps.
The investigations may cover a simple accountant's report,
market surveys, technical analyses, product investigations
and, quite likely, property valuations.

Appraisal costs
Although it is possible that investigation expenses can be
reduced by making contingent promises, the costs will in the
end have to be paid and even work done by in-house experts
will generally be charged.

A final question
Both sides will have learnt about each other's business and
both should be sympathetic to one another's demands. On the
assumption that the deal is to be consummated, then the final
question which the venture capitalist asks, is: how can I
communicate with you in the future as the project progresses
and as our investment matures ?

In summary, the key areas for investigation are likely to cover:
track record of the entrepreneur and his management team
technical performance assumptions about the product1
market size, growth and penetration (market share and
distribution effectiveness) assumptions
pricelcost assumptions, particularly with regard to competition
staff resources assumption, with special attention to the mix,
source and cost of essential skills
overall timescale and important milestones along the business's
anticipated path
'Venture Capital Today' Lorenz T. Woodhead-Faulkner l985

Funds will use their own check lists and the main purpose will be to test the
assumptions behind the forecasts, determining whether or not they are
Techniques for evaluation:
In evaluating an investment proposal, a venture capitalist will want to
satisfy himself that the business proposal will still be sufficiently profitable
under 'worst case' circumstances (also called a 'downside assessment'). All
forecasts are subject to some degree of uncertainty, but the usual
consequence of a variation from a cash-flow forecast is an increased demand
for finance.
Also, some businesses are highly vulnerable to small changes in
circumstances. To determine whether this would be the case for any given
business, it is possible to vary certain figures by a set amount (such as
projected turnover levels in a cash flow forecast) and then gauge the extent
to which key factors are adversely affected. This process of sensitivity
testing may fall under the heading of 'risk assessment7.
The general method for testing such forecasts is to apply a series of 'what-if
questions to the business plan. For example:-
What would be the effect upon cash flow if the projected sales for
the first year fell by 10% - or even 25% - short of target?
If the demand for working capital is estimated as being, say, 25% of
annual turnover, how would the cash-flow be affected if it
increased to 30%?
What would be the effect on profitability and cash-flow if major
contracts materialised later (or sooner) than expected; or, likewise,
if an important approval (from, say, a major customer or a
government department) to supply or manufacture goods were to
be delayed by 12 months?

Risk Assessment:
'Risk', in a general sense, means: "hazard; chance of bad consequences,
loss", and in the evaluation of investment proposals, investors place
considerable importance on the risks inherent in these businesses and the
ability of management to identify and minimise them.
One of the larger accountancy firms (Peat Marwick McLintock) advises:
"The venture capitalist will normally make up his own mind
on the risk factors, but will take note of the company's own
assessment. To determine these you should consider which of
the business plan assumptions or potential problem areas are
most critical to the success of the business. Highlight these
factors, explaining how it is planned to minimise the impact of
unfavourable developments in each risk area."
"Having determined these factors it will also help to provide a
sensitivity analysis of the projected results, possibly by showing
a best, worst and median position."
'Venture Capital and The Growing Business' 1985
It may be helpful to think of the areas of 'risk' as those which would be
subject to an appreciable degree of variation or uncertainty and which
would bring about some significant adverse consequence. These can be
tested by the 'what-if process (mentioned in the previous section
'Techniques for evaluation').
When dealing with the subject of risk in a business plan, it has been
suggested that the following two points should be borne in mind:
[l] " I f a specific section is devoted to risk assessment, it must
be complete, not selective. I f it is obvious that only those risks
which can be adequately countered have been included in the
plan, the mutual trust between investor and investee, so
essential throughout the financing process, will prove
significantly harder to establish."
[Z] " I f the question of risk is not dealt with directly as outlined
above, it must be done indirectly, at the appropriate place in
the plan. For example, i f a manufacturing company has to rely
significantly on one or more components whose ready
availability at reasonable prices may be a potential problem
for the business, the plan should discuss alternative sources of
supply and projectedcosts."
'Business plans and financing proposals'
Arthur AndersenlBritish Venture Capital Association 1985

Bwak-even sensitivity:
If the break-even trading level is taken to be that condition whereby the
business is making neither a profit nor a loss, then a low gross profit margin
business (e.g. 20%) may soon become loss-making if the actual sales level
falls only a little below the target level. Thus a firm having an ultimately
high ratio of fured to variable costs will be thought 'fragile' i.e. more
sensitive to small changes in sales, and such a business will not represent an
attractive proposhion for investment.
To illustrate the point: consider the (deliberately simplified) circumstances
of two businesses which are seeking finance and have identical projected
sales figures for their first year's trading, but have different break-even
Both sell the same item at £100 each, both buy the item at the same price and
both have the same direct ('variable') costs of £50 per item. However, one-
Business 'A' - has much higher annual overheads ('fixed' costs), amounting
to £40,000, whereas the other - Business 'B' - has a lower overhead of only
Business Business
'A' 'B'

Fixed Costs (overheads) [XI £40,000 £30,000

Variable Costs per item [yl £50 £50
Sales Price per item [zl £100 £100
Projected Sales (Year 1- 1000 items) £100,000 £100,000
,*, PROJECTED NET PROFIT £10,000 £20,000

N.B. Break-even Sales Level (S) £80,000 £60,000

& Break-even Sales Level (no. items @ £100) 800 600

Calculated from: [X]

*** PROFIT (LOSS) if sales level falls

by 25% below the projected level (£2,500) £7,500
i.e. to 750 items; or £75,000

Business 'A', with the higher fixed costs, and the lower profit margin, will
find itself making a loss much sooner when sales begin to fall. For further
information, see the appendix entitled 'Key Ratios'.

Exit routes:
Another important consideration would be the investor's opportunity to sell
his or her shareholding and realise the investment at some later date.
'Voluntary realisation' may be achieved via any of 3 main exit routes,
a repurchase by the original owner(s) of hislherltheir company
a flotation on a public stock market
a 'trade sale' of the business to another company
A voluntary realisation may sometimes represent a preferable alternative to
an involuntary realisation; losses to the venture capitalist may be minimised
if liquidation or receivership can be avoided.
Control vs. external investment:
Generally, a venture capital fund would not be seeking to take over the full
day-to-day running of a business, though it would be looking to supplement
the firm's existing strengths with complementary management skills (the
latter to a varying extent, depending upon a given fund's philosophy). The
point being that such sources (both private and public sector) will be
seeking a minor share of the total voting rights.
However, the control of the company rests, in essence, with those
shareholders who command a majority of the voting rights, i.e. over 50% -
though the voting rights for a given business need not necessarily
correspond in direct proportion to the total share capital. For a more
detailed appreciation, see the appendix on share valuation, entitled 'Share
valuation - the ground rules'.
Thus, if a business having a relatively small base of founders' capital is able
to re-structure the share capital by issuing a suitable combination of, say,
ordinary and preference shares, then it may be able to raise an external
amount which would be several-fold the current share capital - while still
holding a majority of the voting rights.

For example:-

Voting Voting
Present shareholding: Rights Proposed shareholding: Rights

$ £10,000 Ordinary shares 100% $ £20,000 Ordinary shares 67%

+ External investor:
£10,000 Ordinary shares 33%
£30,000 Preference shares

£10,000 TOTAL £60,000 TOTAL

$ Founders' equity

The 'Microdisk' case study illustrates this type of approach.

Participative style:
Venture capital funds fall into 2 general categories, namely: 'hands-on' (also
called 'pro-active'), or, 'hands-off ('passive'),
'Hands-on': such an investor will appoint a non-executivedirector who
will have reasonably frequent contact with the investee
company (perhaps 314 days a month); the intention being
to offer advice as a positive contribution to the better
running of the business. The fund's representative will be
interested in receiving details of the regular management
accounts and usually will be remunerated by the investee
'H~nds-off:seen as the traditional style of participation whereby the
investing fund has relatively infrequent personal contact
but will reserve the right to appoint a director if things
start to wander too far off course. The fund may still
require some form of reporting on a fairly regular basis.
The non-executivedirector's fees and costs are usually borne by the investee
company (the role of the non-executive director is discussed in Chapter 3,
entitled 'Equity Finance - More than just money ?').

Fundlcompany distance constraints:

A preference for a closer degree of involvement with any investee business
may also place a limitation on the distance deemed acceptable between the
business and the fund's head office. Some fund managers may have such a
limit defined in terms of travelling time: e.g. "within an hour's travelling by

Most funds have a standardised package of documentation to govern
relations between them and any prospective investee businesses. The 'heads
of agreement' (or 'heads of terms') will set out the main details in outline
form and are usually used as a basis for negotiations. They indicate the
liability for legal and other fees likely to be incurred during investigation,
and when they have been agreed by the two parties, they can be signed and
passed to legal advisers to determine the exact detail of the proposed
A shareholders agreement will usually give the investor some say in:-
the involvement of further outsiders
the borrowings of the company
the composition of the board of directors
the payments of dividends

This agreement will also contain warranties which cover the scope for any
liabilities should the agreement be broken.
An example of an investment offer letter is shown in the appendix entitled
'Sample Non-disclosure Agreement'

An issue as likely as any to divide both parties will be the value set by the
entrepreneur on the portion of the business being placed on offer - i.e. what
equity at what cost?
Entrepreneurs have been criticised for sometimes expecting too much for
too little. Clearly, a professional valuation will strengthen hislher hand, but
if the investigation of the business plan reveals, for example, some evidence
of higher risk and a need for an increased level of financing, then the venture
capitalist will seek compensation, more likely than not, by way of an
increase in the potential rewards.
Under such circumstances, the venture capitalist may offer the argument
that, say, 55% of a £1 million business should be more attractive to the
entrepreneur than 70% of a &!h million business or even 90% of a failed
business - though not all entrepreneurs are susceptible to this argument.
The subject of share valuation is described more fully in the appendix
'Share valuation - the ground rules'.
Public sector sources
Most public sector sources are likely to have job saving or job creating
criteria as high priorities, but another criterion, certainly at local
government level, could include an insistence that investee companiesmust
have 'good employer' policies.
"Enterprise Boards also take into account the need for good
employment practices, including recognition of trade union
rights and compliance with employment legislation and best
industrial relations practice. These are regarded as essential to
the long-term success of the firm and its contribution to the
economy . of
. the region."

" I n some cases the legally binding investment agreement with

client companies will include clauses which specify compliance
with these objectives as well as other requirements such as
continued location in the region and on equal opportunities."
'Enterprise Boards - their contribution to economic development and investment'
Centre For Local Economic Strategies (CLES) 1987

To protect their position as a minority shareholder, it is common practice

for such sources to appoint their own director to the board of an investee
company. This post would be accompanied by various covenants which, if
breached, can trigger multiple voting rights to allow the nominee director to
redress the situation. However, the introduction of such rights, subject to
the agreement of both the investor and the existing shareholders of the
investee company, would also apply to a private sector investor.
The process of evaluating business proposals will be similar, in a good
number of areas, to those adopted by private sector sources. Again, from
the CLES study on enterprise boards:
" W Y E B (West Yorkshire Enterprise Board, now Yorkshire
Enterprise) does not get involved itselfin drawing up business
plans for potential clients, f m fear that this might affect the
objectivity of its executives in appraising submissions. The
Board stresses that is appraisal technique goes beyond the
balance sheet to include an assessment of the quality of line
management, the quality of industrial relations, and the
company's record in such areas as marketing and product
Further details on public sector sources can be found in the appendices
entitled 'Profile - public sector fund (Yorkshire Enterprise)' and 'Profile -
The board of a public sector fund (Bexley Venture Capital)'.
One private investor may exhibit quite different preferences from another
of his kind, and so any generalised observations must be handled with due
care. His or her investment criteria may be less clearly defined, and any
subsequent investigation of a prospective investment probably less
rigorous. The criteria are likely to include several from the list shown
against the fund type of investor, namely:-
* Investment range, maximum & minimum - £000'~
Equity range - % of capital
Industry preferences and exclusions
Stage of company development (start-up, development & C.)
Extent of participation - part-timelfull-time
Realisation term - years
Geographical preferences

The Peat Marwick study of the Business Expansion Scheme produced some
interesting findings about BES 'direct' investors (those investing directly in
a business rather than those investing via an approved fund). Their
observations refer to the BES and although some are bound to be useful in
the broader view of all private investors, the original context must be borne
in mind.
In a survey of 500 investors (both indirect and direct), 71% of investors
indicated that the primary reason for selecting the BES was the 'tax relief,
followed by 'potential capital appreciation' (12%).
When asked to indicate their principal sources of information on potential
BES investments, the most common source was the 'media' (for half of the
respondents - with the Financial Times, and the Daily and Sunday
Telegraphs receiving the most frequent mentions). This source was
followed by a general classification: 'financial advisers' (45% of the
respondents, with stockbrokers and accountants prominent). Colleagues
and other personal contacts were also important.
A sub-sample of investors was interviewed and asked what factors were
considered important when assessing the risk associated with a prospective
investment. The response for the direct investors is shown in Table B (more
than one response per investor was allowed).
Investment risk assessment- BES direct investors
Percent of interviewees %
. . . . . . . . . . . . . . . . . . .W
Asset-backing . 42
. . . . . . . . . . . . .D. . . . . .
Company track record
Quality of management

Marketabilitylilliquidity W.....
Results to date ....B...W..21
Returns expected B
.. 5
'Nature.of. .H
. . . companies'
Other H
.. 5

TABLE B l983184 U.K.

'The Peat Mamick Report on the Business Expansion Scheme' Inland Revenue 1986

This gives an indication of the relativeimportance of the factors used when

assessing investment opportunities (but not the way in which they were
assessed). 'Marketability' refers to the uncertain marketability of BES
shares and the fact that the investment would need to be held for 5 years.

'Non-BES' investors
It should be remembered that BES investors are not allowed to receive any
remuneration in return for services rendered to any company in which they
choose to invest (under the scheme), and so the exact producthector
compatability may be more critical in the case of a non-BES investor seeking
some form of part of full-time involvement. This latter situation may also
mean that the investor would be looking for an opportunity based within a
limited radius of his home.
The viewpoints of various different investors are described in a number of
the case studies e.g. 'Tripos R & D Ltd.'

"Let our advance worrying become advance

thinking and planning."


Raising Risk Capital - How to get started

This chapter deals with the practical aspects of raising external share capital
and is intended to provide general guidelines on how to best organise a plan
of action. The two most important points to convey at the outset are:-
1) For anyone who wishes to raise such finance from a prospective
investor - whether it be a private or public sector fund, or a private
individual - a business plan is the accepted medium which allows
an investor to evaluate and consider a proposal on its proper
merits. Of course, the existence of a business plan in itself will not
guarantee eventual success, but its absence will almost certainly
ensure failure.
Bearing in mind that a typical venture capital fund manager may
reject around 30 or more propositions for each one finally selected,
it is clear that the private sector 'funds' market is very selective.
And while there is evidence to suggest that some public sector
sources may have a lower rejection ratio, the basic argument for a
business plan still remains.
2) While such a plan is being researched and developed prior to
presentation, the determination of its exact contents will involve
some difficult judgements (what is relevant and should be
included?; what should be excluded?; how much detail should be
shown? etc.). And since the typical small business owner tends to
be very closely involved with the day-to-day running of his
business, he or she may find it hard to stand back and take a
detached view on certain issues. Moreover, some fundamental
aspects of raising external share capital will require professional
guidance (on, say, share valuation and tax implications, or perhaps
on contractual obligations). Therefore, to have access to a variety
of sources of external assistance or guidance may be not merely
helpful, but vitally important. "Do-it-yourself' to a large extent,
certainly, but not wholly "Do-it-by-yourself '.
Useful low-cost advice and information for smaller businesses has
become more widely available in recent years (much of it offered
free by public-sector - supported agencies), and suggestions have
been included in this chapter to help you locate and exploit these to
the full.
In terms of elapsed time, from start to finish, a successful business 'rescue'
may be possible within a few weeks, but a more typical timescale when
raising external share capital would probably be closer to 4 to 6 months. A
generalised sequence of events for the main activities is shown in the chart
illustrated overleaf.
The time spent in preparing a suitable plan is likely to be greater than one
would first imagine (or hope, perhaps): a reasonably well-researched plan
may demand a commitment of 100 or more hours (excluding secretarial
effort for typing and re-typing of drafts - access to a word-processor can
help to reduce this).
Thus it will not be possible to 'knock out' a plan after spending merely a
couple of afternoons on the project.
If you are like the typical businessowner and feel the continual pressure of
'not-enough-hours-in-the-day' this sort of time commitment can seem
daunting at first sight. However, when the preparation of a business plan is
viewed in the broader context of:
a) the extent of your personal commitment to the business say over
the coming 12 months (perhaps some 2,000 - 3,000 working
hours), and,
b) the extent to which the business could be better understood - and
hence, better managed - as a result of considering the fundamental
issues which must be addressed when developing such a plan,
then the process will probably have sufficient merit in its own right.
If, for example, you have only a vague (or untested) notion of the main
factors - such as: "price, specification, and delivery" - by which customers
favour your firm's product or service, then a competitor having a more
soundly based and clearly defined set of influences may well be able to reach
the current market (any new markets) more effectively and more profitably
than you. However, this is a fundamental issue which would be addressed
whilst formulating a business plan. Another - and one which could even
help to avoid serious problems (including failure) - would be the need to
prepare a cash-flow forecast.
Being realistic, no-one is able to guarantee that any search for external risk
capital will end in success (the main aim of the whole search process being to
maximise the chances of success).
But nevertheless, having undergone the discipline of researching and
developing a business plan, it would seem likely that, as a direct result, you
would be better equipped to manage the business than otherwise would be
possible. Therefore, and at the risk of labouring the point, the benefits of
this outcome should be assessed before dismissing the task out of hand.
Predictions of any form of business activity - such as monthly sales figures
or cash flow requirements - must be based upon assumptions (either stated
or implied). And it could be that the existing ownerlmanagers do not have
the experience or skills (especially in the case of a start-up business) to
formulate realistic assumptions without some external assistance.

Key Activities When Searching For External Risk Capital

This is a generalised guide indicating a possible sequence of events when
seeking an investor to supply external risk capital. Reference should be
made to the comments in the guidebook on the investor's standpoint and
the general problems of raising small amounts of risk capital (chapters 5 and
7), and to help minimise the overall elapsed time, the possibility of running
one or several activities concurrently should be investigated at the outset.

START E.g. For: new product or service

general expansion
financial re-structuring
Extra finance needed when borrowing facility fully
utilised at bank

'Guestimate':- Develop initial cash-flow estimate

for the next 12/24 months - determine
1) Amount likely peak requirement
2) Timescale

E.g. Loans, grants, extra share capital

(see 'Sources and Applications' table in
appendices - shows other possibilities,
solutions should the raising of share capital
prove unsuccessful)

Consider future implications, such as:-

1) financial structure of business
2) tax matters e.g. BES eligibility
3) assess likely costsltimescales
business adviser Discuss with AccountantIBank Manaeerl
Professional Adviser1Business ~ o u n & o r
to help select most appropriate solution

(continued on
next page)
Use general matching criteria, such as:-
1) investor investment preferences1
dentif; I list exclusions e.g. geographical
potential investors 2) investment range e.g. min. £
+ 'links' to same 3) extentlmode of participation
plus others as appropriate -
SOURCES: Guidebook directory;
Local enterprise agency

This could involve as many as 100 to 300

Gather information hours spread over 6 months. Outside
help should reduce elapsed time (and
personal workload). Consider benefits
Business Plan vs. Costs - financial assistance may be
available (e.g. DTI marketing scheme)

Prepare Business Initially, a 2-sided overview should

suffice to allow prospective investors
Plan Synopsis to determine whether the proposal matches
for investors their investment criteria

Contact and Some investors may offer specific

distribute guidelines to help businesses provide
them with the information required

They will ask for fuller information

if interested - often via an exploratory
Business Plan meeting
to interested If NO 1NTEREST:- reviewlimplement contingency
potential investors plan with alternative approach

Agree 'Heads of Agreement' (initial terms).

Assessment involves an evaluation of the
important features of the plan, such as:-
Assessment of management team
markets & marketing strategy
Business Plan technical aspects
by investor(s) financing considerations
Modification and re-submission may be
needed at one or more stages - a fund could
spend 200 man-hours or more on evaluation

(continued on
next page)
Legal advice should be sought in
Offer made & connection with contractual matters
I negotiation I -fees to be paid shortly after conclusion,
(and likewise to other advisers)

Conclude The plan now has to be implemented -

as agreed; monitoring systems may have to
Agreement be modified (perhaps, to provide more
(not) THE END information, or more frequent reports)

Even if ownerlmanagers do have the necessary experience and skills, the

view of an appropriately informed outsider should prove valuable in testing
whether the assumptions are based on achievable outcomes or whether they
arise from little more than 'wishful thinking'. A detached view is likely to
resemble more closely that of the prospective investor, whose perspective of
the business will be quite fresh and unencumbered by the distortions of
most ownerlmanagers' perpetual closeness.
This detached view could be sought from a professional adviser, although
he or she will have strengths only in certain areas. For example, it is unlikely
that the skills on offer from an accountancy firm, and particularly those of a
smaller practice, will extend very far into the area of marketing.
Correspondingly, such constraints should be considered before an
approach is made.
A crucial question now, however, would be: "How do I find out what other
forms of assistance are available?'.

Business advice agencies:

More general assistance is offered, free of charge, by a number of small
business support agencies. All have locally or regionally-based offices, and
the main sources in England are shown below.
1 ) The Small Firms Service (Department of Employment)
2 ) Local enterprise agencies (public/privatesector supported)
3) The Rural Development (Formerly operated by the Council
Commission for Small Industries in Rural Areas -
Outside England, the Small Firms Service is managed in Wales in
association with the Welsh Development Agency (WDA), and in Scotland,
by the Scottish Development Agency (SDA). An equivalent service in
Northern Ireland is supplied by the Local Enterprise Development Unit
Local enterprise agencies can be found in most larger and medium-sized
towns. There are around 270 throughout the UK and some have satellite
offices. In Scotland, they tend to be known as 'local enterprise trusts'.
Other possibilities which should not be overlooked, are the local
authorities and the innovation centres.
Local authority assistance for small businesses varies considerably from
area to area, and the extent of such support in any given area is probably
determined as much by the preferences of the local controlling political
party as by any other single factor. It is easy to mistakenly prejudge local
public sector support - useful assistance and support may be available
where you might not expect.
There are approximately 20 innovation centres and they exist to help small
businesses to develop and exploit innovative products and processes (not
necessarily original ideas of their own).
~ i n a & re-launched as the 'department for enterprise' (announced in
January 1988), the Department of Trade & Industry offers a range of
specialised assistance. It can: ". .. puz you in touch with experts in thefields of
marketing, design, quality and manufacturing systems" and the DTI offers free
'enterprise counselling' and subsidised consultancy support.
Further information on each of these sources can be found in the

The aforementioned sources offer:
advice and counselling
The government-funded Small Firms Service (SFS) provides:
". ... free information on a wide variety of management
questions both to existing businesses and people who wish to
start one. And, if you need advice, the Service's business
counsellors (themselves experienced businessmen - not civil
servants) will give sound practical, impartial and confidential
advice on your project, whether you are developing a going
concern M just starting."
"In particular the Service can help you to draw up a business
plan, raise money, choose the right premises, plan your
marketing M re-jig your production. They can give you an
impartial second opinion on your plans ifyou wish to check
their viability."
'How to make your business grow!' DTIIHMSO 1985
It is well-placed to provide information about the current range of
government schemes, and also general guidelines on eligibility. Their
advisory service was formerly known as a counselling service, but was
re-packaged mid- 1987 under the title 'Business Development Service'.
On the other hand, if we take a typical local enterprise agency (Derby &
Derbyshire Business Venture - like all local enterprise agencies, a joint
publiclprivate sector supported initiative), it offers advice on most aspects
of setting up and running a small business including:
"0 Help with assessment ofyour business idea
0 Help in the fqrmulation and presentation of your proposals
Advice in marketing, accountancy, legislation. finance, taxation,
personnel matters
Advice on obtaining premises, land, planning permission &c.
Advice on grants"
These services are strictly confidential and free of charge. Some local
Enterprise Agencies have access to small business finance.
The Government-funded Rural Development Commission is charged
with revitalising "... country areas by helping small ruralfirms to become more
prosperous" and the service relies upon a number of regional organisers who
are supported by professional and technical officers.
Services on offer include 'Business Management Advice', for example:
"Accountancy - book-keeping, profit planning, cash flow fore- casting,
costing, applications for loans and overdraft facilities.
Marketing - market research, product planning, pricing and
distribution, advertising and sales, export, exhibitions."
Another feature worthy of mention would be the Rural Development
Commission's limited loan fund which could be relevant for those trying to
raise combined equity and loan-based finance.
Regarding local authority assistance, this, as mentioned earlier, varies
quite considerably. As an indication of the potential scope for assistance,
the table below lists the following activitieslinterests based oh a near-total
sample for the London area. (The Manpower Services Commission- 'MSC'
in the table - is now known as The Training Agency).
Local Authority Support for Small Business


Equal Opportunities
Premises Register
Number of Authorities

m w ~ m m m ~ m m m m m m m m17
m r n m r n m m m m ~ m ~ m ~ m17
Co-operatives m m m m m m m m ~ m ~ m . m 16
Loans & Loan Guarantees m m m m m m ~ m m m 13

Premises Improvements
Training Courses
Rent Grants
Setting Up Grants
Firms Directory

Promotion of MSC & DTI Schemes

Training Grants
Marketing grants
Start Up Premises
New Technology

TABLE C London Area

'Small Businesses in London - A Guide to Local Authority Assistance' London Research Centre 1987

Finally, another possible source of low-cost help to smaller businesses could

be an innovation centre. With the help of support from the private and
public sectors (including the European Community in some instances), 20
or so centres have been created to stimulate the creation of new businesses in
technology-related sectors.
Such a centre would provide help to inventors and small firms with: - a) the
development of ideas into production prototypes; and, b) setting up
arrangements for profitable exploitation.
As well as offering assistance with the assessment of ideas for technical and
commercial viability, the support from an innovation centre can include:
General business and market appraisal
Product development
Patent protection
Commercial exploitation
Business plan preparation
Financial planning
Access to other business services of the local authoriw and other
As with all of the previously-mentioned services, approaches are treated in
complete confidence.

Which service ?:
At first sight, it may be difficult to differentiate between the various
services. The following simple guidelines may help:


Whilst developing a business plan, the requirements for information will
generally fall under the following categories: Management; Product;
Production; Financial; Marketing; Premises; Employfnent; and
Clearly, certain aspects will relate more directly to local matters than
national, but if in doubt - contactyour local enterprise agency (listed in the
directory section).
If they aren't able to help directly, it is very likely that they will know who to
contact. Any such enquiry could be handled over the telephone or by a visit.
(For help with simple and relatively straight-forward enquiries, no
appointment should be necessary, but for a 'counselling session', an
appointment is recommended.)
The reason behind this general recommendation is not any implied
suggestion that the general supply of information from this type of source is
necessarily superior to any other, but that the local enterprise agencies,
collectively, have declared a high level of interest in assisting with the
supply of equity capital to smaller businesses, and therefore, they should be
better placed to handle enquiries of a related nature.
In addition to the aforementioned organisations, other sources of
information could include:
Accountant Bank Manager
Business Acquaintances Catalogues
Chamber of CommerceITrade Consultants
Rural Development Commission Customers and Clients
Directories (eg. Yellow Pages, ExhibitionsITrade Shows
Kompass, Kelly's &C.)
Government Departments1 Guidebooks (for small
Agencies businesses)
Innovation Centre Libraries - reference1
academic &c.
Local Authoritylies Local College1
Media - RadioITV Newspapers - local/
Newsletters Online Databases
Research Associations Small Business Clubs
Small Firms Service Solicitor
Suppliers' representatives Trade Associations
Many businessmen are unaware of the information which may be obtained
from their local libraries - either directly, or indirectly (the British Library
at Boston Spa handles 3 million requests a year, 75% being science and
technology oriented). Librarians are highly trained, and will be most
helpful when given the opportunity. Also, most colleges, polytechnics and
universities will allow access to their considerable stocks for members of the
public - some will accept membership requests too.


A face-to-face discussion with the relevant information immediately to hand
often represents the most satisfactory type of approach (and in a meeting
arranged by appointment; although it may be possible to resolve less
important queries over the telephone).
Generally speaking, the main choices for assistance with the business plan
will probably rest between: - your local enterprise agency; the Small Firms
Service (SDARVDAILEDU); or the Rural Development Commission.
In terms of mobility - i.e. the ability of a counsellor to visit your own
business premises - the most mobile of the low-codfree counselling
services are likely to be those operating on behalf of the Small Firms Service
or the Rural Development Commission (though the latter would apply only
to country-based businesses - check the Rural Development Commission's
eligibility criteria first).
Generally less mobile, but having more offices, would be the local
enterprise agency counsellors.

Regarding initial costs, tbe first discussion would usually be free - whoever
you decide to contact (an appointment can be arranged by telephone) - so
this shouldn't be an important consideration.
Inasmuch as one recommendation could ever be suitable for such a diverse
range of business interests, it is suggested that your local enterprise agency
would in most cases represent the best port of call for initial business
However, if for whatever reason the service first contacted isn't able to fulfil
your requirements or expectations, do not hesitate in making contact with
an alternative source.


Since investors' preferences vary, in detail, at least, it was felt that the
inclusion of 2 sets of business plan guidelines would be helpful.
These have been supplied by the London Enterprise Agency (LEntA) and
Brian Warnes (as an extract from his book 'The Genghis Khan Guide To
Business', and used by the Midland Bank Venture Capital investment fund)
- both of whom are experienced and closely involved with small business
risk capital investment. LEntA operates a business counselling service and
'marriage bureau', and Brian Warnes is former managing director of
Midland Bank Venture Capital (MBVC) - a private sector fund having,
until recently, a special interest in investments in the area below £50,000
and a 'hands-on' portfolio of over 50 companies.
The LEntA guidelines (shown overleaf) are usually supplied to all 'marriage
bureau' clients wishing to raise finance and may be particularly useful for
those seeking to interest a personal investor; however; however, the
guidelines can also be used as the basis for a submission to an investment
As an alternative, the other set of guidelines may be helpful when
anticipating the requirements of an investment fund.
The following set have been offered as a preliminary guide - a prospective
investor may requirefurther information. (The 'fund' guidelines are shown in
the appendices.)
Plan guidelines:
The layout is intended to provide LEntA with an outline of the applicant's
organisation so that the scope for further assistance - and possible
managerial assistance - can be considered early on in the process.
Each heading in the index should ideally be covered in half a page with the
probable exception of the budget and cashflow projection. It is suggested
that each subject be kept on a separate sheet for ease of alteration and for
eventual presentation in a punched ring binder. Items such as brochures
and audited accounts may more conveniently be included as appendices.

1 Introduction to the Business
2 ProductKervices
3 TheMarket
4 Pricing Policy
5 Plan of Action
6 The Marketing Budget
7 Record System
8 Management
9 Premises
10 Objectives
11 Finance Required
12 Financial Information
The notes which follow are intended to cover the salient factors in an
organisation for the benefit of a reviewer who is not familiar with that
organisation. If you were discussing the situation with your bank manager,
he or she would normally already have much of the information.

I . ZNTRODUCTZON - on first page

Brief outline of what you want to do (this is to get people interested in the
An outline of the product/service that you wish to promote. Brochures and
drawings should be included as appendices if relevant for an existing
business; outline the history to date.

You should show an assessment of the market you propose to enter to prove
viability, product potential etc.
Prove the need; this section should include sub-headings such as:-
a) Competition
b) Statistics and research information to support your proposal
c) Packaging
d) Distribution
e) Advertising
f) Brochures, literature, sales aids etc.
g) Contacts
h) for Products - show supply channels
i) any other sub-headingsrelating to the proposal
j) Sales estimates as appendices
k) Sales methods - direct/salesmen/van sales etc.
Show how this has been arrived at e.g. basic costings and margins

The steps taken to actual launch of the product/service with appropriate

Do not forget to show marketing under its own heading in the cashflow
forecast and not just as a miscellaneous expense.
NB For Budget and Cashflow information together with relevant financial
information, see separate guidelines. [These follow shortly.]

At the centre of every successful operation there is an efficient record
system, whether by simple cards or computer. [The system should be used to
keep a record of quotations, sales, customers, suppliers etc. for subsequent analysis
- this will enable future plans to be implemented with maximum efficiency and

Include fairly brief but concise notes on the person or persons who are or
will be running the business, and of any key employees, highlighting if
possible why they should be successful.
Include full curricula vitae as an appendix.
You should state the following details about your premises:-
- Whether existing or sought
- The size, tenure (i.e. details of lease, licence etc.), rent and rates
payable, when the next rent review is due
- Whether local authority permission for 'change of use' is
- The maximum possible production and staffing
- How long before bigger premises are needed
NB If you are taking on a 'full repairing lease', you should be aware that this
imposes significant obligations upon you and your business.

Outline the key areas of the business over the next five years or so, dividing
these into:-
- Short term (next 6 months)
- Medium term (6 months to 2 years)
- Long term (2 years to 5 years)
Your long t m objectives can have a particular bearing on how an outsider
will look at your plan, particularly if you are looking for investment (as
opposed to borrowing) to finance your business.

a) Amount required, including breakdown and timing of proposed
b) Contribution available from shareholders/promoters.
c) Preference for i) institutional source, or, ii) private investor(s).
a) Audited accounts - up to 5 years (if available).
b) Selling prices and product/service costings.
c) Budget for forthcomingyear broken down into 12 months.
d) Cashflow for next 12 months.
e) Outline budgets and cashflow for the following 2 years.
Examples illustrating c), d) and e) follow the Notes on Preparation of Budget
and Cashflow.
-Basic Market Assessment -
[This ia a general questionnaire used by LEntA counsellors to help them when
advising clients - it may serve as a useful checklist when consideringyour own
circumstances. A more detailed approach to marketing can be found in 'The
Small Business Action K i t - as described in the appendix entitled 'Further
Reading'. ]

Type of Business:

Briefly, what is the product or service you are selling or planning to


How long have you been trading or do you propose a business


How would you describe the market you are in or propose to enter:

Indentify who are your existinglpotential customers by trade/

[6] Which are the principal competitors and list their names:

Together with their:-

Strengths: Weaknesses:

[7] Against these competitors, what do you think are your:-

Strengths: Weaknesses:

[g] Do you have factual evidence that would support your answers to
Question 7?

[9] Of your potential customers, which of their specific needs or

requirements does or will your product/service satisfy ?
[l01 What do you consider to be the characteristics of the market sector
most likely to buy your product or service?

[l l] Do you anticipate the demand for your productlservice declining in

the future? If so, why and when?

Do you intend to develop and produce replacement or successor


[l21 How do you propose to communicate with your marked customers?

(e.g. advertising, mail shot, leaflets, telephone calls, direct calling):

[l31 How do you propose to make available the product or service? (e.g.
mail order, direct, retailer, wholesaler, van sales, dealers, franchises
[l41 Which of the following more closely describes the market strategy you
will be adopting? Tick as appropriate.

(A) Increasing the volume sales of your product or

service in an existing market

(B) Finding a new market for an existingproduct

or service

(C) Introducing a new product into the market 0

(D) Entering a commodity market 0
[l51 Which of the following most closely describes the pricing policy you
will be adopting? Tick as appropriate.

(A) Demand pricing (set the price

to whatever the market will bear)

(B) Mark-up (cost plus variable margin) 0

(C) Competive pricing (cut-price, discounting,
offers, etc.)

[l61 What is the estimated value/volume of the total market, or the sales
value in the area you are considering entering?:

[l71 What production/inaugural problems do you envisage with your

product or service?:

[l81 Are you conversant with statutes/regulationsetc. that may apply to

your product/service?:
Notes On Preparation Of Budget And Cashflow

A budget is the management's plans for a business expressed in financial
terms. It should show the sales value of the products or services against both
the total costs of making the product or providing the service, and the costs
of overheads (including the cost of promoting the business and bringing in
orders) needed to support these activities.
The budget records the monthly sales invoices and estimated cost of
running the operation for the month. Seasonal variations in the level of
activity are revealed as are the costs of an expanding operation which tend to
increase in steps rather than in a straight line. Some months may therefore
show a loss although the overall picture for the year is a profit.

This forecast anticipates cash movements from: - sales, outgoings costs,
details of capital expenditure; and it indicates the level of financing required
by the business. Where audited accounts are not available for the period
immediately preceding the period covered by the budget and cashflow it is
important to provide a note of debtors, creditors, stock and capital and
reserves at the opening date.
Some points to be considered when preparing the cashflows:-
Cash sales, cash purchases, salaries and wages will be reflected in
the current month.
Debtors and creditors should be entered according to the terms of
trade - or experience where this is more relevant i.e. 30 days net
often becomes 6 weeks, 2 months, or even longer.
Rent and rates may be paid quarterly or half-yearly in advance.
Insurance is usually paid for a year in advance.
Light, heat and telephone are likely to be paid quarterly in arrears,
whereas postage may be an immediate cash payment, as also will be
the case for most travelling and entertainment.
Hire-purchase charges are usually monthly while bank interest is
usually charged quarterly in arrears.
Capital expenditure may incur a deposit with order. Details should
be supplied.
Marketing costs should include such costs as: - Selling costs other
than salaries included elsewhere; Packaging; Design; Brochures;
Market Research; Advertising; Customer Liaison; all Sales Aids,
samples etc.
h) Capital inflows will arise from sale of plant, vehicles etc. and from
cash introduced by shareholders/promoters. Details should be
i) Outline budgets and cashflows for the following 2 years should
reflect the objectives set out in 6 above. These shortform
documents can be produced on a quarterly basis to the nearest £100
or £1000 as appropriate.
j) VAT must be included where applicable.
These notes are intended as a guide to the elements that should be thought
through when compiling budgets and cashflows. They are not meant to be

Budget Example:
1) £12,000 equipment purchased with Directors' initial capital
2) Materials comprise 50% of invoiced sales throughout.

Cashflow Example:
Credit taken - 3 months
Credit given - 2 months
Reserve stock - £5,000 (at cost)
Rent - £6,000 per annum (paid quarterly in advance)
Rates - £1,200 per annum (paid half yearly)
Insurance - £600 per annum (paid annually)
25% of budgeted wages and salaries is PAYE and National Insurance
(30 days credit).
p - P - p-p

MONTH = 1 2 3 4 5 6 7 8 9 10 11 12 TOTAL
SALES 7000 7000 7000 8000 8000 9000 9000 9000 l0000 l0000 l1000 l1000 106000
Materials Used 3500 3500 3500 4000 4000 4500 4500 4500 5000 5000 5500 5500 53000
Wages 1300 1300 1300 1300 1300 1800 1800 1800 1800 3500 2500 2500 22200
GROSS PROFIT [A] 2200 2200 2200 2700 2700 2700 2700 2700 3200 1500 3000 3000 30800

Salaries 400 400 400 400 400 400 400 400 400 400 400 400 4800
Telephone 80 80 80 80 80 80 80 80 100 100 100 100 1040
Travel 100 100 100 100 100 100 100 100 120 120 120 120 1280
Rent,Rates&Insurance 650 650 650 650 650 650 650 650 650 650 650 650 7800
Light & Heat 50 50 50 50 50 50 50 50 60 60 60 60 640
Miscellaneous- inc.
MarketingIAdvenising 270 270 270 370 370 370 470 470 470 550 550 550 4980
Repairs & Renewals
Finance Costs: Bank, HP
Depreciation @ 20% p.a.
(straight-linemethod) 200 200 200 200 200 2d0 200 200 200 200 200 200 2400

OVERHEADS [B] 1750 1750 1750 1850 1850 1850 1950 1950 2000 2080 2080 2080 22940
- - minus -[B1- 450 450 450 850 850 850 750 750 1200 (580) 920 920
PROFITI(L0SS) 450 900 1350 2200 3050 3900 4650 5400 6600 6020 6940 7860 7860

Source: LEntA
MONTH = 1 2 3 4 5 6 7 8 9 10 11 12 TOTAL Year End
IAl t

Materials t 9775 4025 4025 4600 4600 5175 5175 5175 5750 48300 18400
Wages 975 975 975 975 975 1350 1350 1350 1350 2625 1875 1875 16650
Salaries 300 300 300 300 300 300 300 300 300 300 300 300 3600
Telephones t 276 276 299 345 1196
Travel 100 100 100 100 100 100 100 100 120 120 120 120 1280
Rent, Rates, Ins. 2700 l500 2100 l500 7800
Light & Heat 150 150 160 180 640
Miscellaneous inc. t
Advertising 310 310 310 426 426 426 540 540 540 633 633 633 5727
Repairs and Renewals

Finance Costs: Bank, HP

VAT Settlement 668 1672 1850 4190 2107
PAYE, Nat,
Insurance 425 425 425 425 425 550 550 550 550 975 725 6025 725

OUTGOINGS[B] 4385 2110 2536 14169 6251 7052 11212 7440 8494 12753 9078 9928 95408
p --

Change in month
[A]-[B]or[B]-[A] (4385) (2110) 5514 (6119) 1799 2148 (2012) 2910 1856 (2403) 2422 1572
Opening Bank
Position [C] NIL (4385) (6495) (981) (7100) (5301) (3153) (5165) (2255) (399) (2802) (380)

Closing Bank
Position [C] (4385) (6495) (981) (7100) (5301) (3153) (5165) (2255) (399) (2802) (380) 1192
+I- Change in I

less Depreciation

Stock 5000
Debtors 25300
Cash in hand +l192 =31492


Creditors (Trade) 18400
PAYE & National Insurance 725
VAT + 2107 =21232 +l0260

Represented by:

Source: LEntA
-BUDGET FOR 2nd &3rd YEARS -

Quarter = 1st 2nd 3rd 4th TOTAL 1st 2nd 3rd 4th TOTAL
Less Cost of Sales
(materials & labour)
Gross Profit


Profit or (Loss)

Cumulative Profit
or (Loss)

Source: LEntA
- CASHFLOW FOR 2nd t3 3rd YEARS -

Quarter = I 1st
Materials t
Overheads t
Loan Repayments
Capital Expenditure
or (Inflow)


Change in Quarter
Opening Bank
Closing Bank
How far should you go in preparing different sets of figures ? Guidelines
jointly published by the British Venture Capital Association and
accountancy firm Arthur Andersen ('Business plans and financing
proposals') advise:
"The availability and popularity of microcomputer-based
spreadsheet packages has given many businessmen the facility
to perform extensive senstivity analysis with minimum effort -
but it can be overdone."
"The figures derived from sensitivity analysis are meaningless
in isolation, and must be analysed to have any point. I n this
context, too much sensitivity analysis can be as bad as too little,
if the assumptions used have little chance of happening in real

"We recommend that where this technique is used, revised

assumptions are applied, i p limited numbers or events, such as
sales growth, or the impact of delays in product introduction
schedules, capital expenditure etc."


The Peat Manvick survey of Business Expansion Funds highlighted several
criticisms by investee companies of some non-executive directors (who had
been appointed to act on behalf of BES funds). The points raised were:-
little practical knowledge of small businesses
little knowledge of the specific markets in which the business
too financially oriented
expensive in relation to their contribution
These are areas which should be explored with any type of investor before
reaching an agreement on such an appointment.


The principal initial costs are likely to be those associated with:-
* professional consultation - whatever the selected
accountant-solicitor charges per hour;
investors' fees - variable from nothing up to around 3% or 5% of
the capital sought (some may charge even where the appraisal does
not result in an investment);
Stamp duty - formerly 1%of capital sought - was abolished by the
1988 Budget
These may be followed by:-
ongoing management fees - these may be paid to cover monitoring
costs andlor the fees of a non-executive director (if appointed);
dividend payments - depending upon the class(es) of shares
purchased by the investor.

For businesses seeking investments in the region below £50,000 (under the
Business Expansion Scheme), research suggests that the average initial
costs were 3% of the finance raised for direct investments, and similarly 9%
for fund investments. A specific example indicated that the total cost to a
small service sector company raising £30,000 was £750 (£300 stamp duty
plus £450 legal fees), i.e. 2?h%.
It was also found that the typical charge for non-executive and monitoring
support was in the range of £2,500 to £7,000 per year, although one example
was found to be as low as £500 per year. (These figures are possibly biased
towards larger investments.)


Whilst formulating your business plan (regarding proposals intended for
any type of investor), you may find this general checklist helpful.

Positive Factors Negative Factors

J Strong management team X Dependent on one or
and management structure two individuals
J High prospects for growth X Unexciting returns

J Good management information X Weak management

systems control systems
J Significant marketsldistinct X Single outletlmarket
productslmarket niche supplier
J Strong customer base X Good ideas without
financial discipline
J Exit route visible X Ill considered plan
J Good track record
J Low downside risk; high
asset backing

'The Peat Marwick Report on the Business Expansion Scheme' Inland Revenue 1986

These features were seen by the BES funds as being positive or negative
when included in a proposal for finance. Any single factor may be relatively
unimportant by itself (indeed, some may be less significant for investments
below £50,000), but collectively, a picture will emerge which should help to
provide beforehand an indication of your chances of success.

"Forewarned, forearmed; to be prepared is

half the victory."


Problems You May Encounter When Raising

Small Amounts Of Risk Capital
This chapter introduces the main hurdles to raising smaller amounts of risk
capital and, importantly, ways in which they can be overcome. Whilst the
initial sections apply, in principle, to the difficulties of finding any type of
prospective investor, they are particularly relevant in the context of a search
for an individual investor (i.e. a personal as opposed to an 'institutional'
Since the recent introduction of the Financial Services Act, the selling of
shares in private companies has been (and still remains) under review, but
in essence, the ability of private companies to offer their shares or
debentures to the general public has been deliberately constrained by
statutory legislation - and this will continue to remain so. The legislation in
question refers to the Companies Act 1980 (subsequently consolidated in
later Companies Acts) and the Prevention of Fraud (Investments) Act
The former piece of Iegislation makes it an offence for a company (or its
directors) to offer such securities to the public, while the latter, which
controls 'dealing in securities' (an all-encompassing definition), means that
any service seeking to link potential investors to businesses raising risk
capital needs to be licensed by the Department of Trade and Industry.
Moreover, any person (licensed dealer or otherwise) who makes misleading
or deceptive statements as a fraudulent inducement to invest, runs the risk
of substantial criminal penalties, extending to a total of 7 years'
In general terms, the securities market has been described as providing
almost unequalled opportunities for parting fools from their money and,
clearly, the legislation was introduced in arder to deter people from
misleading or deceiving investors, and also to help ensure that only
reputable people undertake or advertise for such business.
What constitutes 'the general public' though ? In terms of numbers, the
upper limit was not previously defined; but if one-to-one negotiations took
place between two friends at their local club, then, in all probability, this
would not be considered a breach of the spirit of the law. Similarly, if
proposals were circulated to several business friends, then this, too, would
probably be quite acceptable. However, as soon as the number of recipients
increased much above these sort of levels - perhaps as a means to help
improve the chances of successfully finding an investor - then the position
became less certain.
Thankfully, this particular position should be quite clear after the
appropriate provisions have been introduced under the Financial Services
Act, since'tke limit will be defined and will probably be set at a figure
of 40.

If a business owner places a small advertisement in, say, the business
columns of a national newspaper, announcing - without drawing reference
to equity or share capital: "Business seeks finance for ...... (expansionlto
exploit new market &C.)", then, generally speaking, it would not be seen as
offering securities to the general public. But if the advertisement were to
state: "Business seeks finance for ....-equity offered", then it would almost
certainly be in breach of the law.

'Linking' services:
As one way round this difficulty, it is possible to provide a service which
links together the two groups (formerly, by gaining general permission
under the Prevention of Fraud (Investments) Act; but more recently, by
complying with exemptions under the Financial Services Act, or by acting
as an authorised investment business). These specialised services act as an
information channel between small businesses wishing to raise external
finance and investors looking for investment opportunities.
Examples of such services include the London Enterprise Agency's
(LEntA) 'Marriage Bureau' and the Henley-based 'Venture Capital Report'
LEntA, for example, distributes to subscribing investors a monthly bulletin
of very brief 'pen pictures' describing such businesses (their operation has
since joined forces with a nationwide operation called 'LINC'). Fuller
information on specific opportunities can be made available to interested
subscribers upon request. In contrast, VCR is a monthly magazine showing
fuller details, though of fewer opportunities, which is circulated to a
network of subscribing investors. Both services have a cross-section of
several hundred private and corporate investors as subscribers.
Organisations complying with exemptions under the Financial Services
Act, such as local enterprise agency 'marriage bureaux', are obliged to
prominently display in each publication:
"Investment in new businesses carries high risks, as well as the
possibility of high rewards. I t is highly speculative and
potential investors should be aware that no established market
exists for the trading of shares in private companies.
Before investing in aproject about which information is given,
potential investors are strongly advised to to take advice from a
person authorised under the Financial Services Act 1986 who
specialises in advising on investments of this kind. The persons
responsible for using this advertisement have taken reasonable
steps to ensure that the information it contains concerning
proposals requiring capital is neither inaccurate nor
misleading. "
Inevitably, the need to take "reasonable steps" involves some degree of
vetting of proposals by the publishers. This takes time (usually to interview
the individual or individuals behind the proposal, and to help with certain
aspects of content or presentation), and since 'time equals money', there are
associated costs which have to be borne by someone.

Further information about these and other services can be found in the
directory section; but for immediate reference, LINC charges £50 to
businesses seeking finance, and £50 to subscribing investors (for 12 issues).
Correspondingly, VCR charges £100 to start-up businesses (£200 to
expanding businesses) plus a small percentage fee for any risk capital
successfully raised, and £200 to investors. The former is subsidised by the
enterprise agency in which the service is based (as tends to be the case with
any enterprise agency operating such a service), whereas the latter must
stand or fall as a profit-making commercial venture.

When looking for a suitable investor, you might think: "Surely my
accountant (or solicitor, bank manager, stock broker, etc.) must know of
one or two local businessmen who would wish to invest in my business ?"
Of course, this could well be the case, but in making such introductions, the
professional adviser, acting as an intermediary, runs the risk of a conflict of
interests between himself and the other two parties. A reputable
accountancy firm, for example, would find it impossible to be able to give
advice which could represent simultaneously the best interests of both seller
and buyer.
Another view of the problem of making introductions was expressed in the
Small Business Research Trust's report (1985) on the Business Expansion
Scheme, where a senior partner in one of the largest accountancy firms was
reported as saying:
" I f we give a proposal for funds to our private clients, the
suggestion is that we think it is a good idea even i f we make no
recommendations. I f our client makes the investment we will
gain no praise if it & su~cessful,but stand to get criticised if it
In addition, accountants, as a profession, probably take the view that
investment in private companies is a very risky activity - especially
start-ups. And in spite of the fundamental attraction of the Business
Expansion Scheme as a useful tax shelter (especially to higher-rate
tax-payers), a sizeable proportion may be much more likely to recommend
an investment in a pension plan with a guaranteed return for the investor
(and a commission paid to the practice), in preference to, say, £15,000 for a
20% stake in a new business.
Stockbrokers, who, also, should have a useful range of contacts, may be
reluctant to draw their clients' attention to an investment which will yield
them no commission and see a significant amount locked up for a
considerable time, when it could be moving in and out of quoted stocks and
shares and gilt-edged securities.
This basic type of problem can be extended to include other people who
appear well placed to effect introductions between potential investors and
small business owners seeking finance (those working within say the banks
or accountancy firms would fall into this category). Whilst in principle such
people may have opportunities to perform useful introductions, the
potential losses tend to outweigh the rewards- especiallywhere no charge is
made and where, for some reason, an investment ultimately goes wrong. To
some, this might seem like a rather narrow commercial view, but before
passing judgement, perhaps we should speculate as to how you or I might
act if we were to find ourselves in a similar position.
High Street banks:
A recent NEDO report on lending to small firms touched on the situation
which can occur when an applicant's request for a loan has been turned
down by his or her bank, which then necessitates a search for sources of
equity finance. It was felt that:
"Some (but not all) banks take the view that it is not their
responsibility to advise their customers on who to approach nor
do they appear to collect or disseminate appropriate
information. Branch managers in these banks suggested that
the accountants were likely to be the best source of advice."
"For the small customer this means an additional visit,
perhaps to a bigger accountancy practice than he cun-ently
uses, to explain his position. He may be uncertain as to which
firms in his locality can provide the information, he may be
reluctant to attend for reasons of time, cost, or even pride; he
may even feel that the financial community has given him the
brush off. I n short there is a real possibility that his business
plan will not be implemented because of inefficiencies in the
communicationprocess linking the providers of external equity
with small businesses via intermediaries of the banks and
So, whilst advisers may seem well-placed to act as intermediaries between
businesses seeking equity capital and potential investors, there are, in
practice, several reasons why they may prefer to decline the opportunity.
However, this is not to say that the chance of finding a private investor via
this route is non-existent, but that it could be lower than you might


None of this dwells yet on the problems of potential compatibility between
investor and investee company; namely, the ability to match people having
coincident, or at least, substantially overlapping, interests and
For example, if a business is seeking 225,000, then the ability to locate an
investor who is prepared to offer simply the same amount is unlikely to
result in a successful 'marriage' - especially if the business seeking the
finance is engaged in wholesaling industrial electrical goods and the investor
is seeking an involvement with a domestic consumer-oriented retailing
On the basis of this simple case (which perhaps implies a diversity of
interests spanning both investors and investee companies), it could be
argued that the most fruitful approach for finding a compatible investor
would be one which reaches the largest target audience, i.e. by helping to
improve the chances of a successful match.
Therefore, and where the business concerned has access to, say, an
accountant who is happy to help seek out a prospective investor from
amongst his or her clientele, the next step could be to ask the accountant to
make some preliminary enquiries.
Given, however, the great diversity of businesses and investors' interests -
in terms of the amotmt of finance soughtloffered, the nature of the business,
the extent and mode of involvement and so on - then the likelihood of both
the local investor who best matches the given proposal and the business
itself using the same accountancy practice at the same time, must be quite
low. This is an idealised, perhaps extreme, view to help illustrate the
fundamental difficulty; in practice, however, there may be not one, but
several, local investors who could be compatible with the proposal.

Improving the chances:

The logical progression from this situation would appear to be some form of
local service linking investors and businesses seeking finance, and, as
mentioned in previous chapters, a small number of enterprise agencieshave
developed local variants of the LEntA 'marriage bureau' to help tackle this
basic problem. Further details on this activity and the nationwide 'LINC'
can be found in the directory.


Finding 'institutional' types of risk capital sources - including both public
and private sector funds - can be a relatively straight-forward task. Several
directories are available, and as well as the directory section of this
guidebook, other examples would include those published by the British
.Venture Capital Association, Venture Capital Report, and Stoy Hayward.
Examples of useful directories published as sections within publications
include those produced by the Investors Chronicle and the Financial
Times. However, other difficulties arise with these sources of risk capital.
The 1980's have witnessed a rapid growth in the availability of venture
capital in the UK, but due to the relative costs of appraisinglselecting
proposals and the subsequent monitoring of investments, most venture
capital sources have a pre-determined investment threshold, below which,
proposals will not be considered. This situation is reflected in the reduced
number of smaller investments as shown in Table D (overleaf).
UK Venture Capitallnvestment TABLE D



Investment by Size Range 1985

'UK Venture Capital Journal' - MayIJune 1986 Source: Venture Economics

These costs can include legal expenses and charges made for accountancy
work and technical evaluation. As an indication of the charges which would
be incurred for fund investments falling within the range £100,000 to
£500,000 the National Economic Development Council reported in 1986
published by NEDO that the professional fees would usually be £20,000 to
£25,000 (as a 'one-off cost), and that the non-executive directors' fees
associated with the subsequent monitoring - and which are charged to the
investee company - could be £6,000 to £10,000 p.a.
Of course, venture capitalists are seeking high capital returns to compensate
for the high level of risk, but since a significant number of investments may
grow more slowly than first predicted, or even fail (and failures tend to
appear relatively early), smaller investments are frequently considered not
In addition to these considerations, some funds have claimed insufficient
levels of staff to enable them to monitor large numbers of small
Around half of the companies receiving BES investments have been below
£50,000, and the dominant type of source has been the direct investor - in
contrast to the BES funds, which, due to the relatively large costs of
appraising and monitoring of investments, have made only a limited
contribution at the lowest end of the spectrum. The situation is well
illustrated by Table E (below).

Whilst the BES has a number of distinct benefits to small businesses and
investors alike (see also the Appendix entitled 'Business Expansion Scheme'
for a review of its primary advantages and disadvantages), it also has a
number of features which, depending upon the circumstances of the
business and its BES investors, can turn into disadvantages.

BES Investment TABLE E

% OF



[AIF = Approved Investment Fund; n = 670 companies]

'Inland Revenue Statistics 1987' Inland Revenue 1988
Accordingly, some important features which small business owners,
investors and their advisors need to consider prior to making any
commitment include:-
* a potential inflexibility when raising additional finance - existing
BES shareholders may be reluctant to supply additional finance if
their tax relief is prejudiced, and external sources may be unwilling
to accept conditions which are necessary to preserve the company's
BES status
investors seeking paid involvement may be deterred - the tax relief
for BES investors is prejudiced if they receive remuneration from
the company
short-term investors may be discouraged - investors must hold
their BES shareholding for at least 5 years to enjoy full tax relief


'Forecasting is hard, particularly of the future' (anon.) -and often no more
so than in the case of a business about to commence trading.
Appraisal of business investment proposals, especially by fund managers,
normally involves a 'what-if questioning process which focuses - but not
exclusively - on the cash-flow forecasts.
What if the actual turnover achieves only 75% of the first year's target?
What if the overheads prove to be 15% higher than forecast?
One strategy for businesses seeking finance, though, is to present 2 or 3 sets
of figures, representing both optimistic and pessimistic projections.
However, one could imagine that a relatively established business, with
some hard experience of selling a specific product or service, should be able
to produce more accurate forecasts (based on recent sales trends, overheads
and so on), than a business which:
a) has not yet traded (or traded for very long) and is without the data
upon which a reasonable prediction could be based,
b) is planning to sell into a highly volatile or untested market, and,
c) whose owners have not yet been able to acquire the broad range of
skills needed to manage a business successfully on all fronts (e.g.
marketing, production, financial, personnel).
Thus it would seem that, given these very general conditions, an established
business would be a 'safer bet' than a start-up - although some venture
capitalists hope that they can successfully locate one or two of the few small
companies which do have the capability to grow rapidly (sometimes called
'stars' in a portfolio of investments) and outweigh, overall, the weaker
Taking a general view of start-up failure rates: an analysis of UK VAT
registrations and de-registrations over the period from 1974 to 1982 (by the
Department of Trade & Industry), indicated that the peak rate of company
de-registrations occurred between 12 to 24 months after registration. That
is, 15% to 20% of the registered businesses had de-registered within that
period (some industrial sectors fared better than others). N.B. businesses
can register and de-register for reasons other than simple trading start-up
and failure.
In the context of venture capital-backed companies, it has been estimated
that some 20% fail, and another 20% survive, but fail to achieve the
investors' expectations. For 'early stage' projects, however, (those falling
within the range from prototype development, through start-up, to second
round [i.e. loss-making or just profitable]), the failure rate rises to 40%.

"The present interests me more than the past

and the future more than the present."

Financing The Next Stage

Future events are always subject to a measure of unpredictability; and the
further forward we try to see, the greater the uncertainty. But the
longer-term future of any business - if it is to survive, never mind expand -
will not take care of itself.
For example, a rapidly growing company may be unable to finance the next
phase of expansion solely out of retained profits; and if this proves to be the
case, what would be the consequences if today's prospective investors seek
to place restrictions (eg. regarding the sale of shares) which might hinder
later financing, in say, 4 or 5 years' time?
It is likely, therefore, that the next phase will need to be explored well in
Thus the following overview is offered as an introduction to the various
longer-term possibilities; although it should be remembered that an
investor or venture capital fund may be able to help in the raising of
additional finance to support later growth.

New investors:
Having once grown past the difficult 'start-up' phase, a company may have
some form of track record with which to attract new investors: there are
likely to be more institutions interested in taking equity in businesses
having a reasonable past performance as well as a promising future.
Again, professional advice should be sought, but the main suppliers of
relatively larger amounts of equity capital (£100,000 plus) are summarised
below. Further introductory information and addresses can be found in the
Bank of England's 'Money for Business' (see the appendix entitled 'Further

Venture capital funds

Clearing banks Most have subsidiaries able to
secure or provide equity capital
Other banks
Investment trusts
Pension funds Tend to have only a rather small
proportion of their investments in
unquoted companies, but may
represent a possibility
Insurance companies
Issuing (inc. accepting) May provide equity finance directly;
houses also important when raising finance
via the Stock Exchange
Other companies
Public sector agencies Such as enterprise boards and
development agencies e.g. Scottish
Development Agency
'Linking' organisations Do not provide finance but, usually
for a fee, link sources to companies. A
'venture capital sponsor' can perform
a similar function
Research & Development A small number of sources are able to
support R & D projects

There are a number of markets for selling shares to the public, of which, 3
are governed by the Stock Exchange. With centres in Belfast, Birmingham,
Dublin, Glasgow, Leeds, London, Manchester and Newcastle, the Stock
Exchange operates a main market of securities in 'listed' companies; it also
controls two smaller markets - the Unlisted Securities Market (USM) and
the Third Market.

'Full listing':
To become listed, a company has to satisfy the various requirements of the
Stock Exchange. These are intended to protect investors and relate to the
way in which securities may be issued and to the disclosure of information
by the company.
Whi1.e this is one method of raising additional capital, it may also represent
an opportunity for existing shareholders to realise their investments. This
can be achieved by one of 4 routes, i.e.:-

Prospectus issue: The company offers its securities

directly to the public (the issue may have
been underwritten by an issuing house)
Offer for sale: Similar to a prospectus issue, except that
the company agrees to sell the whole
issue to an underwriter, who will then
himself offer the securities to the public
Placing: Here the public are not invited to
subscribe; instead, an issuing house or
stockbroker will offer the shares to
selected clients - usually large
institutional investors
Rights issue: Underwritten, whereby new shares are
offered to existing shareholders in
proportion to their current holdings
Statutory legislation (Companies Acts) and the Stock Exchange's listing
requirements both place emphasis on the principle of pre-emption, under
which, existing shareholders must be offered any shares being newly issued
by a company for cash.
A full listing is accompanied by appreciable costs and is clearly suited to the
needs of the very largest companies. By the end of 1987, the Stock
Exchange's full listing comprised around 2,900 companies, trading a total
of 5,100 securities (stocks and shares).

The Unlisted Securities Market (USM):

The Unlisted Securities Market (USM) was launched in 1980 to help
smaller companies achieve flotation with less onerous requirements than
those dictated by a full listing. No minimum size has been set, but it has
been suggested that companies should have pre-tax profits in excess of
£250,000 (p.a.) and also the prospect of significant growth in the following 2
or 3 years. Otherwise, a minimum pre-tax profit threshold of, say, £400,000
might be appropriate.
By way of a comparison, a full offer for sale to raise £2.5m might cost in the
region of £270,000 to £400,000, whereas a £2.0m USM placing could fall
within the range £120,000 to £200,000.
Up to March 1986, nearly 450 companies had been admitted to the USM, of
which, over 50 had transferred to the Official List. A similar number had
also left for other reasons (being acquired, reorganised or suspended). By
the end of 1987, approximately 370 companies were trading a similar
number of securities on the USM.
The Third Market:
Launched in January 1987, the Stock Exchange says, for "companies which
are young and therefore have good prospects for growth", but do not meet the
requirements of the Official Listing or the USM.
Candidates need no; have begun trading, but must demonstrate a well
researched project or product, alternatively, they may have one year's
audited accounts showing significant revenue flows.
The cost of introducing a company having a large number of public
shareholders to the Third Market has been estimated as being in the region
of £20,000, and likewise, for a prospectus issue, possibly in excess of
By the end of 1987, 35 companies were being quoted on the Third

The 'Over-the-counter' Market (OTC):

Whilst the previous markets are administered under the control of the Stock
Exchange, the OTC is not. The OTC started around 1972 and may be
defined as a group of licensed dealers who provide two-way trading facilities
in company securities with regular posted prices outside the Stock
Exchange system.
About half of the OTC flotations are by way of an offer for sale, which for an
amount in the range of £ to £lm, could cost £150,000 (in 1984).
By August 1986, according to Peat Marwick, around 210 UK companies
had obtained an OTC quotation, of which, 80 qualified for tax relief under
the BES. However, the largest dealer failed to obtain authorisation under
the Financial Services Act and has since pulled out of this market; thus the
OTC would appear to have an uncertain future.
- Contents - Page
Case Studies 92

Profile - A Public Sector Fund (Yorkshire Enterprise)

Profile - The Board Of A Public Sector Fund

(Bexley Venture Capital)

Review - A 'Marriage Bureau Investors' Meeting

The Business Expansion Scheme (BES)

a) Synopsis
b) Advantages & Disadvantages

Finance - Matching Applications To Types & Sources

Key Ratios

Share Valuation - The Ground Rules

Sample Non-disclosure Agreement

10) Sample Investment Offer letter

11) Possible 'Fund'-type Business Plan

12) 'A' Scores - Qualitative Company Assessment

13) Bank Lending Criteria

14) Further Reading

15) Practical Glossary

It is intended that the following 6 case studies should offer some insight into
the businesses and the way in which their owner(s) went about raising
external equity capital. Apart from the hypothetical 'Microdisk' example
(included to illustrate in greater detail some of the considerations which can
affect the development of an appropriate financial structure), each business
was ultimately successful in finding a suitable investor.


A) Publishing1 Comic Arts Ltd. Private Investors
B) Micro-computer Microdisk Private Sector Fund
Disk Drives Individual
C) Manufacturer of Fibre Composites Private Investors
Industrial Vessels Limited
D) Thermoplastic Motaplas UK Ltd Public Sector Fund
Repair Service
E) Publishers Transit Private Investors
Publications Ltd
F) Component Kit-car Tripos R & D Ltd Private Investors

Two of the businesses - Comic Arts and Transit Publications - started life as
publishing-type ventures, and although they may seem similar at a first
glance, their cases reveal some significant differences.
Each case study has a brief introductory section which indicates: - the type
of business; where it was based; how much was raised (at the outset, more
may have been forthcoming later); the purpose for which the external
finance was required; the type of investor; and the method used to contact
the investor.
Case Study A

BUSINESS: PublishingIMerchandising Comic Arts Ltd -


FINANCE: £10,000 Raised in 1985

PURPOSE: Working and expansion


SOURCE: Private Investors via Inventure Ltd.

LINKAGE: 'Marriage Bureau' London Enterprise

Agency (LEntA)

Based upon extracts taken from LEntA Investors' Meeting presentation

notes and other information supplied by the company.

Comic Arts was managed in 1985 by its two founder directors, Chris
Reynolds and Colin Brett, and their main line of business involved the
design and supply of Christmas cards to in-house benevolent funds such as
those associated with the Fire and Ambulance services. Other activities
included the marketing of specially-designed products (mugs, badges &C.)
to the Fire Service.
Chris, a full-time London fireman with 15 years' service, was a natural artist
with an extraordinary talent for cartoon work, and he acted as the originator
of most of their designs. His skills were usefully complemented by those of
his co-director, Colin Brett, whose experience of working within the print
industry was extensive - he had worked on all aspects of origination,
printing and finishing, and had also covered estimating, costing,
production management and print sales.

After much research, it had been discovered that there existed no national
publication for firefighters - particularly to carry advertisements of new
products on a regular basis. The directors felt that they had the contacts, the
knowledge and the skills to produce such a publication, and so they formed
Fireline Publications Ltd. to exploit this opportunity.
Under Fireline Publications, they planned to attack 2 main markets:-
1) A free monthly newspaper - 'The National Firefighter' -which would be
a 16-page publication with a print run of 35,000 copies and distributed
to every fire station in the country. It would be financed by advertising
and would contain news and photographs of major fires, road accidents
and many other special problems faced by firefighters. Stories of
outstanding bravery and personal achievement would also be included,
as would lighter items touching on sports news, general interest and
2) 'Characterisation' - that is, the creation of characters for a book or film
theme and then further developing them into a wide range of related
products aimed at a mass market. At this stage, they had originated
several characters for a series of children's books called 'Trotters
Bottom Fire Station'. Each book carried a different safety message and
they were judged to be of value as a schools' teaching aid on both fire
safety and the Fire Service. Other products were also in the pipeline.

In terms of competition for 'The National Firefighter', the only other
nationally-circulated publication was 'Fire', a technical journal aimed at
officers, rather than firemen. Chris and Colin had established that there
were over 75,000 Fire Service employees in Great Britain and Ireland, and
taking into account possible interest overseas and in industry, another
25,000 could be added to the potential readership.
Secondly; although the Fire Service represented an initial market for their
'characterisation' products (Comic Arts then had over 60 established outlets
within the Service), both Colin Brett and Chris Reynolds felt that the scope
elsewhere would be much greater. The main market would lie not only in
schools and book clubs, but also in multiple outlets such as W.H. Smith and
Woolco. They also planned to approach various television companies with a
view to making a children's programme (in a similar vein to 'Postman Pat',
or 'Camberwick Green').

On the basis of personal guarantees, the directors were able to obtain an
overdraft of £5,000 from their bank, but since they were advised that a
larger amount of finance would be needed to support such a venture (part,
at least, in the form of equity capital), they started work on a business plan
which would help them to raise such finance.
By mid- 1985, they estimated that £5,000 had been spent on the project:
that is, to pay for the existing premises and office equipment, to cover their
research, and also on the development of artwork and prototypes. To enable
them to employ a general managerial person on the newspaper, and to get
into production with the books and other products, it was estimated that
another £15,000 would be required immediately, plus a further £10,000
some 5 months later.
The original business plan was prepared by Colin Brett, who found it
time-consuming and difficult afterwards to find suitable sources of finance.
'Suitable sources7 included a number of city institutions, but they soon
became 'unsuitable' when it was discovered that the level of finance being
sought was considered too small to warrant any further interest in Fireline
However, one of the funds, Investors in Industry (3i), suggested as an
alternative that they try to find an investor via LEntA - the London
Enterprise Agency. LEntA offered not only the usual enterprise agency
business counselling service, but also a 'marriage bureau' which acted as a
"business introduction service designed especially to help small businesses find
capital and management help".
After a preliminary meeting with a LEntA counsellor, Comic Arts (Fireline
Publications) were accepted as a bonafide proposition and were allowed to
register their requirements with the agency's marriage bureau.
The marriage bureau publishes and distributes a monthly bulletin
containing brief descriptions of various businesses seeking finance, and if
an investor subscriber is attracted to any of the propositions, further details,
in the form of a 2-page business plan summary, can be supplied upon
For Comic Arts, their 'advertisement7 announced:
New Fire Service Newspaper Publishers (London)
£25,000 working capital required to assistlexpand national
newspaper for the Fire Service and to allow producation of a
series of childrens books, as the basis to the highly lucrative
characterisation of the Fire Service. Excellent return on
This appeared in the October and November (1985) issues of the bulletin,
but soon after the preliminary counselling discussion at LEntA, Colin and
Chris were invited to make a presentation at the September meeting of the
LEntA 'Investors' Club7.
Investors' Club meetings are held most months, and business promoters
seeking finance via the LentA bulletin can present their plans and ideas to
an audience of twenty or so potential investors. Each of the 4 or 5 presenters
are allowed 20130 minutes to explain, demonstrate or display hislherltheir
venture in whichever way they feel is appropriate. Usually, there is a little
time after each presentation to allow for questions from the floor, though
any interested parties have a better chance to introduce themselves and
learn more over the informal buffet which is held at the end of the
afternoon's session.
At the September meeting were Simon Rogers and Michael Downey, joint
Managing Directors of Inventure Ltd., and although they had serious
doubts about the ongoing viability of the activities and plans as presented,
they felt that Comic Arts would offer the seeds for profitable growth if the
strategy was revised. In particular, they recognised the niche that they
created for specially-targetted artistic products in support of specific
Chris and Colin made initial contact with the Inventure directors during the
informal session which followed the final presentation, but after further
discussions, and in spite of an interest expressed by other prospective
investors, they felt that Simon Rogers and Michael Downey had more to
Simon had earlier helped to form Applied Holographics - a business
exploiting commercial opportunities using holography - and had
successfully floated the company on the Unlisted Securities Market only 16
months after its launch whereas Mike, a qualified accountant and graduate
of Harvard Business School, had been the Finance Director at
Willcinson-Sword prior to the Inventure formation in 1985. It was felt that
this type of background experience could only enhance Comic Arts' future
By late October 1985, it had been agreed that Inventure would invest
£10,000 in exchange for a 33% shareholding in Comic Arts - with the
prospect of a further £40,000 to be invested during the coming year.
"As part of the deal," Mike Downey explains, "it was
decided that the free newspaper and 'fire brigade
paraphernalia' would be dropped in favour of re-focussing on
niche-marketing of Christmas cards, childrens' books and
charity support activities."
"One of the problems with the owners of smaller businesses, is
that they find it difficult to differentiate between what it is that
they are good at, and conversely, where it is that their
weaknesses lie - and the free newspaper seemed tofall into the
latter categoy ."
"Clearly, the main strength of Comic Arts lay in their ability to
produce purpose-designed items - of high quality - which
would combine a general theme with some specific aspect of the
customer's interests or activities."
"For example: instead of offering a standard 'Santa Claus'
type of motif for a benevolent fund's Christmas card, they
would incorporate a design which would identify much more
strongly with the client -for the Fire Service, the scene would
include fire engines, firemen and so on."
"This we felt was an archetypal 'niche' type of market, and
one which at that time was relatively unexploited."
It was realised shortly afterwards, however, that their initial plans were
likely to be under-financed, and so the deal was re-structured so that
Inventure would increase their holding from 33% to 50% upon the
successful raising of a £65,000 loan under the government's Loan
Guarantee Scheme.

As a result of concentrating on the company's strengths and developing
niche positions, the turnover rose from £60,000 in 1985 to £280,000 the
following year. The target for 1987 was &1.4m.
This progress has not been without problems and Inventure had to supply a
further £45,000 as a temporary loan to help overcome a cash-flow problem
caused by over-stocking in 1986.
Colin Brett, as co-founder of Comic Arts, says:
"Much of the original businessplan was undertaken by myself,
and while this helped to reduce our external costs, the exercise
was v e y time-consuming. One particular problem lay in the
difficulty of actually finding suitable sources offinance - and
one which was not helped when few accountants at that time
appeared to know of services like the LEntA Marriage
"Our business has grown rapidly from small beginnings: the
children? stoy books were initially sold by the book-sellers W .
' H . Smith and Menzies with ISplcopy zoing to the BBC's
'Children I n Need' campaign - and now we act as the sole
merchandising agentsfor this campaign."
"Our association with Inventure has brought about a total
change of attitude - obviously, small businesses must be
adaptable to survive in a volatile market, but looking back, we
used to be reluctant to change. Now, when complete changes of
strategy become necessary, we can adapt much more quickly
than before."
Case Study B

BUSINESS: Micro-computer Disk Drives Microdisk -

Hypothetical Case

FINANCE: £50,000 raised in equity capital

(plus £90,000 loanlgrant finance)

PURPOSE: Expansion

SOURCE: Venture Capital FundIPrivate Investor

Adapted from a case study first published by Arthur YoungiBusiness in the
Community 1985 and reproduced by kind permission.

In 1986, Microdisk Ltd., manufacturers of a disk drive suitable for most
micro-computers, had been trading for 18 months from a small industrial
unit in Cheshire. After initial losses, the company had built up a significant
market share in the North West, and by mid-1986, its reserves stood at
£15,000. These were as a result of the company's net trading position which
had recently been improved by a 100% increase in turnover during the
previous 6 months.
The company was owned in equal proportions by 2 working directors, and
the issued share capital was £5,000 (issued at par value - i.e. with each share
at a nominal value of £ 1).
A further 10 staff were employed by the business, and most were in

Due to an increased demand, the company had outgrown its existing
premises but had been able to identify a suitable new unit in the Manchester
Science Park. This unit would also provide additional space for the
commercial development of a new hard disk drive unit which was the
brainchild of one of the directors.
Technical trials of the new product had proved satisfactory and the results
of market research appeared to justify production on a viable basis.

In the course of their regular business planning, the company's directors
had compiled financial projections for the coming 3 years. During this
period, the market for the existing disk drive would continue to be
exploited, and the new product would be introduced.
After a rigorous analysis of future operations, including an analysis of
financial sensitivity to the key critical factors - sales volume and gross
margin - the most likely requirement for finance had been calculated as
shown below (detailed cash flow estimates have not been included):

Cost of developing new hard disk drive unit:

(up to the time of full commercial production)
Piant (to manufacture prototypes) £10,000
Materials £20,000
Labour £30,000

Total Development Cost £60,000

Plant for new production line £50,000
Additional net cash requirement £30,000
at peak (early in year 2)
Maximum likely requirement £140,000

At that time, Microdisk's only borrowing was a bank overdraft of £20,000
secured by a fixed and floating charge on the stock, debtors and plant (total
book value £95,000). The company was also financed by directors' loans of
£30,000 split equally between the two shareholder/directors, and their
projected Profit and Loss Accounts and Balance Sheets looked like:-
Latest Year Year 1 Year 2 Year 3
£ £ £ 6:
Sales - existing product 250,000 300,000 50,000
- new product 100,000 495,000 670,000

Contribution (gross margin> 55%) 138,000 220,000 300,000 400,000

Development materials 20,000
Overheads 113,000
p 201,000 250,000 300,000
PROFIT (LOSS) before tax 25,000 (1,000) 50,000 100,000
LESS tax 30,000

PROFIT (LOSS)After Tax 25,000 (1,000) 50,000 70,000

Brought Forward (from previous year) (10,000) 15,000 14,000 64,000

Reserves £15,000 £14,000 £64,000 £134,000

Note: All development costs written off in the year of expenditure

Latest Year Year 1 Year 2 Year 3
£ £ £ £
FIXED ASSETS 40,000 90,000 100,000 80,000

Directors' loans
Bank overdraft



Represented by:
Share Capital
Profit and Loss Account

The directors did not have any further funds of their own to finance the
expansion, and although they were open-minded about the introduction of
outside equity, they wished to retain control of the company. A friend who
had made money on the commodity markets had said that he was prepared
to invest £10,000 but did not wish to take part in the running of the
At that time, the directors were seeking to expand the business on a sound
base for the next 5 to 10 years. But afterwards, it was their intention to
obtain further finance for continuing expansion - realising also the
enhanced value of some of their own shares - by flotation on the USM, or
alternatively, by sale to a larger business.
Having sought professional advice on the development of their business
plans - prior to talking to a selected number of venture capital funds - the
Microdisk directors were then able to present a case for investment based on
the following considerations.
Company Valuation:
In general, the valuation of a company may reflect its:-
* past dividend record,
asset base,
future earnings.
But, in the case of Microdisk, the 'past dividend' method was not
applicable, and since the 'asset base' approach showed a less favourable
valuation, it was felt that a 'future earnings' assessment represented the
most appropriate basis ['earnings' = profits available to ordinary
However, the directors were advised that, beyond a preliminary
orientation, there were no hard and fast rules, and in practice, the
determination of a fair valuation is a matter for negotiation between a
willing buyer and a willing seller of the shares in question.
Accordingly, it had been assumed - based on the following calculations -
that a fair valuation for the company would be £225,000. Namely:-
Sustainable future earnings, say: £50,000
PriceIEarnings (PIE) ratio for an unquoted
company in this industrial sector, say: 9 and
discounted by 50% to allow for the
accompanying risk of reduced earnings and
lack of marketability of private company
shares: 4.5
Therefore Valuation: £50,000 X 4.5 = £225,000

capital Structure:
Given that Microdisk needed £140,000, the principal factors were:-
1) The shareholder/directors wanted to retain control.
2) It had been assumed that the debt:equity gearing ratio would be
about 1.3: 1 - this seemed conservative to the Microdisk directors,
but they were advised of the inherently high risk in their business,
and that additional short-term borrowing might be needed at short
notice. Second round financing could be sought by selling further
shares 2 or 3 years hence.
3) A private investor was interested in an investment of £10,000
which could be suitable for tax relief (for the investor) under the
Business Expansion Scheme. £10,000 would represent 17% of a
company valued at £225,000.
4) There were directors' loans of £30,000, which were, in effect,
long-term and represented their commitment to the business. It
was recommended that they be capitalised by an issue of new
shares as part of re-structuring the balance sheet.
On further investigation, it seemed likely that the company would
qualify for a government grant under the 'Support for Innovation'
scheme. A maximum rate of 25% applied to the planned
development costs of £60,000 would produce a potential grant
worth & 15,000. (This particular scheme was replaced in l988 but this
aspect illustrates the principle of raising a 'package' offinance by using
several different sources).
To enable a venture capital fund to invest a substantial sum
without acquiring a majority of the ordinary shares and a
corresponding proportion of the voting rights, a proportion of the
investment could take the form of preference shares. These would
offer a reasonable dividend yield, say 10°h, with rights to convert
into ordinary shares at a later date if certain conditions - perhaps
linked to profit performance - were met.
Taking into account each of the above factors, the restructured funding of
the company was calculated as follows (with % of voting rights shown in
right-hand column):-

E % of
ShareholderslDirectors Ordinay
Original holding of 5,000 shares @ £ 1 Shares
New shares issued on capitalisationof
directors' loans: 30,000 @ £1 30,000

BES Investor
New shares issued: 10,000 @ £1

Venture capital fund

New shares issued: 15,000 @ £1
Convertible 10% preference shares:
25,000 @ £1

Total external money raised

from new share issues
+ Medium term loan and hire purchase
facility secured on new plant
+ Additional overdraft facility
+ Support for Innovation' grant
Totalfunds raised
f % of
New investors - ordinary shares at 25,000
par value (£10,000 £15,000)

- preference shares

Medium term loadhire purchase facility
Existing overdraft
Additional overdraft (of which, £15,000 will be
repaid from the 'Support for Innovation' grant)
Case Study C

BUSINESS: Manufacturer of reinforced Fibre Composites Ltd.

plastic tanks & related - St. Helens
FINANCE: £40,000 Raised in 1986
PURPOSE: Start-up working capital
SOURCE: Private Investors BES Syndicate
LINKAGE: Local Enterprise Agency Community of
St Helens Trust
Based upon a personal interview and supplemented with information taken from:
'St Helens Business Expansion Scheme Syndicates' (Planning Exchange LEDIS
Review September 1986); and 'Start-ups; still a dearth of appropriate finance' in
the Financial Times 15110/85; and 'The Trust that turned Derek's plastic into cash',
(Daily Mail 21/10/87).

By mid-1985, Derek Brooks had worked for 5 years as a sales and marketing
manager for a manufacturer of reinforced plastic equipment used in
industrial applications. He felt that although the company was hoping for
an upturn in sales, it was not faring sufficiently well for it to be able to
sustain its manufacturing capacity into the medium-term future. In Derek's
mind, this could spell problems sooner or later and so he decided that he
would prefer to exercise greater control over his own destiny and would
explore the possibilities for setting up his own business.
He was familiar with the markets for process vessels in the effluent,
chemical and food processing industries and was convinced that there was a
niche for a small, but profitable and growth-orientated, manufacturer of
standard and purpose-designed reinforced plastic tanks, pipework and
ducting. Based on what minimum level of income he felt he needed, he then
drew up a simple plan, and started talking to some of the local banks.
Derek soon discovered that they would lend him a proportion of the money
needed, but that their contribution would be limited 'pount for pound' to
match Derek's contribution, and then only if it was fully secured. However,
in the process of looking for suitable premises, the local industrial
development officer (at the St Helens' Town Hall) suggested that he talked
to the local enterprise agency because they had access to an alternative
source of finance for smaller businesses.
And so, in July 1985, he approached the local enterprise agency, the
Community of St Helens Trust, to discover how they could help.
Lauliched in 1979, as one of the first enterprise agencies in the UK (q.v. the
directory), the Community of St Helens Trust was set up to provide a range
of free advice and counselling to help those thinking of starting in business.
But, being progressive in its approach towards small business support, it
also helped to establish the first of several local Business Expansion Scheme
(BES) syndicates to act as a source of that relatively rare commodity for
small firms - risk capital.
When the BES was first established in 1983, it was created to encourage
external equity investment in smaller firms. Much of the money raised
under the scheme was, and still is, placed through special BES funds,
though these funds have tended to favour larger-sized investments (ie. those
businesses seeking over £100,000); mainly for cost considerations
associated with investment appraisal and monitoring. Recognising that this
situation was of little benefit to start-ups or very small businesses, the Trust
endeavoured to rectify matters locally by sponsoring a local BES fund
(technically a 'syndicate' and not an 'approved investment fund') which
would provide firms based in or around St Helens with an accessible source
of relatively small amounts of equity capital.
From the potential investor's standpoint, the intention was that the
inherent risk of investment in small firms would be reduced by:-
a) spreading the investment across a portfolio of several firms, so that
a loss of one or two firms would not wipe out all the original
investment, and
b) improving the investee companies' prospects for survival by
offering access to the business skills and experience of Trust staff
and non-executive directors.
The general philosophy is perhaps best conveyed by David Boult, former
full-time Director of the Trust and still involved on a part-time basis, when
he says:
" I n thefirstyear when the business is most dij~ficultto manage,
the entrepreneur is likely to be least experienced. Thus, apart
from help in planning the business and ensuring provision of
sufficientfinance, a new start-up needs a considerable amount
of after-care."
" I t often happens that an entrepreneurplanning a new start-up
has both a good idea and a deep knowledge of the business he is
entering, but a poor plan which does not give the necessary
confidence to a would-be-investor. More time, more research
and the introduction of a more balanced management team can
often result in the plan revealing a real business opportunity.
The cost of preparing this plan may be daunting to the
entrepreneur. I t may require 100 or so hours of professional
help which he can ill afford. Most of the longer established
enterprise agencies are able to provide this help."
A first syndicate invited investors' subscriptions for investment during
1984185, but this was followed by further syndicates - one per tax year - for
the purpose of placing investments in subsequent years. Each syndicate has
around 18 investors and the total money raised each year for investment has
been in the range of £200,000 to £250,000.
The responsibility for syndicate management rests in the hands of a
management committee (comprising a chairman plus 3 members, including
the chairman of a six-strong appraisal committee) and the members - who
offer their services free,of charge to the syndicate - are drawn largely from
the corresponding syndicate's investors.
The members of the committee usually are businessmen having an
appreciable depth of managerial experience and responsibility, and
additional support comes in the form of stockbroking, audit, legal,
investment monitoring (via appointed part-time non-executive directors or,
latterly, non-executive chairmen) and investment appraisal services.
As part of a deliberate policy, the syndicates have been able to keep the costs
to investee companies relatively low (usually 2Y2% of the sum invested, in
contrast to anything ranging from 4% to 11% for most BES funds) as a result
of the investors agreeing to waive any rights to deposit account interest prior
to investment. The syndicates are also in receipt of grant-aid of from the
European Regional Development Fund to help cover appraisal costs. (As a
result of job losses in steel, shipbuilding, textile and clothing industries, St
Helens falls within an EEC-designated area for support and can receive help
under a special 'Business Improvement Services' Scheme).

The syndicates are interested in existing or new businesses which are or
could be: -
1) locally-based, ie. within a 10-mile radius of St Helens
2) operating BES-qualifying trades
3) seeking risk capital within the range of £25,000 to £60,000
4) prepared to offer a minority equity shareholding - typically 25% to
5) able to offer longer-term capital growth (dividend payments are
6) prepared to accept board-level representation - usually a part-time
chairman who receives a small fee from the investee company
A meeting was then arranged with Ron Halford, the Trust's Director, to
discuss Derek's sales and cash-flow forecast, which had been drawn up to
cover the first year of trading. In the ensuing discussion, it became apparent
that although there seemed to be basis for a viable business, the plan
required additional information in several respects. For example, the costs
for certain items had not been anticipated and his plan would therefore
require further work before it could be presented to potential backers.


For those businesses or prospective businesses which are broadly able to
match their criteria, the Trust formulated a set of guidelines to help people
present their proposals to the syndicate's appraisal committee. This applied
to Derek's proposal and the following format was adopted:-
1. An overview of the plan (ie. a one-page summary of the
2. The opportunity (for start-up or expansion)
3. Background including: [* = not applicable for a new company]
- History*
- Products, market, marketing proposals
- Management and personnel
- Recent financial performance*
- Facilities (buildings and plant)
4. Summary of financial forecasts (detailed assumptions and forecasts
in appendices) covering profit and loss accounts, cash flows, and
balance sheets for as far forward as is practical and meaningful
within the context of the project.
5. An assessment of the risks in the project and analysis of the
sensitivity of the forecasts
6 . The proposals for the structure of the management team and
employment levels in the project
The following items should be included in Appendices if
- C.V.s for key employees and management team
- List of major customers/suppliers
- References from customers
- Detailed assumptions and forecasts (see 3. above)
- Detailed product information
- Other relevant detailed information
Over a period of several weeks, the proposal was discussed sector by sector,
and gradually the full plan began to take shape. The Trust had a computer
and software on which cash-flow figures could be calculated, and changed,
with a minimum of effort and this was used to check Derek's revised
The manufacture of reinforced plastic tanks imposes certain constraints on
the type of premises which are suitable eg. a detached building with external
storage space (to store moulds, etc) would be required - the risk of fumes
from manufacturing processes would exclude a location in the middle of a
housing estate, and since some customers preferred suppliers located near
to the motorway network, quick access to the M6 motorway was considered
important. For these reasons, and also the desire to locate within an area
which would qualify for Government grant-aid, the local Industrial
Development Unit (as mentioned earlier) was approached and the staff were
found to be helpful in providng a comprehensive list of potentially suitable
local industrial premises.

Established businesses can rely on historical data to help predict with
greater confidence what lies in store over the next 12 or 24 months - a luxury
that new businesses usually do not enjoy. Thus, the absence of a track
record can deter even the most enthusiastic investor.
This fundamental problem of uncertainity goes hand in glove with a very
real risk of running short of money and these difficulties were recognised
from the outset at the St Helens Trust.
David Boult says:
" I t is crucial that enoughfinance is made available in order to
ensure that the business is not prevented from becoming viable
because, predictably, there are deviations from the forecasts in
the plan."
"The early months are dangerous times for a new business. I n
the first year, variations from the sales forecast may be great,
perhaps as much as 50% either way. I t is probably only in the
third year, when the business has an established place in the
market, that variationsfrornforecast come within a more easily
manageable bracket."
"Entrepreneurs are naturally optimistic -perhaps they would
not be entrepreneurs otherwise - and allowances must be made
for over-optimism. I t is possible to deal with this problem by
ensuring the plan is fully tested using financial modelling
techniques on a computer. Variousparameters can be flexed on
the computer and their impact on profit and cash-flow readily
assessed. Judgement of the financial resources can then be
made so as to reduce either the risk of failure or the need to
search for extra finance at a later date."
" I t is always difficult to obtain second stage finance. Bank
managers are not over-sympathetic with those whose
performance is below forecast and who are short of cash, even
if the order book has by then become healthy and success
appears to be just round the corner."
Although the Trust's business advisers were only too willing to help in
developing a sound business plan for consideration by the active syndicate's
management committee, it was made clear to Derek that the decision
whether to place an investment, or not, rested solely with the syndicate.
This 'arm's length' approach is intended to avoid a conflict of interests
which might adversely affect either party - namely, the investors or any
prospective investee company.

Another point brought out was the ultimate need for an 'exit route' -that is,
an opportunity for the investors to sell their shareholding and realise the
increased value of their investment. This is important, because, otherwise,
the investors could easily find themselves holding an investment in an
unquoted company with no ready market for their shares. There are several
possibilities, and these include:-
the outright sale of the investee company;
the sale of shares to other shareholders in the company or to a third
by selling the shares back to the investee company itself; or,
via a listing on a stock market, such as the USM.

After some 200 hours of research and planning by Derek (but with only
negligible out of pocket expenses), it was felt that he was in a position to put
his plan to the St Helens syndicate. Although the basic business concept
remained largely unchanged, the discussions with St Helens Trust
highlighted certain weaknesses and showed where supplementary
information was needed if it was to stand a chance of finding support from
the BES syndicate. Proposals from businesses seeking backing tend to
arrive in various stages of development and this sometimes necessitates a
certain amount of toing and froing between the Trust and the Syndicate; a
generalised appraisal route for St Helens is shown overleaf.
- Appraisal Route -

Proposal or

Refer to Trust Business plan
to help presented I

develop plan

, Testing of plan on
Trust's computer

First response
to client by
Committee Chairman

Submit plan to

Committee reviews
+ I

and reaches

Return for

- -
of plan


'Trust' = Community of St Helens Trust

'Committee'= Appraisal Committee, St Helens BES Syndicate
Following a preliminary discussion, held in November 1985, and two
further meetings, the management committee decided that Fibre
Composites looked like a viable proposition and agreed to invest in the
proposed business. A formal offer was made in February 1986 and it was
planned to start in earnest at the beginning of April. The comqittee had
members with stock-broking and accounting experience and looked at the
proposed business from all angles: 'where was the business going to come
from?', 'how are you going to be able to manage the company?', and so
forth. Derek found the investigation "....vey detailed and very
probing.. ..".
It was agreed, following some bargaining between Derek and the syndicate,
that, in exchange for 35% of the ordinary shareholding (the equity), the
syndicate would invest £40,000 in the proposed business. Derek himself
was able to raise £20,000 and would acquire the remaining 65% of the

In these circumstances, the voting rights are apportioned according to the
equity owned, and this meant that Derek held a majority, and thus
controlling, shareholding and that the syndicate held 35% (what the Inland
Revenue would term an 'influential minority shareholding'). A shareholder
having 25% or more of the shares can block a special resolution for the
liquidation or disposal of the company and this arrangement was to help
protect the interests of the BES investors.
The board of directors would comprise:- Derek Brooks as Managing
Director, Jean Brooks (Derek's wife) as Directorlsecretary, plus Edward
Wilson (on behalf of the syndicate), as non-executive Chairman.
Fibre Composites Limited, then, were ready for a flying start - or so they

The predictions for their anticipated sales were felt to be somewhat
optimistic by the Trust's counsellor, although Derek didn't feel so at the
time. Turnover levels for each of the three years following start-up had been
forecast and a figure of £240,000 had been confidently predicted for the first
year. However, due to an active trading period which did not manage a full
12 months, the first year's turnover fell significantly short of expectations.
The reasons for the slow build-up were several-fold.
They had identified suitable premises and planned to move into them at the
beginning of May 1986. However, they were dealing not with the landlord
directly, but with another business which was sub-letting the premises. As
is usual when leasing property, the terms of the lease required the occupier
to accept ~ e r t a i nconditions. In this instance, the proposed building had
some structural problems and Derek felt that any potential liability for
repair should not rest upon Fibre composites. It proved impossible to
persuade the (sub-)lessor to vary the conditions and because of these
contractual difficulties (which were more complicated than has been
indicated here) the search for suitable premises had to start again. This
meant that Derek then had to spend time looking for alternative premises -
at the expense of other time that had been set aside for a concerted
marketing and selling campaign.
Not everything was against them though. In his previous search, Derek had
identified one building as being almost ideal for his requirements. At that
time the building was already occupied by another business but when he
encountered his subsequent difficulties, Derek discovered that the
ococupiers had since been asked to vacate the premises, which rendered
them available for occupation. The new building still needed some
modification to make it suitable for their needs - telephones had to be
installed, stationery reprinted, and so on- and by the time they were able to
concentrate on selling, the holiday period was upon them and it was then
proving difficult to make contact with prospective customers. In their
experience, they had discovered that sub-leasing appears fraught with
problems, and these problems, inevitably, had delayed the start-up date.
Edward Wilson, Fibre Composites' chairman, thinks the problems of
finding business accommodation - even in an area where there seems to be
ample choice - are sometimes underestimated:
"Finding premises for any small business, let alone one in
manufacturing with special requirements, can entail much
more than you might atfirst imagine. The legalities have to be
considered, and the lead time before the selected premises
become available for occupation can be as long as a year".
Another opportunity for introducing a delay would be where difficulties
arise with compliance with local authority planning regulations. A lapse of
several months is not unusual before approval is received.
" T o get all the people concerned -your solicitor, the landlord and his solicitor, the
local authority, the fire seruice - to meet a set deadline," says Derek, "is virtually
Track record, lack of:
After two years' trading, Fibre Composites has managed to win a number of
better-known companies as customers - including ICI, United Biscuits and
the Wellcome Foundation. The business's turnover is now running at &4m,
it produces a range of standard and customer-designed products, and it
enjoys the relative comfort of having work in hand. However, the initial
demand, and therefore the workload, proved intermittent. Nevertheless,
this is the sort of problem that any manufacturing start-up can encounter
and one which should be considered beforehand.
In the absence of some sort of a track record, a new business may have to
rely upon selling products which, to date, exist only on paper. This is not to
be treated lightly: after all, why should a company which is used to buying
goods or services from proven suppliers suddenly switch to someone who
claims they can offer the same (or better), but who has no proof to
demonstrate that he actually could 'deliver the goods'? This is potentially a
'Catch 22' problem: you can only develop a track record after having sold
and manufactured the products, but you are unable to sell the products
(especially with larger value items where the manufacture of samples would
be prohibitively expensive) until you have established an acceptable track
Derek was aware of this pitfall and has managed to obtain a written
intention from a prospective customer who also intimated that the company
would probably buy tanks from Fibre Composites at a rate equivalent to
60% of the first year's projected turnover. This expression of intent was
given (and taken) in good faith, but, for reasons which Derek has still not
been able to fully ascertain to this day, the anticipated business from this
potential customer just never materialised.

Government Aid:
At the time of Fibre Composites' start-up, the Government operated a job
creation initiative, through the Department of Trade and Industry, in the
form of Regional Development Grants. (RDGs have since been phased out
as part of the 1988 'Enterprise Initiative'). These were available to
qualifying businesses based iin selected areas of the country, such as St
Helens, and provided grants which helped towards the outlay on elilgible
items of capital expenditure. The application procedure was intended to be
straight-forward (the DTI has described these as 'automatic grants'), but in
this case, the company encountered significant delays in the receipt of their
Their application was submitted in April 1986 and the original premises
were registered as the location of the business. They were intending to claim
for the capitalised value of the lease (on the replacement premises) in the
grant application but, as a condition of grant-aid, a copy of the full
agreement needed to be submitted before any grant could be paid. As it
transpired, Fibre Composites were unable to acquire and submit this
information until November 1987, some 18months later. Final grant claims
needed to be submitted within 12 months of project start-up, and so the
DTI determined that the project fell outside the terms of the RDG scheme
and, initially, rejected their application.
Fortunately, the problem of ineligibility has since been resolved and they
have received £27,000 to date; a useful contribution which Derek and
Edward readily acknowledge has helped to restore the capital base of the
company. However, the delay has been reflected in increased borrowing
charges from the bank (as a result of the overdraft being extended to
£48,000) and meant that expenditure on items which could have helped
with the business's earlier expansion - such as on a new brochure - had to be
shelved for some time.

Bank borrowing:
At the outset, an overdraft facility had been agreed at a small branch of one
of the clearing banks (the then manager offered to waive a fee of £500 for
setting up the new facility), but the slow start-up and low initial turnover
meant that the overdraft needed to be extended. As the delay in receipt of
the grant increased, the bank's confidence in the business waned, and since
the overdraft had reached £14,000, the business was asked to reduce its level
of borrowing to £3,000. Although the manager had recently retired and had
been succeeded by a younger and personable replacement at the branch, it
was felt that the account had been identified as a problem account by the
branch's regional office and that pressure was being applied for the lending
to be cut, even though a personal guarantee of a greater amount had been
taken by the bank as security.
After reviewing the situation internally and feeling the bank was indicating
to Fibre Composites that they didn't want the business, they decided to find
another bank. Edward Wilson knew the manager at the branch of one of the
larger clearing banks, at which the manager had a higher level of lending
authority*, and a facility of £24,000 was agreed (£14,000 being secured
against Derek's house, with the balance unsecured).
[* The managers at branches of the clearing banks have discretionary limits
for secured and unsecured lending, and approval must be sought from a
higher internal authority before a borrowing application for loan above these
limits can be sanctioned. The limits tend to vaty according to the size of the
branch and are also dependent upon the status and experience of the
individual manager. For example, a smaller branch could have a 'secured'
lending limit of say £50,000, whereas a larger branch might be £500,000.
The 'unsecured' limit is usually much lower.]
With the benefit of hindsight, Derek says:
"There is a tendency to accept the bartk manager's view almost
as gospel, especially where the language of banking and
finance is not as familiar as one might prefer. However,
cheapest is not necessarily best, and it can be important to find
a manager who understands and appreciates the nature of the
businessyou are in. Some bank managers understand the more
commonplace types of business - such as retailing or running a
local pub - but a good number would appear to have a limited
appreciation of the complexities associated with higher
technology manufacturing businesses. This limitation may be
critical when the business falls on dgficult times."

For any business, especially for one in the process of starting up, where
circumstances canchange very rapidly, it is important to keep a constant
watch on the business's day-to-day performance. Thus the St Helens
syndicates require, as a condition of placing any investment, a quarterly
report covering the following points:-
1. Financial a) Profit performance and comparison
with budgeted figures
b) Liquidity
2. Operational a) Sales and marketing including
comments on margins
b) Costs and overheads
c) Other related issues as appropriate
3. Forecast a) Short-term sales, profit and cash
b) Forecast to year-end
4. Other key issues
From the outset therefore a "simple, but effective" management accounting
system was implemented to help them exercise close control over the
business. The format for their systems are shown on the following pages.
(1) Monthly Operating Statement (Profit & Loss Account)
Budget Actual Budget Actual
& % & % & % E %
Invoiced Sales
Variation in Work-in-

Value of Production [A]

Materials Used
Direct Labour & NHI

Direct Costs [B]

PROFIT: [A] - [B]
(Materials & Labour Capitalised)

Sales, Administration and Distribution

Directors' Salaries
Car Leasing
Professional Fees
Vehicle Costs

Total [C]

[AI - [B1- [Cl

less Interest & Bank Charges


(2) Balance Sheet (Updated monthly)

FIXED ASSETS: Cost Depreciation Book Value

Plant & Machinery
Furniture, Fixtures
and Fittings


Materials, Tools & Stores
Finished Goods and
Cash at Bank


VAT, Tax & NI


ASSETS: [2] - [3]

[l1 + 121 - 131

Issued Capital
Share Premium
Profit (Loss)


The monthly figures are usually completed and ready for internal use within 7 days
of each month-end, and a set is also duly supplied to the company's bank.
Based on the early experience with the St Helens BES syndicates, there
appeared to be a number of potential problems arising from representation
via a non-executive director. For example, such a representative:-
* may not spend enough time with the business;
may be seen as a hindrance by taking-up too much time;
may have no involvement in most of the important decisions;
may be unable to create disciplined management of the
In the light of this experience, the representative's role was subsequently
enhanced to that of a non-executive chairman. NOW,he:-
* has direct access to whoever does the accounts;
organises monthly control information;
takes part in major decisions;
checks important quotations submitted by the company;
can instil disciplined management of the company.
In Derek's experience at Fibre Composites, he has found that another
perspective is invaluable in what can be a lonely existence. Like line
managers at most other larger businesses, he never had to deal with the
company's bank in his normal day-to-day business. Whereas Edward
Wilson (the non-executive chairman), originally had been trained as an
accountant and was, until his retirement three years earlier, the Managing
Director of Lantor (UK) Ltd, in Bolton - part of a manufacturer of
non-woven materials (jointly owned by Tootal Group plc and West Point
Pepperell Inc). His experience and contact at the new bank proved to be of
almost immeasurable value when the business needed a solution to the
overdraft problem, and he also helped to set up a financial monitoring
system for the business.
Under the rules of the Business Expansion Scheme, investors claiming tax
relief are not allowed to receive remuneration from the investee company,
but, as a representative of the syndicate, Edward spends around half a day a
week at Fibre Composites to check how things are progressing and to see
whether he can help in any way.
External investors:
Did Derek Brooks have any sense of foreboding before actually getting
involved with external investors?
"Not really. A t m y previous company we had non-executive
directors and I was already aware of the type of involvement
that they had. Also, I belong to a school of thought that
believes that it you didn't have the necessary skills and
wherewithal yourself, then you went out and acquired
Under the BES, any single investor is not allowed to acquire more than 30%
of the ordinary shares in any case, but as a member of a BES syndicate and
an investor in Fibre Composites himself, Edward Wilson says:
"The larger share of the business should go to the entrepreneur
himself, the person who is doing all the work; that is only
right. "
Also, the syndicates, comprising a number of small business investors, have
the potential - where further investment is felt appropriate - to provide
extra finance for investee companies.

Case Study D

BUSINESS: ThermoplasticWelding Repair Service Motaplas UK Ltd

FINANCE: £30,000 Raised in 1987
(plus a further investment later in the year)
PURPOSE: Expansion capital
SOURCE: Public Sector Fund Kent Economic Development
LINKAGE: Via 'VOICE', an employers organisation active in the
Swale area

The Kent Economic Development Board (KEDB), based in Maidstone, is a

public sector initiative and was established in 1984 by Kent County
Council. It employs 18 people (end 1987) and relies at present principally
upon local authority funding. In their own words, it was created:
". .. to cater for the needs of the businessman, and to provide
practical help, expertise and advice to enable companies to
establish themselves and to prosper. The Board aims to lead
and co-ordinate endeavours across the County to achieve the
maximum effective deployment of Kent's human, material and
community resources."
Among its primary objectives, the KEDB aims:
"..a T o encourage and support the start-up of new enterprises,
large and small, within the County.
l T o give priority, in the generation of economic activity, to
the expansion of long-term employment opportunities
within the County, particularly in the identified action
l T o ensure that the industrial environment in Kent is made as
conducive as resources permit to the development and
growth of sound economic activities."
The Board adopts a multi-faceted approach to help achieve its objectives
and - in addition to other forms of assistance - it:
"..a Advises on potential sources offinance to benefit existing or
potential Kent enterprises and operates its own Venture
Capital Fund.
Aids and reinforces current local initiatives to further the
development of new and small businesses throughout the
County, and provides backup in areas such as marketing
support, export advice, technological development and
financial possibilities.
l Assists in the identification of suitable sites and premises for
those businesses seeking to expand within Kent, and those
moving their operations to the County, whether from
overseas or from other parts of the country.
l Provides advisory and support services for industrial and
commercial enterprises and organisations, to sustain
profitable expansion."
The KEDB provides an information service, and it has produced a number
of guides -more for the benefit perhaps, of the smaller business - including:
'Advice and assistance for small firms', 'Financial assistance for business',
and a booklet entitled 'How to be Your Own Boss in Kent' (to assist with
such matters as marketing, raising money, premises, keeing records,
employment and so on).
Though for Steve Parsloe, the 25-year old owner of Motaplas U.K. Ltd.,
his main need towards the end of 1986 was some additional finance, and
thus his over-riding interest in the KEDB lay in their venture capital
After leaving school, Steve trained for a couple of years as a vehicle
refinisher; he then moved on to a paint factoring company, where he gained
practical administrative experience as an assistant manager. This was
followed by a promotion, within the same business, to the post of Area Sales
Representative for Kent.
His experience also included demonstrating a hot-air welding gun (whilst
selling a range of garage equipment), and he soon found that friends were
asking him to do small repairs to plastic vehicle parts - such as
accident-damaged car bumpers and motorbike fairings - in his spare
This type of repair technique originated in Sweden (and later developed in
Denmark), and the demand for this type of work arose for two main
(a) An increasing trend by vehicle manufacturers to use lighter and more
durable materials in the production of certain components for cars and
motorbikes. New cars, for example, were starting to be routinely fitted
with injection-moulded plastic bumpers, sometimes textured and
coloured to match the bodywork.
(b) The high cost of a complete replacement which was required when such
a component had been damaged in an accident. Repairs to fractured
items were, at that time, weak and unreliable, and the average plastic
car bumper could easily cost £60 or more; similarly, the fairing on a
sports bike would cost somewhere between £200 and £400 ko replace.
However, this new repair technique could offer a significafit saving -
reportedly, as high as 60% - on the cost of a new component.


In a short space of time, the demand increased to such a level that Steve
Parsloe decided to set up his own repair business, and by November 1985,
Motaplas U.K. Ltd. had been formed.
They were soon offering an exchange service on Ford and Leyland
components - with as many as a 1,000 bumpers awaiting repair at any one
time - and, as a complementary line of business, paint was imported for sale
to the motor trade. The repair business served both the trade and retail
market, offering a saving of around 45% of the retail cost of the new parts
and a turnround of 7 to 10 days.


However, a growing population of vehicles having components which
required a costly replacement would ultimately be reflected in rising
insurance premiums. Accordingly, the insurance industry were keen to
minimise any adverse effects which might accompany this trend and, in the
early 1 9 8 0 ' ~experimental
~ plastic welding was carried out at the industry's
vehicle repair research centre at Thatcham, Berkshire. Using fairly basic
equipment, the research achieved only limited success, but, with the advent
of improved techniques, the insurance industry's interest in plastic welding
began to re-awaken.
Since the insurance companies were clearly influential in determining
whether or not damaged vehicle components should be replaced or
repaired, Steve recognised that an important key to progress lay in receiving
the support of the insurance companies. Correspondingly, he presented the
cost benefits to a number of them, and he subsequently managed to obtain,
by early 1987, the formal acceptance of Motaplas's plastic welding service
from 10 insurance companies.
At that time, the business was operating out of a small industrial unit at
Aylesford, near Maidstone. Though it was becoming apparent, that if the
company was to be able to take full advantage of the new repair technique,
some additional external finance would be needed. An amount in the region
of £60,000 was initially required, and knowing of the KEDB's venture
capital fund, Steve decided to make contact and investigate the fund at close

KEDB's investment fund - a wholly-owned subsidiary called Kent
Investments Ltd. - had been established: "... for the purpose of promoting
economic growth in Kent by way of equity investments" within the range of
£20,000 to £100,000. The fund seeks a return described as "usually low
initially, higher long termJ',and, like many other public sector sources, it will
not subscribe to a controlling equity stake (no more than 30% of a
company's equity). Investee companies are encouraged to buy back the
investment stake within 5 to 7 years, and whilst the fund's management are
interested in most industrial sectors, "special circumstances would be
required in the case of retailing, building and construction, farming and
transport ".
As a condition of investment, they usually require a monthly progress
report and quarterly management accounts, and selected companies are
required to pay an arrangement fee of typically £500 to £1,000 (or more for
particularly complex cases).
Examples of the fund's equity investments include (each, coincidentally,
£25,000):- a distance learning company providing study modules for
science technicians; a manufacturer of soft toys; and, a manufacturer of
enclosures for the electronics and defence industries. For businesses
requiring larger investments, it will consider joining an investment
consortium. Examples of such collaboration include: - an investment of
£27,000 (as part of a total of £807,000) in a company manufacturing
scientific and analytical equipment, and £200,000, including a rights issue
(as part of an equity and loan package totalling £4.2m for a rough terrain
vehicle manufacturer).
Applications for finance
Having once approached Kent Investments in the latter part of 1986, Steve
found that they (like all investment funds) required some preliminary
details to help them assess whether or not the business fell within their broad
investment criteria. A standard form is typically used to gather such
information, and it took Steve approximately six weeks to provide the
necessary details - which, in his case, were expanded to include a business




NAME: ....



198415 198516 198617
SALES: ....


-1- Continued
I F SO HOW?: ....



NAME: ....

A): ....
B): ....
&c ....







The money being sought was to be used to redevelop their existing premises
and to expand into larger premises, which would include new training
facilities. It was also planned to develop several repair centres throughout
the South-East of England.
Steve discovered that investment applications were appraised by a management
team which comprised 2 full-time members: Robert Emerson FCA, as
Managing Director - experienced at director level of several major
organisations (latterly at Thomas Tilling Group); and, Ray Horner AIB, as
Chief Financial Executive - previously a Business Advisory Service
Manager with Barclays Bank and having an extensive involvement with
small and medium-sized businesses. Applications were subsequently
approved by the Board of Kent Investments Ltd., comprised of leading
Kent industrialists. 124
On the basis of the preliminary information supplied, a meeting was then
arranged to discuss his plan in further detail.
The plan indicated that the already growing use of plastic components
within the automotive industry was on the verge of significant expansion
with the anticipated introduction of the 'plastic car'. Also, plastics were
finding applications within other industries - for example, within
agriculture and shipping - and Motaplas would be investigating the
possibilities for extending their repair service beyond the automotive
industry. A current assumption indicated that the motorbike repair work
would constitute 50% of the total sales value, and, with the backing, the
turnover,was capable of substantial growth over the coming 5 years.
Early on in the discussions, however, it became apparent that if Steve was to
stand any chance of success in gaining the financial backing, then he would
need to demonstrate his commitment by increasing his own stake in the
business. This was achieved when Steve agreed to sell his house to increase
his own shareholding in Motaplas (and this, in turn, encouraged his bank to
extend the company's overdraft facilities).


Following further deliberations, it was decided that the business would
represent an appropriate investment for KEDB. An investment offer letter
was issued, and, in exchange for an investment of £30,000, the agreed
shareholding would be:

Ordinary Voting Preference Total No.

Shareholder Shares Rights Shares Shares Held
Steve Parsloe 25,000 70% 25,000
Kent Investments 10,714 30% 19,286 30,000

TOTAL 35,714 100% 19,286 55,000

The nominal value of each share class would be £1 and the full designation for
the preference shares would be 'cumulative participating preference shares'
(entitling Kent Investments to cumulated dividends - if they were unpaid in
earlier years - and ahead of any dividend payment on the ordinary shares, and
also, the prospect of an increasing percentage dividend in later years).
Including Steve's contribution (but excluding the initial start-up share capital),
the total amount raised was very nearly £55,000.
KEDB's investment was protected by a comprehensive investment
agreement, which can be expected as a general rule, and this initial investment
was completed in February 1987.
By the end of 1987, it became apparent that further funding to consolidate
production in a new location would be necessary. The KEDB was
instrumental in helping to raise an additional equity package totalling some
£139,000, in which the KEDB participated to the extent of a further
£30,000. Motaplas's board was also strengthened upon the completion of
the new investment allowing Steve more time for marketing and production

Case Study E

BUSINESS: Publishers Transit Publications Ltd. - London

FINANCE: £50,000 Raised in 1986
PURPOSE: Start-up: Working capital
SOURCE: Private Investors BES Syndicate
LINKAGE: Personal Contact Landlord of business premises
Adapted from "The Long Journey of Clive Lewis", written by
Kenneth Roy and first published in 'The Journalist's Handbook'
Autumn 1986

[In two previous issues of 'The Journalists Handbook', 1l new magazines had
been reviewed. Of these, 2 ('Best of Health' and 'Review') had already died, and
a third ('Woman's Review') was looking urgently for a saviour. A recent
remarkable level of start-ups in the magazine business had its inevitablefi7ip side:
thefatality rate was high.
Of the remaining 8 new titles reviewed, nearly all were protected, for the time
being at least, by having big-company strength around them. The notable
exception, and still above ground, is 'On The Move', a magazine for public
transport users published by the unknown Transit Publications. Launched in the
winter of 198SI86, the bi-monthly 'On The Move' is now into its eighth issue.]
Transit, operating from a single room in the South Bank Business Centre,
Battersea, turns out to be Clive Lewis, a former features sub-editor on 'The
Times', who is 'On The Move's founder, publisher, editor, telephonist and,
for the time being, advertising manager. For Lewis, the notion of running a
magazine took shape as one of those "nice warming ideas" most journalists
have from time to time, but then discard in the cold light. In Lewis's case,
the idea wouldn't go away.
It first struck him about 15 years ago, when he joined the long-suffering
crowd of suburban commuters into London, that no one seemed to care
how travellers were treated. How about a magazine about the world of
public transport - but aimed firmly at the consumer? Lewis reasorled that it
would offer detailed information about when to travel, where to get the best
buys, how to connect, a sort of Which? of the booking office.
"I didn't think of the idea in commercial terms", he admits. "It sprang from
a purely social concern. Then Mr Murdoch arrived at The Times, and I
thought it might be the time to clear the furniture in my mind and see if the
idea would stand up."
He resigned, took up freelancing to make ends meet, but spent most of his
tirnw working out a way to get his magazine launched. It was three years'
hard labour ("If you are going to do your work properly, you'll have to be
prepared to wait a long time").


With the help of friends in business journalism and the City, he stitched
together a detailed business plan. He went to see "dozens of people, no,
hundreds of people, people who rejected it outright, people who said it's a
good idea BUT ..., people who promised to get back to me but never did."
He was even invited to a city gathering where he was invited to 'sell' the
project to a group of would-be investors. It was a harrowing experience, he
remembers, and nothing came of it [Clive Lewis's experience at a LEntA
investors' meeting is described later, as an Appendix].
Quite undeterred by the sound of doors slamming in his face, he managed to
interest a group of accountants (his landlord, actually) in the idea. They
were in touch with a BES syndicate who put in £5,000-£10,000 apiece. He
was off.
But only just. He started 'On The Move' with less money than he needed,
and having brought out the first issue, found that he had just enough to
finance a second.

Did the inaugural issue sell as well as he had expected? "No," Lewis says
flatly. "We had a large order from the trade because it had been hyped. But
the returns were disappointing. The magazine was not right
presentationally. It looked too much like a trade magazine, and I found I
had been relying too heavily on my previous experience in journalism,
applying newspaper logic. It was all too stiff looking. Instead, it had to be
spectacularly different. Also, I had very little money to spend on publicity,
and I did suffer from that."
A trade magazine, however boring to look at, would have been an easier
proposition for a new, independent publisher with severely limited
resources. It would have been simpler to identify the market and cheaper to
reach it. Instead, 'On The Move' was aimed at the amorphous mass of the
country's public transport users, and expected to sell on the news stands
already groaning with titles.
After the launch, Clive Lewis took off on a tour of the nation's points of sale.
This was not particularly encouraging. In Birmingham, he found 'On The
Move' in the gardening section. Sometimes, it was just visible, peeping out
behind the stacks of 'Good Housekeeping'. Occasionally, it was not to be
seen at all.
"We are not competing against other transport magazines, but against all
other magazines," he says cheerfully.


He thinks his distributors do a good job for the magazine. "They're a big
chain, and they'll stay keen if you give them the right level of business. They
are very supportive, but of course they have lots of titles in their lockers -
and at the end of the day, its the managers of individual shops who decide
how many copies to stock or whether to stock it at all."
Lewis now hires a designer to give 'On The Move' extra impact on the
magazine rack. It is a professional job on a low budget: just enough in the
kitty to put full colour on the covers and some spot colour inside. At
90 pence, the 50-page AprilIMay number, packed with facts and figures, is
good value. But just getting the title known is an immense marketing
Subscriptions might be a long-term solution. Already, he has more than 500
in the bag at £5.40 (post-free) and many of his regular readers are notably
communicative. "It is the sort of title that brings lots of letters," says Lewis,
"people who think it's a marvellous idea and why hasn't it been done before.
Then we get inquiries, like the one from the lady in Ayrshire who wanted to
know about cheap air flights to Guernsey. We don't really have the
mechanism to deal with the sort of thing - but we did get a sub out of her !"
At present, though, the subscription list represents only a tiny fraction of
what is needed: a sale of at least 15,000 to convince advertisers and make the
project viable.
Recent breakthroughs have given Clive Lewis fresh inspiration. Two bus
companies are buying 'On The Move' in bulk and using it as a free magazine
for their passengers. And it has become the first magazine to be sold in
London Regional Transport information centres, giving a useful boost to
sales generated by the normal news trade outlets. Lewis believes that
diversification of this kind is vital to the magazine's survival.
'On The Move's owner/driverlconductor finds time, or lack of it, his main
enemy. "Two months between issues seems a long stretch, but it is nothing.
My hours are nine in the morning until nine or 10 at night and at weekends I
take my work home. There are times when I feel very inefficient because I
am overworked. One of the the problems is adhering to schedules. If you
don't hit deadlines, you start to lose credibility. We skipped a month
becahse we had to move offices. The news trade lose interest."
Lewis's solution is to lessen his editorial involvement in the business. He
has appointed an assistant editor, Anne Rurnmey, deputy chief sub-editor
of 'Options' magazine. Her appointment allowed him to step back from the
day to day editorial grind and concentrate on the publishing operation.
Having lost his space salesman some while ago, he has been flogging
advertising and finding, to his surprise, that he rather enjoys selling and
doesn't find it too difficult.
However, a look at the advertising content of the latest issue shows plenty of
scope for improvement. About eight pages out of 52 are devoted to ads, and
most of the space is taken by English bus companies. Lewis is candid about
it: "Our survival is due to the goodwill of the bus companies and, to a lesser
extent, the ferry operators." British Rail are conspicuous by their absence
from the schedules; likewise, the airlines are nowhere to be seen. Lewis
contrives to remain fairly philosophical in the face of these

He would like to go monthly, "it's a natural monthly, really", but is worried
that there might not be the advertising to sustain 12 issues a year. Against
that, however, greater frequency of publication would allow him to spread
overhead costs. It is all part of the delicate balancing act of the small
publisher, a role with which Clive Lewis is now very familiar.
"You start as a journalist and you end up as a businessman," he says. But
there is still in his character and outlook a strong element of the social
concern which gave birth to 'On The Move'.
"The magazine is basically about information, but views give an edge to it.
It is also about the quality of life. We are a small island. The logic is that if
we let market forces dictate transport requirements, we will end up with
spaghetti junctions all over the place."
'On The Move' deserves to win. It is bright, well-researched, admirably
written, authoritative on its subject. But, even after 15 years, Clive Lewis
has still to find out for sure whether social concern can be married to
commercial reality. "The going is tough," he says. "We're still not making
money, but we're getting close to it now. And with every issue, the
magazine finds a clearer way of getting its messsage across."
The start of 1988 saw signs that the hours and years of endeavour were
beginning to pay off. Plans were laid to make 'On The Move' monthly from
May and the listings heart of the magazine, called 'Fare Check' was being
developed as a separate, three-times-a-year magazine available from
newsagents. As a further boost to confidence, the British Tourist Authority
is to make 'Fare Check' freely available at its 26 enquiry offices around the

Case Study F

BUSINESS: Component Kit-car Manufacturer Tripos R & D Ltd

- London
FINANCE: £40,000 Raised 1984- 86
PURPOSE: Start-up: Working capital for production and marketing
SOURCE: Private Investors via Synergy
Holdings Ltd
LINKAGE: Specialist Publication Venture Capital Report
With extracts from 'Routes to Success' and
'Venture Capital Report' -see Further Reading

In 1982, Laurence Abbott, who is an architect and sports car enthuasiast,
decided that he would build himself an equivalent of the Caterham 7 kit car
(perhaps better known as the Lotus 7), but using the most up-to-date
technology for running gear and suspension, and packaged in a superbly
elegant body. At that time he worked as a partner (and consultant) in a
3-man architectural practice, Tripos Architects, but recent experience
included two year's work with Fiat's IDEA team in Italy designing an
all-plastic car-of-the-future. Once his idea had been discussed with the
other Tripos partners, Rodney Gordon and Ray Baum, they warmed to the
project and quickly became involved too. At the time, they reckoned that a
prototype would cost about £15,000 to build.
Having raced cars of all sorts himself for 30 years, Laurence Abbott knew
many experts to whom he could turn for specialist advice (as well as being a
considerable expert himself, he has a collection of sports cars which he
rebuilds and races, including two Aston Martins and two Jaguar E-Types).
For example, the current chassis and suspension was designed by Mr.
Abbott and Bob Egginton, whose company, Automotive Systems
Development, a specialist supplier to the motor racing industry with a
reputation for producing the highest quality work, and with its own
Formula Ford racing team.
Throughout, the intention was to produce a no-frills, but elegant,
high-performance sports car with adjustable suspension so that the car
could be raced or used on the road. The body would be moulded from
self-coloured glass reinforced plastic ('GRP' - which meant no painting or
finishing) by Protoco, a specialist moulder in London, and the moulds
would be built to produce 100 to 200 body shells before replacement would
be necessary.


After two years' work, the Tripos team were so pleased with their design
and with the comments of friends and like-minded enthusiasts that they
decided to exhibit the Tripos R81, as the car became known, at the May
1984 Classic Car Show (held at the National Exhibition Centre,
Birmingham) to test public reaction and to see whether there might be
sufficient demand to warrant limited production.
The results exceeded their expectations; great interest was shown by the
public and motoring press alike, and the promoters received substantial
coverage in the motoring press, of which the quote below is an example
(from Kit-Car, July 1984):
"The Tripos has beautifully smooth lines reminiscent of a
1960's racer: the mechanics, however, have benefited from
much more up-to-date engineering."
Originally designed to take an Alfa Romeo engine and gearbox, it was
decided to redesign the chassis to take Ford components, which would give
buyers a much greater range of engines and widespread service locations.
Next, though, came the problem of raising finance to support the car
development. With the benefit of advice from a variety of sources,
including their accountant, the consensus of opinion emphasised the need
for a business plan.
In the words of Rodney Gordon:
" W e knew we could win. W e had the right product, the right
people and the will. W e also knew that we had to utterly
convince potential investors of these facts by producing a
business plan as thorough and professional as any strategic
plan ever produced."

" I t was not only important that it should contain a full

evaluation of the product, the cash-flows, the projected profit
and loss accounts and balance sheet, the marketing strategy etc.
etc., but that the overall presentation and residual impression
should do justice to a Dr. Goebbels. This had to be a
masterwork of propaganda."

" I t took us six months of burning the midnight oil, of draft and
re-draft, in which all three of us (Rodney Gordon, Laurence
Abbott and R a y Baum) were involved, each undertaking an
aspect that was our individual forte, each listening to the
criticism of the others, and all of us obeying the word of the
Oracle (our accountant)."

Their research showed that while there were over 100 component or kit cars
made in the UK, the promoters believed that only about 10 were even
remotely comparable to Tripos. Of these, the nearest was the Caterham 7. It
was planned to sell the Tripos R81 in component form only, since this
avoided the need to obtain Type Approval, and the intention was to offer 3
kits in varying degrees of completion, ranging from £2,500 to £6,000.
The R81 standard kit was to be sold at £4,500, the same price as the
Caterham 7, of which, the promoters believed that about 200 to 250 per year
were being sold.

By autumn 1984, they had prepared a 43-page business plan, and the first 3
years' profit and loss projections are summarised in the Table overleaf.
YEAR 1 2 3
£ £ £
Mini-kits @ £2,500 - 6 15,000 18 45,000
Standard kits @ £4,500 5 22,500 40 180,000 84 378,000
Maxi-kits @ £6,000 6 36,000 23 138,000
Spares - 1,200 6,700

22,500 232,200 567,700

Less cost of sales

Mini-kits @ £1,500 9,000 27,000
Standard kits @ £3,000 15,000 120,000 252,000
Maxi-kits @ £4,000 - 24,000 92,000
Other 500 2,600

15,000 153,500 373,600

A Gross Contribution = 7,500 78,700 194,100

Fees to directors (1)
Other overheads

*** Net ProJit = - 5,905 11,875 58,615

(1) The directors were prepared to link their salaries to the financial
performance of the business.

In view of the positive flow resulting from deposits and prepayments, the
cash-flow estimates suggested that £23,000 would be required to finance the
anticipated operation. However, the directors preferred to raise £40,000;
not only to cover the costs of developing two production cars
simultaneously, but also to allow for contingencies.

Tripos R & D Ltd. had been formed to develop the car, and each of the
Tripos partners held a 33% directors' shareholding in the company. When
an investor had been found, a new company, Tripos Motors Ltd., would be
formed to take over Tripos R & D with Rodney Gordon acting as Managing
The Tripos team preferred to raise all £40,000 as equity (under the Business
Expansion Scheme), but they were also prepared to consider an alternative
equity structure such as the one shown below:-

Name Contribution % Equity Loan

Abbott Project to date 26.7
Gordon Project to date 26.7
Baum Project to date 26.7
Investor £20,000 20.0 £20,000

The loan would be interest-free and would be repaid before the salaries to
the existing directors could rise above £500 per month each, or £1500


A passive investor would have been quite acceptable, but they also would
have welcomed an investor who had some relevant skill to contribute and
who could become a working director.

They first approached the Small Firms Service in London. The directors
received some helpful advice - including "an impressive list of
organisations" in the business of arranging investment in projects up to the
order of several millions. But after "much letter writing and inumerable
phone calls", Rodney Gordon and his fellow directors felt that it was "far
easier to raise £4m than the paltry £40,000 that we needed".
The Small Firms Service also suggested that they contact the London
Enterprise Agency's (LEntA) 'Marriage Bureau' to help find a prospective
investor. In addition, the directors became aware of the existence of the
Greater London Enterprise Board (GLEB, now Greater London
Enterprise) - as another source a investment finance - from television
advertising placed by the former Greater London Council.
Simultaneously attacking what they called "both ends of the political
spectrum" [in simple terms, local enterprise agencies are generally
considered as a government-inspired initiative to help smaller businesses,
whereas enterprise boards tend to find greater favour among certain local
authorities], and after a meeting with several representatives of GLEB, they
came to the conclusion that a "bright red two-seater out and out sports-car"
was not really at home with the philosophy of their own region's enterprise
After making a presentation at one of LEntA's Investors Club meetings,
everyone socialised "as anxious brides and potential spouses", and although
their particular presentation didn't ultimately lead to a successful business
consummation, a representative of LEntA did suggest that they also try
Venture Capital Report (VCR) as another possible way of finding an
Accordingly, a copy of their much-travelled business plan was duly
despatched to VCR, and following a day-long meeting with Lucius Cary (of
VCR) - which took in the London-based design office, the mouldings
supplier, and the workshop in Kent - a draft article was received and
approved by Tripos for publication in December 1984.

Within a matter of weeks, the Tripos directors were talking to a couple of
potential investors, and after yet another visit to the workshop, one of the
investors, Peter Brown, expressed a desire to invest in Tripos as a whole,
rather than in just the car project alone.
As an accountant himself, Peter felt that the business should be
re-structured to form Tripos Ltd. as a holding company managing both the
car project (as Tripos Research & Development) and the architectural
practice. He, and another friend of long standing, Martin Bunting (also
with accountancy training and ex-Managing Director of Courage Ltd.),
would then:- jointly provide the capital needed to develop the car;
introduce an enhanced standard of financial management; and, exploit their
existing business contacts for the benefit of the architectural side.

As Chairman of Synergy Holdings, Peter Brown's involvement with a
variety of business ventures has included investments in:- computer
software, sports equipment, specialist publishing and yacht building.
After reading their article in VCR, he felt that the Tripos presentation was
well-produced and merited an initial meeting, even though the project
smacked of self-indulgence and "middle-aged fantasy fuelled by early
hero-worship of Colin Chapman".
Coming away from this meeting, he believed that the Tripos team had the
collective skills to develop the car to the production stage, but had
"negligible'' knowledge of the type of organisation which would be needed
to produce it to strict cost and time deadlines. Moreover, he discovered that
the practice had borrowed heavily from their bank - due to a drop in
architectural commissions since 1982.
Private investigations with the specialist car trade and media indicated that
a niche market for the Tripos car did exist, but that their cash plans were
probably over-optimistic, and that at least £50,000 would be needed to: - 1)
complete the development programme, 2) help the architects' practice to
provide income support during this period, and, 3) invest in the limited
infrastructure which would produce a viable production and sales unit.
Synergy's experience in the specialist car trade was somewhat limited, and
so Martin Bunting (an "old friend, car buff and experienced businessman")
agreed to invest 40% of the £50,000 needed.
Having decided to invest in Tripos, the contractual terms and conditions
associated with the investment deal needed to be tied down. Peter Brown
now says:
"Structuring the actual investment was extremely complicated
but worth the effort. I used City solicitors, as we needed an
arrangement that provided security and incentivefor the Tripos
team, but also offered flexibility for the seconda ry funding that
would obviously be necessary".
Two companies were formed, namely:-
1) Tripos Ltd. - with 50% of the equity being owned in equal shares by
Rodney Gordon and Ray Baum (equivalent to £30,000 in time and
money), and the other 50% being shared equally by Synergy Holdings
and Martin Bunting in the form of a £30,000 investment in low interest
convertible loan stock [Business Expansion Scheme investment was not
applicable because only ordinary shares are eligible for tax-relief.]. 75%
of Tripos R & D (below) was owned by Tripos Ltd.
2) Tripos R & D Ltd. - with 25% of the equity being held by Laurence
Abbott and the balance by Tripos Ltd.
The whole deal, from the initial meeting to the completion of contractual
details, took around 6 weeks to complete, and the legal costs (including the
filing of forms with the Registrar of Companies, registration of VAT details
with the Customs & Excise, payment of stamp duty &C.)were in the region
of £2,500.
Having once committed his money and around 3 or 4 days a month to
Tripos, Peter Brown didn't see himself as an investor, but rather more as a
"fellow entrepreneur" to the original team.
However, his advice to other investors/entrepreneurs when seeking
opportunities would be:
l ) "Check the gross margins that could be achieved with the
proposedproduct or service. You must see the possibility of
40%, and for comfort, SO%."
2 ) "Always allow for secondary funding at least equal to the
initial investment within two years. Zfyou cannot raise it
yourself, be sure who can, and what their terms will
be. "
3) "You must like your entrepreneur partners. Y o u will face
rough, tough times together. Trust is essential and is more
likely to be engendered $all your wives have met as well,
so that everyone knows who is providing support or
criticism, when things get fraught."
4) "Feel proud of the product or service the company offers.
This does not just relate to quality, but to the product area.
Enthusiasm is infectious, and you must get an emotional
as well as a financial returnfrom helping a provider of the
particular speciality."
5 ) "Do not, however, feelyou must have previous experience
in an industy to make a good investor: unless you are a
v e y slow learner, the problems associated with start-up
companies in most industries are very similar. You should,
though, t y tofind investment opportunities selling at least
part of their output directly to the public, or, contrariwise,
a unique industrial product or additive which adds less
than 2% to the cost of the product into which it is
incorporated by your immediate clients."

By the end of 1985, Tripos R & D had spent £70,000 on development and
had sold the original car for £3,500. In the following year, they budgeted for
a loss of £9,000 on a turnover of £370,000 (from the sale of 70 kits and
completed cars). For 1987and 1988the projected turnover [and profits] was
set at £570,000 [£50,000] and £860,000 [£90,000] respectively.
However, the architectural side of Tripos started to pick up, and the time
spent on the car was cut back to such an extent that, by the end of their first
trading period (14 months to the end of March 1986), their sales amounted
to a little over £6,000, producing a loss of some £18,000.
Since then, two Americans have been brought in as new directors with
investments of £10,000 each; namely, Scott MacMillan (as Managing
Director of Tripos R & D - with Rodney Gordon still acting as a director,
but committed in the main towards the architectural practice), and Steve
Walker. The present total investment stands at £100,000- with the two new
directors each owning 16.7% of the car business - and following the
acquisition of the American-based Hunter kit car company in September
1986, the Tripos car is now under manufacture in both the UK and the
United States.
Apart from bringing the initial finance - now standing at £50,000 from
Brown and Bunting - and also the anticipated general business skills to
Tripos, Ray Baum and Rodney Gordon feel that the outside investors have
successfully helped to find further finance (and skills) for the car project.
And even though it has taken much longer to develop than was first
envisaged, the business probably has been set on a much firmer footing than
otherwise would have been possible.
From the viewpoint of an outside investor, Peter Brown has been able to
help the mainstream business in several ways. Tangible examples
include: - assuring the bank that Tripos would not be dissipating too much
money into the car development; introducing a higher degree of selectivity
when seeking architectural commissions; and reducing clients' average
payment period from 12 weeks down to 6 weeks.
1990 could hold the prospect of a flotation on the Third Market or the OTC,
although this may be delayed until 1992 if they choose to merge beforehand
with, for example, a motor dealer specialising in classic cars.
Reproduced by kind permission of the Planning Exchange, Glasgow. First
published in September 1986 as LEDIS Initiative A281 (Local Economic
Development Information Service).

Yorkshire Enterprise
[Formerly West Yorkshire Enterprise Board]

A local authority funded investment company which provides'finance for

small and medium-sized companies in the Yorkshire and Humberside

In the late 1970s, the recession and decline in industries such as textiles and
coal mining produced rapid increases in unemployment in West Yorkshire.
In their 1981 West Yorkshire Metropolitan County Council (WYMCC)
election manifesto the local Labour party had a commitment to set up an
enterprise board to provide finance for viable local businesses, thereby
helping stem rising unemployment. In November 1982 the West Yorkshire
Enterprise Board (WYEB) was set up.

WYEB provides an additional source of finance for viable local businesses.
It aims to meet the demand from small or medium-sized companies,
particularly those with insufficient collateral to gain further clearing bank
finance and which are unable to offer a sufficiently rapid investment
realisation to interest the 'City'.
The Board considers it vital that the private financial sector appreciates that
it is market oriented, supporting viable businesses which have good growth
prospects. This is important for 2 reasons:-
a) it will enable WYEB to attract major funds which can then be invested
in local business,
b) it will encourage the private sector to make joint investments with the
Board in major projects.

Organisation and StafSing:

WYEB is a company limited by guarantee with 13 directors, all formerly
elected members of the now abolished WYMCC. Although WYEB was set
up by a Labour-controlled authority, the directors are drawn from across
the political spectrum.
There are 19 staff, including a 10-strong team of investment managers and
analysts, all of whom have business experience. This is seen as being a key
factor in making informed investment decisions that achieve a sensible
balance of risk.
Grants from the former WYMCC have totalled£10.5m, of which f7.8m was
given in the Board's first 18 months. Profits on investments have since
increased the capital base to some £12.5m. To finance further investments,
WYEB has negotiated access to institutional loan finance; £10m from the
Bank of Nova Scotia, and up to £20m from the Yorkshire Bank.

Financial support is of 3 main types:
A) Loan and Lease Capital is usually medium term finance in the £15,000
to £500,000 range, lent at commercially competitive rates (around 3%
over bank base rate) but with lower collateral than private sector
funders would require.
B) Equity Capital is in the form of ordinary or preference shares, again in
the £15,000 to £500,000 range. Minority holdings of around 25% are
the norm. Combined loan and equity packages are available.
C) The Guaranteed Industrial Mortgage Scheme enables a district
council (within the Yorkshire and Humberside Region) which wishes
to support a firm in its area, to offer a 90% mortgage loan. The loan is
based upon the district's valuation of the property involved and a
guarantee of repayment to WYEB. As WYEB provides the money to
the firm, local authorities are able to use their own credit power (rather
than ratepayers' funds) to promote local investment. The scheme offers
a higher percentage mortgage than is generally available and is
particularly helpful for businesses needing larger premises. As the
security can be readily refinancied, WYEB does not need to tie up a
substantial proportion of its own funds. Finance available ranges from
£25,000 to £250,000.
Examples of WYEB investments include: a half stake in an £800,000 loan
and equity investment in a firm of loudspeaker manufacturers; a £175,000
mortgage loan (guaranteed by Bradford City Council) for the purchase and
development of new premises by a manufacturer of specialist air handling
equipment; and a £100,000 loan and equity package for a fabrication
engineering company jointly supported by a loan from British Coal
(Enterprise) Ltd. [LEDIS A2601.

Investment criteria:
Before April 1986, WYEB only helped companies based in West Yorkshire.
An amendment to its Articles of Association means that it can invest
antwhere in the Yorkshire and Humberside Region. A business is eligible
for support if:-
a) it is not retailing direct to the public;
b) it is not a subsidiary of a larger business;
c) the proprietors and shareholders are contributing a reasonable
proportion of the total capital;
d) the investment will ensure good long term prospects of
e) the investment will be saving or creating jobs;
f) it has 'good employer' policies.

Finance has been given for management buy-outs, company start-ups,

rescues, expansions and re-locations.
A normal investment condition is the appointment of a director
representing WYEB, accompanied by covenants to protect the Board's
interest as a minority shareholder. Although the covenants are felt not to be
onerous, a breach - either rhreatened, or actual - can trigger multiple voting
rights in favour of the nominee director allowing him to redress the

WYEB receives some 300 enquiries a year, of which, about 25 gain funding.
Urgent proposals may receive a decision within 2 weeks, although 2 months
is more normal.
By April 1986, investments had been made in 60 companies, with the
average loan being £113,000; the average shareholding £58,000. Equity
investments represent about 15% of the investment portfolio. To date, only
5 client companies have failed. WYEB is prohibited from paying dividends,
and therefore, in 1985186, it retained net profits of almost £lm. The
investments are estimated to have safeguarded or created 4,000 plus jobs,
with an average investment per job of £2,500, and have achieved a leverage
ratio of 1 to 4.

The West Yorkshire Small Firms Fund:

The fund was set up in May 1986 as a limited company with enterprise
agency status, by the former WYMCC, the districts within the county, and
WYEB. It is staffed by 5 secondees from Bradford District Council, with
WYEB providing a grant to the fund of £550,000. The fund is to help
start-ups and firms with less than 30 employees based in West Yorkshire.
It is non-profit-making and offers:

a) unsecured 'soft' loans of up to £15,000, repayable over 3 to 5 years, with

up to 2 years interest free. Interest rates are about half the normal
commercial rate.
b) up to £15,080 in redeemable preference shares, with a 2-year
dividend-free period and repayment due after 5 years.
The investment criteria used are similar to those of WYEB.

Initially, WYEB had to generate income. It therefore concentrated upon
giving loans. However, as one of its main roles is providing risk capital,
more is now to be placed in equity investments. Whilst these are far from
risk-free, WYEB feels that its strengths in investment appraisal and
aftercare should result in lower losses than experienced by most other
investment institutions.
It is felt that there is a scope for local authorities in the region to set up joint
companies with WYEB to channel investments into their areas. The first
such joint venture, Bradford Metropolitan Enterprise Ltd., was set up in
July 1986 in conjunction with Bradford District Council.
In the longer term, WYEB may wish to re-cycle funds committed to equity
holdings in investee companies. However, for a number of reasons, WYEB
investee companies may not be suitable for an independent listing on the
Stock Exchange and there is no ready market for shares in unquoted
companies. Accordingly, in June 1986, in conjunction with the
Leeds-based merchant bank, York Trust, WYEB bought a 29.9% stake in
the Unlisted Securities Market quoted property investment and printing
business, the York Mount Group. This will become an industrial holding
company able to acquire interests in WYEB-financed companies. Thus it
will provide an 'exit route' enabling WYEB to realise its equity


This has been included to convey some feeling for the type of people who
may be involved in the decision-making of a public sector source of equity
finance. Clearly, the skills, experience and philosophical outlook of people
engaged in similar positions can vary quite considerably from source to
Reproduced by kind permission of Bexley Venture Capital.
The Board of Bexley Venture Capital

Mr. Robert Nott

Robert Nott is a well-known businessman. He was born in Erith and has
lived in Bexleyheath for the last 28 years. Some 30 years ago he founded
Robert Nott & Partners which is now one of the largest independent
insurance broking concerns in the South East. He retired as chairman in
1984 and now acts as a consultant to the company.
As a Rotarian, he is a past president of the Rotary Club of Erith, and is
vice-chairman of the district covering Kent and Sussex. He is a past
president of the London Borough of Bexley Chamber of Trade and
Industry, and is an active member of the management committee of Bexley
Training Workshop, which provides training in a range of business skills
for local school-leavers. A keen squash player, he, together with his
business partners, financed and built Erith Squash Club in 1980, providing
a unique sporting and social facility in the centre of Erith. He was chairman
of that company until he sold his interest the the club in 1983. He is an
associate of the British Insurance Brokers Association.

Mr. Michael Ellsmore

Michael Ellsmore is a member of the Chartered Institute of Public Finance
and Accountancy and has worked in local government finance at the
London Boroughs of Wandsworth and Bexley. He is currently assistant
financial controller at Bexley and has wide-ranging responsibilities which
include the management of both the Council's &96m pension fund and
& 130m borrowing portfolio.

Mr. John McBride

John McBride FCA AT11 is a chartered accountant who started practice in
1973. His firm, McBrides, in Sidcup, is now one of the largest independent
practices in South East London.
He is a keen sportsman, an expert skier and currently a vice president of
Sidcup Rugby Football Club having played for them for approximately ,l0
years. He partcipates in a number of local organisations and is presently
chairman of Chislehurst Round Table, a regular opera and theatre goer, and
one who thoroughly enjoys the frantic pace of business and personal
Mr. Alan Nelson
Alan Nelson FCCA FT11 has recently retired as a partner in Opass Billings
Wilson & Honey in Sidcup. He now acts as a consultant. He is a former
president of the Chartered Association of Certified Accountants. He is also a
former member of the Accounting Standards Committee and is currently a
member of the Auditing Practices Committee. He is a member of Sidcup
Rotary Club and devotes his time to professional activities and other
business interests.

Mr. Keith Sykes

Keith Sykes LLB was educated in science and law, spent 6 years in the
Research & Development Department of a Midlands engineering company
and then 20 years in a publicly-quoted extractive company in S.W.
England, ultimately as managing director.
Since 1983, he has been chairman and managing director of Keith
Refractories Ltd., a long-established refractory raw material producer
previously in the Redland Group. Keith Refractories Ltd. employs about
50 people and exports 80% of its turnover worldwide. Keith Sykes is also
linked with a private investment group with companies in this country and
Correct as at 8th August l987


Clive Lewis gets to grips with LEntA

(Adapted with permission, from an articlefirst published in

The Guardian' 25/6/84)

Six of us were on the programme for the half-day session. "Dress

comfortably but smartly" the briefing note intoned. "Prepare your
presentation thoroughly. Remember you are making a formal presentation
to a fairly critical audience." The London Enterprise Agency (LEntA) was
lining up the presenters, of whom I was one, for its monthly Investors'
LEntA, the biggest of the 150 local enterprise agencies [over 270 in 19881
dotted around the country funded by private industry specifically to help
small business, has been in the marriage broking business ever since it was
set up in 1979. Indeed it does not shrink from calling this side of its business
a "Marriage Bureau". But since last July, the bureau has added a new
dimension to the flow of new business opportunity information for its client
Difficulties of presentation
Hitherto, the propositions of entrepreneurs filed with LEntA, depended
for their broadcast to the agency's list of private investors solely on the
written word in the monthly bulletin. "We were finding that many
proposers with good ideas were having difficulty getting the full potential of
their project across in writing," says Mr. Peter Lovell, the bureau manager.
"There had to be a better way."
Finding the better way has been Mr. Lovell's principal pre-occupation over
the two years he has been on secondment from Barclays Bank. The
investors' meeting is his answer.
LEntA caters for the entrepreneur who is looking for funding - and advice -
outside the mahogany and baize of the bank manager's office. His or her
search for start-up or expansion funding seldom exceeds, and is often
below, £100,000, a sum which does not excite the interest of the big venture
capital groups.

Investors' meetings
And LEntA has the added attraction that its list of private investors
numbers many with management skills which are on offer as part of a
"hands on" financial package for fund seekers. The investors' meeting
devised by Mr. Lovell is tailored for the entrepreneur with a well-developed
business plan which is ready to go into action.
This talking shop in which entrepreneurs can show off their wares to
investors works like this: Six bidders for cash are invited to participate.
Each prepares a resume of his or her project, with the emphasis on financial
performance forecast - profits, turnover and value, etc. - which are then
presented as a session portfolio before the start of the meeting to the
Peter Lovell's guidance notes for presenters continues:
"Zdeally your presentation should last from between 15 to 20
minutes" (exceptions can be madefor the inclusion of a video or
slide programme which takes the whole presentation beyond
the agreed limit).
"Allowing five minutes for questions, your overall time will
therefore be somewhere between 20 and 3 0 minutes. I n our
experience, this is ample to put over most cases."
"The use of slides, video, flip charts and other visual aids will
always help your case. D o not expect to be able to turn up on
the afternoon of the meeting, make a few off-the-cuff remarks
and get your money ."
The six presenters are expected to have completed their submissions within
three hours, and this includes a short tea break. The session is rounded off
with a buffet at which eyeball-to-eyeball contact is made between the
hunters and their quarry.
The LEntA notes conclude:
"Investment money will only be forthcoming after fairly
extensive investigation by the prospective investor, and
perhaps a good deal of bargaining relating to the actual terms
upon which money is made available."
Any hardened fund seeker will join amen to that. So what banana skins lie in
the path of the entrepreneur who wants to present his or her project to a
group of investors?
If like me, you are caught in the trap of being the first to present, devise a
method of coolly coping with late arrivals. Avoid sandwiching slides into a
running script. Unless you bring a team of assistants along with you it can be
a hit and miss affair and wipe out the benefits that such aids are supposed to
Learn your script. Prompt cards are always preferable to reading from close
writing or typing on A4 sheets. Those fellow presenters who topped my
score card - and we all sat in on each others' presentation - included one
who adopted the "come here I have a tale to tell you" approach. He had the
money men eating out of his hand. Another, aggressive and confident to his
fingertips, prevailed by his sheer professionalism.
The dreams that come alive for 30 minutes in that 6th floor room in the City
of London once a month are already showing encouraging returns. Half the
36 entrepreneurs who have played to LEntA investors at the six meetings so
far held, have got their money.

Postscript Clive Lewis had been seeking backers for a magazine aimed at
public transport (the coach, train, plane and ferry) travellers -
entitled ' O n The Move' - and although he was unable to find an
investor via the L E n t A Marriage Bureau, he achieved his aim
almost by accident.
A s it transpired, his landlord (of his business premises) was afirm
of accountants. Unbeknown to him at the start, a number of the
partners belonged to a syndicate of B E S investors on the look-out
for suitable investment opportunities. I t wasn't long before this
connection became known, and, after the usual appraisal and
negotiations, the syndicate decided to invest in the project. ' O n the
Move' was launched by Transit Publications at the end of 1985.
His story is described in case study E (Transit Publications).
Reproduced by kind permission of the Bank of Scotland from their Government
Assistance Information Service ('GAINS' database). The information was
correct as at June 1988 (database updated 31/3/88) but is subject to review (the
Chancellor of the Exchequer's March-time budget speech will usually announce
any major changes to the scheme).

I . Summary
Under the Business Expansion Scheme (BES) tax relief is available to
individual taxpayers who invest in the new ordinary shares of a new
company starting up a new trade or in a qualifying established unquoted
trading company. Relief from income tax is given at the individual
investor's highest rate of tax on up to £40,000 invested in BES approved
companies in any one year.
In addition, BES shares issued after 18th March 1986 are exempt from
Capital Gains Tax on their first disposal provided BES relief is not wholly
withdrawn from the shareholders (see 9).
The aim of the scheme is to encourage investment in unquoted companies
which are engaged in higher risk businesses and have difficulties raising
equity finance. Investment in certain specified low risk trades or in
companies with a secure asset backing is therefore excluded from the tax
benefits offered under the scheme (see 4).

2. Awarding Body
The Board of Inland Revenue.

3. Location Restrictions
BES approved shares must be issued by companies whose trading activities
are carried out wholly or mainly in the UK. This includes groups with
subsidiaries which are resident or incorporated overseas provided that the
trading activities of the group as a whole are carried out wholly or mainly in
the UK.
To be eligible for tax relief, the individual investor must be resident and
ordinarily resident in the UK at the time of the share issue. From 6th April
1986, Crown employees serving overseas, whose salaries are taxed in the
UK, are also eligible.
4. Zndusty Restrictions
The company invested in may be any unquoted company (i.e. those not
quoted on the Stock Exchange or the Unlisted Securities Market [USM]).
BES companies may not issue shares on the Stock Market or USM within 3
years of the BES issue. Over-the-counter flotations (i.e. outside the Stock
Exchange's official control) are eligible.
Eligible business may be in almost any trading sector, including
manufacturing, construction and service industries (including ordinary
retail and wholsesale trades). A company is also eligible if it carries out
research and development (or oil exploration) 'with a view to carrying on a
qualifying trade.
Ship chartering companies (except those chartering oil rigs or pleasure
craft) qualify provided the company's ships are all UK registered and are
owned, navigated and managed by it, and the charter period does not
exceed one year.
Film production companies qualify provided they are engaged, throughout
the three year qualifying period, either in film production or in the
distribution of films produced during the period.
The following are excluded from BES relief: companies carrying on
financial activities; dealers in shares and land; most leasing and hiring
companies; dealers in investment commodities (eg., gold, whisky);
wholesalers or retailers trading in goods of a kind which are collected or held
as investments (eg. antiques) unless the company is actively trying to sell
them; the provision of legal or accountancy services.
Relief will become available (after the 1988 Finance Bill receives Royal
Assent) for investment in companies which specialise in letting residential
property on new-style assured tenancy terms over a period of at least four
years from the date BES shares are issued.

5. Size Restrictions
The investor must normally invest at least £500 in any one company (unless
he invests through an approved investment fund). The investor cannot have
relief on more than £40,000 in total in any one tax year.
More than one investor may invest in any one company.
It was announced in the 1988 budget that, with effect from 15th March
1988, a ceiling of £500,000 has been imposed on the total amount of
investment in a company which can qualify for tax relief in any 12 month
period, except in the case of companies raising money.for ship chartering or
private rented housing, when the limit is £5,000,000.

6. Application Deadlines
There is no set terminal date for this scheme.
7. Timing of Application
Relief cannot be claimed until after the company has traded for 4 months (or
completed four months' research and development or oil exploration).

8. Other Restrictions on Eligibility

Only investment in new ordinary shares is eligible for BES relief. They
must not have preferential rights (although they may have preferential
voting rights). The company can also have other types of share capital
provided that all the shares are fully paid up. BES relief is withdrawn in
proportion to the level of any payment received for the grant of an option to
buy shares and the acquisition of an option to sell BES shares will result in
the loss of BES relief altogether.
The investor, together with his associates, must own not more than 30
percent of the company in which he invests and must not be a paid director
or employee of the company. He may qualify if he is an unpaid director, or if
he receives fees for professional and similar services to the company other
than as a director or employee.
Eligible companies may have subsidiaries, as long as the subsidiaries are at
least 90 percent owned by the parent company and are themselves
qualifying companies.
If, within three years of issuing shares, or, if later, commencement of
trading, the value of a company's land and buildings after deducting certain
liabilities exceeds one-half of the net value of the company's assets after
deducting its liabilities, its shares will not qualify for BES relief except for
the first £50,000 of share capital raised in any 12 months.

9. Eligible Expenditure
The tax relief relates to investment in the ordinary shares of eligible
companies. The shares must be held for at least 5 years, otherwise some or
all of the relief is withdrawn. Exemption from Capital Gains Tax is only due
in respect of the first disposal of shares issued after 18th March 1986
provided that relief has not been wholly withdrawn.

10. Rate of Award

Relief is given at the investor's highest rates of income tax. The investor and
his spouse can, between them, claim relief on up to £40,000 paid for shares
issued in a year, for each year of the Scheme. Actual relief depends on the
individual's liability for tax, and on actual tax rates over the period of the
The relief is reduced by the amount of any value (excluding normal
dividends) received from the company by the investor.
An investor will be able to claim up to 50 percent of the BES relief against
his income of the previous year, subject to the following conditions: the
investment must be made in the first half of the tax year (between 6th April
and 5th October inclusive); the carry-back will be subject to a maximum of
£5,000 in respect of the total BES investments made in this period. This
option can be exercised only when the relief is claimed.

11. Payment Procedure

Repayment of tax is made by the Inland Revenue following a claim.

12. Points to Note

With effect from 15th March 1988, entitlement to relief continues to be
dependent on investment in shares in companies but relief is given by
reference to the closing date for investment in the fund rather than, as
before, the date the fund invests in the company; at least 90 percent of the
amount subscribed by the individual to the fund must be invested in eligible
shares within six months of the closing date.
If the conditions of the Scheme relating to the company and the trade are
broken within a period of 3 years, tax relief may be withdrawn. The
individual must continue to qualify for 5 years and the shares cannot be sold
within that period.
Firms have the right of appeal against a refusal by the Board of Inland
Revenue to approve them under the scheme.

13. Application Procedure

The company applies to its Tax Inspector (on form BES1) for approval to
issue certificates to the investors. After approval (which is on form BES2),
the investor is supplied with a statement from the company (form BES3)
certifying that the required conditions are met. This is sent together with
the investor's claim at the appropriate time to the Tax District where his tax
returns are normally made.

14. Further Information

Full details of the Business Expansion Scheme are contained in the Finance
Acts of 1983, as amended by the annual Finance Acts. The local Inspector
of Taxes can provide information (ask for booklet IR5 1) about tax relief but
on all specific matters a financial adviser should be consulted.
A top rate tax-payer (i.e. paying income tax at a marginal rate 40%) would be
able to purchase £40,000 BES-qualifying shares and then claim back £16,000 in
income tax relief from the Inland Revenue; thus the shareholding would cost
£24,000 (plus an amount to cover incidental expenses relating to the purchase).


An extract from a memorandum prepared by Coopers G.' Lybrand, the
accountants, for the Welsh Development Agency (November 1987). Reproduced
by kind permission.


Stable capital structure:
BES investors are required to hold their shares for at least 5 years in order to
maintain their tax relief. Therefore the company enjoys the benefits of a
stable shareholding.

Absence of a running yield:

A major advantage of BES finance in comparison with debt or loan finance
is the absence of interest charges and capital repayments. The BES is
attractive compared to other forms of equity finance due to the willingness
of higher rate taxpayers to forgo'dividend payments in the interest of capital
growth, whereas the cash required to fund the yield of conventional forms
of finance may well limit the capacity of a company to expand quickly in its
early years.

Beneficial terms:
One of the major considerations for investors using the BES is the
availability of income tax relief. As a result, investors may be less likely to
drive a hard bargain over the percentage of equity acquired in return for the
finance provided.

Wider shareholder base:

Raising finance through the BES has the effect of widening the shareholder
base of the company without existing shareholders necessarily having to
sacrifice effective control - as might be the case if equity were raised from a
small number of investors, such as financial institutions.
Furthermore, as the BES investors are each only likely to obtain
comparatively small percentage shareholdings, due to the maximum
investment of £40,000 in any fiscal year, there is a reduced risk of outsiders
being able to take effective control of the company.

Other benefits:
BES finance can often be raised quickly, particularly if finance is being
sought towards the end of the fiscal year when BES investment funds can
find themselves under some pressure to invest the funds at their disposal
before the year-end. Also, some companies find that association with a
'City' institution - the funds at their disposal before the year-end. Also,
some companies find that association with a 'City' institution - such as a
BES investment fund - can improve their corporate image. Companies can
also benefit from the advice and contacts provided by fund managers.

Raising additionalfinance:
A company which has raised funds through the BES may find it difficult to
raise additional finance. If the company looks to its existing shareholders for
such finance, it may find that those who originally invested through the
BES are unable, or reluctant due to changes in their tax status, to reinvest in
the company. Also, the company will have to satisfy the BES legislation
over 3 or more years. This may, in certain circumstances, jeopardise its
ability to raise additional finance from more conventional sources, which
may be unwilling to accept conditions which are necessary to preserve the
BES status of the company.
A company cannot obtain a quotation on the USM or a full listing on the
Stock Exchange until at least three years after an issue of shares under the
BES, without losing its BES status. However, it can enter the Third Market
or one of the Over-the-Counter (OTC) markets.

Overseas business:
The requirement that the trading activities of the group as a whole must be
carried out wholly or mainly in the UK may be a limiting factor on some
companies which are rapidly expanding into overseas markets. The Inland
Revenue's usual practice is that BES companies should have at least half of
their assets, sales and profits in the UK.
Complex legislation:
The legislation relating to the BES is complex and includes many
constraints and restrictions which can prove to be a barrier to both investor
and company.

Exit route:
In order to be attracted to a company, investors will need to be satisfied that
there is a reasonable chance that they will be able to realise their investment
after the 5-year retention period has elapsed.



Tax relief:
The major advantage that the BES offers the investor is relief from income
tax at his top rates of tax in respect of his investment. In addition, BES
shares issued after 18th March 1986 are wholly exempt from capital gains
tax on their first disposal, provided that BES relief has not been withdrawn
by the date of disposal. However, with the reduction in the highest rates of
income tax from 75% to 60%, and the prospect of further reductions (the
upper rate was reduced to 40% by the 1988 Budget), there is inevitably a
corresgonding reduction in the tax saving to the BES investor.

Approved funds:
Investment may be made through BES approved funds. These funds will
choose suitable unquoted companies and spread the investor's risk over a
portfolio of investments. The minimum investment limit, currently £500,
does not apply to subscriptions made through such funds.


Lack of control:
Relief can be withdrawn from an investor for reasons outside his control.
For example, where a company ceases to carry on a qualifying trade within 3
years of issuing the shares, relief is withdrawn.

Value received:
An investor who receives value from the company during the period from
the date of incorporation (or if later 2 years before the shares were issued) to
5 years after the share issue will suffer a withdrawal of relief equal to the
value recevied. A wide variey of circumstances constitutes the receipt of
Connected persons:
The purpose of BES is to encourage genuine outside investment. As a
result, individuals connected with the company are not entitled to claim
relief. For these purposes, the normal tax definition of connected persons
has been considerably extended.

Locked-in capital:
To obtain tax relief, the investor must hold the shares for at least 5 years.
The sources of finance are basically few in number. The followinglist (Fig. 1
taken from 'The Small Business Action Kit', and reproduced by kind
permission of Macclesfield Business Ventures) is properly headed by: self,
family and friends.

- Sources of Finance -
Loans and equity


Loans and equity

3) INTERNAL COMPANY SOURCES (not applicable to start-ups)

Retained profits, cash collection, stocks and creditors

Overdraft, short-, medium- and long-term loans
Loan Guarantee Scheme
Also some start-up and equity packages
(some building societies will provide long-term business
development loans)

Hire purchase, leasing, contract hire, sale and leaseback,
factoring and invoice discounting
Merchant banks and Investors in Industry Group
('3i7, formerly ICFC)
British Technology Group
Pension Funds
Investment Trusts
Insurance companies
Banks other than clearing banks
Some local authorities, development corporations and enterprise


Venture capital funds
Business Expansion Scheme funds (equity only)


Government and local authority
Trusts: Prince's, Royal Jubilee, Youth Enterprise Scheme


Mentioned for the sake of completeness only, and not to be used in

Money raised by a business should be matched to the purposes to which it is

to be applied (see Fig.2 -also from the same source). A common error is to
use an overdraft facility to purchase plant and equipment.

- Matching Finance -
Equity funding
PURPOSE: Core finance
Permanent capital

SUPPLIERS: Self, family, shareholders & retained profits

Private investors
Development corporations and boards
Venture capital funds
Merchant banks
Insurance companies
Pension funds
Business competitions
Short-termfunding (0-3 year money)
PURPOSE: Short-term working capital needs
seasonal requirements
bridging finance
SUPPLIERS: Self, family, directors' loans & retained profits
Debtors, stock reductions and extension of credit
from suppliers
Clearing and other banks (overdraft)
Merchant banks
Finance houses
Leasing companies
Factoring & invoice discounting companies
Money lenders

Medium-termfunding (2- 10 year money)

PURPOSE: Medium-term assets
plant & machinery
Hard core working capital
research & development
SUPPLIERS: Self, family, directors' loans & retained profits
Clearing and other banks
(term loan and Loan Guarantee Scheme)
Development corporations and boards
Merchant banks
Finance houses
Leasing companies
Central & local government loans and grants
EEC loans

Long-term funding (10-25 year money)

PURPOSE: Long-term assets
land, buildings
Corporate development
SUPPLIERS: Self, family, directors' loans & retained profits
Clearing and other banks
Some building societies
Development corporations and boards
Merchant banks
Finance houses
Leasing companies
Central & local government loans and grants
EEC loans
Insurance companies
Pension funds
These are based on the traditional accountants' ratios which are used to help
assess company vitality (or lack thereof). The interpretation of the derived
ratios can vary, though the trends observed from such measurements may
be informative.
In assessing the suitability of an investment opportunity, an investor -
particularly the 'institutional' type - may use several of these ratios to
determine whether the company's past and projected performance matches
up to their own requirements and expectations.
It should be noted that:-
0 some general terms - such as 'gearing' - can have several different
VAT is usually excluded from any ratio calculations;
a single ratio should not be viewed in isolation;
0 the result produced from a ratio calculation may warrant some form
of accompanying qualification. For example, the figures deemed
generally acceptable in one type of trading activity may be
borderline or unacceptable in another;
different people may not place an identical interpretation on the
same result;
it has been recognised, according to John Argenti (author of
'Predicting Corporate Failure'), that "companies in trouble always
use 'creative accounting' to hide their problems".
Some of the main terms, formulae and possible interpretation of the various
calculated results are listed below:-

Gross ProfitMargin = Sales Revenue - Variable Costs
Sales Revenue
(multiply by 100 to convert to %)

Considered to represent a measure of the real income of a business. If

we take a hypothetical business which sells an item at £100 which has
associated direct costs of £60 per item ('variable' costs - such as raw
materials, labour, &C.), then the gross profit margin will be = (£100 -
£60) -+ £100 = 0.4 (or 40%). Or, as Brian Warnes, the author of 'The
Genghis Khan Guide To Business', says: "only £40".
Ignoring cash and service companies (like banks and supermarkets),
the above author says: "most manufacturing companies achieving less than
about 25% gross margin are likely to fail sooner or later"; but "companies
begin to achieve real strength, cash flow, and financial durability ..... once
margins get over about 40°/o", whereas "the real high-flyers, like properly
structured electronics companies begin to get into their stride at over 60%".
Profit [or loss] can also be expressed as:
(Actual Sales - Break-even Sales level) X Gross Profit Margin

Break-evenPoint - Fixed Costs

Gross Profit Margin

If our hypothetical business (above) has fixed costs of £20,000 p.a.

(such as rates and administrative overheads), its break-even point =
£20,000 +0.4 = £50,000 sales revenue p.a. The break-even point can
also be converted into an equivalent number of sales units e.g. 5,000

Break-even PointlSales Margin

- Est. Sales - Break-even Sales
Estimated Sales

(multiply by 100 to convert to %)

Taking our hypothetical business with the £50,000 break-even point; if

the estimate or target for that particular year's sales revenue was, say,
£60,000, then the break-even point1 sales margin would be
= (£60,000 - £50,000) + £60,000 = 0.167 (or 16.7%). This means that
if the actual sales revenue falls by more than 16.7% short of the
projected level, then the company will be making a loss.
For businesses constrained by some inherent limitation (such as the
maximum production capacity in a manufacturing business, or the
maximum number of beds in a hotel), then a similar calculation can be
used to determine the gap between the break-even point and the
maximum sales revenue.
Given the unpredictability of the business environment, then the
smaller the gap is between a business's break-even point and its target
sales level, the easier it is for that business to move into a loss-making
position. This calculation provides, therefore, a measure of a business's
sensitivity to trading fluctuations. It clearly depends as to which
industrial sector is under consideration, but a business with a
break-even pointlsales margin of less than 30% may not represent an
attractive investment to an outsider.
Return on Capital ('ROCE')
= Profits before interest and tax
Capital Employed
(multiply by 100 to convert to %)

'Capital employed' means loans and equity - this ratio indicates the
overall return on all capital employed. Apart from any short-term
deterioration, no company is able to survive for very long unless its
return on capital exceeds the cost of borrowing. More profitable
companies can produce a return on capital in excess of 20%.


'Acid Test' or 'Quick' Ratio = Quick Assets

Current Liabilities

'Quick assets' are only those available very quickly such as debtors and
cash (but not stock or work in progress). Current liabilities includes
overdrafts, creditors and provisions (such as taxation, dividends
Considered by some the ultimate test of liquidity; traditionally, a figure
of 1, or above, is felt acceptable.

Current Ratio - Current Assets

Current Liabilities

The current ratio is a less stringent version of the above; the assets
element now includes raw materials and work in progress. A figure of
around 2 is generally acceptable - but a greater figure of 2 could be
indicative of too high a stockholding.


Collection Period - Debtors X 52

Sales Revenue p.a. X 1.15

As above, it produces a result in terms of weeks (the '1.15' allows for the
inclusion of VAT). In the real world, an average payment expectation
of "30 days" is not realistic. A period of 8 or 9 weeks is more common:
anything over 10 weeks warrants a review.
'Stock Turn' - Stocks X 52
Sales Revenue p.a.

This produces a figure in terms of number of weeks' stocks at the given

rate of turnover (it can also be converted into the number of times the
stock turns over per year by dividing it into 52).
Different types of business have different levels - a certain type of
manufacturing business may need to hold 6 weeks' stocks in theory, but
in practice may hold 9. Unnecessary levels of stocks require greater
amounts of cash.

'Trade Creditor Days' - Trade Creditors X 52

Annual Purchases X 1.l5
This actually produces a figure in terms of number of weeks (the 1.15'
allows for VAT). Where the figure begins to exceed 8-12 weeks,
dangerous 'creditor strain' is building up.


Capital Gearing Debt


'Equity' means all shareholders' funds (share capital plus retainedprofits

- or, minus retained losses), and 'debt', all external borrowings. A figure
of 1 (i.e. 1: 1) is accepted as the norm, though much greater figures can
be achieved in practice (for example, by securing a loan against
personal, rather than business, assets).

Income Gearing or 'Interest Cover'

= Profit before tax and interest

Most companies show a figure of between 3 to 5 - a ratio of 1:l is


8) SHARE VALUATION - The Ground Rules

Prepared by Leslie Livens ATII, AITI (Moores and Rowland)
The last person who should undertake a valuation of private company
shares is the shareholder: for he or she lacks the prime requirement to
undertake a proper valuation-objectivity. Of course, there are many useful
attributes that directorlshareholder will possess.
Primarily, he will understand the business being carried on by the
company; he should know who the competitors of his business are and the
strengths and weaknesses of the business; and particularly he should know
his own markets and the company's plans for developing in those markets or
beyond. All these things are of relevance to a valuation of shares and will
have their place in any assessment of value, but there are many other factors
to be considered and the owner of the shares is unlikely to have the
experience or expertise to appreciate how these factors should influence a
share valuation.

ProprietoJs assessment:
It is true to say that business proprietors often have a "feel" for the value of
their business. This may be acquired intuitively by assessing the
remuneration and rewards that have been earned from the business, or by
noting the price that competitors may have obtained from disposing of
businesses or shares.
The latter is probably a better measure of the likely value of the company's
shares, but, of course, that information is rather difficult to obtain.
An intuitive value may well be accurate, and certainly many valuations start
off by wetting one's finger and putting it in the air to see which way the
financial wind is blowing, yet at the end of the day, the important thing to
remember is that the seller of the shares is not on his own, but that there is a
purchaser who has his own views; not only about the worth of the company
in absolute terms, but also about the total amount that he is prepared to
Prelimina y valuation:
In valuing shares one must understand that a share is not a sum of money
and, usually, that no shareholder has a right to any specific assets belonging
to the company's property.
He is entitled to a share of the company's capital and profits, and therefore
the procedure in share valuation is first to assess the net value of the
company's business and activities, and having done that, to estimate what
proportion of that net value is reflected, through expectation of future
income and capital, in the shares held by the individual shareholder.
Because there are a number of different types of share that a company can
issue, the valuer would first ascertain what type of share is in issue (usually
ordinary shares issued at 'par' value of E l or lop or something in between).
The valuer would ascertain whether there were any peculiar rights attaching
to those shares, or whether they are simply entitled, according to the
number of shares held, to dividends and a proportion of the company's
assets on a winding-up of the company.
Having identified the character of the shareholdings and the rights, the
value attributable to the shares will depend very much on the percentage of
the shareholding owned by the individual shareholder.
Owners of large shareholdings:
The holder of 90% or more of the shares in the company has an unfettered
right to sell his shares and can also give the purchaser of the shares
compulsory powers to purchase any remaining shares of the company held
by minority shareholders who may not wish to sell. He has total control of
the direction of the company and over its dividend policies.
The holder of 75% or more of the shares has power to pass a special
resolution to put the company into liquidation or to sell the business as a
going concern. He cannot force the sale of shares by other shareliolders, but
he has effective control over the company. When selling such a
shareholding, a 'nuisance' value may exist in the shares held by the other
shareholders, particularly if they are all held by one individual, and the
purchaser of the shares may not be prepared to pay as much as 75% of the
estimated value of the business as a going concern and may look to negotiate
some discount from that value. This is very dependent upon the facts of the
case and may well be influenced by the number and identity of the other

Smaller shareholdings:
Although a shareholder with 50% or more of the company's shares has the
day-to-day control over the company, he may have the problem of other
shareholders interfering and similar principles apply here as to the 75%
shareholder. Clearly, if one is selling a minority shareholding, it is
important to clarify, before a deal is completed, the extent to which the
prospective shareholder would wish to be involved in the running of the
business, and whether this is likely to be compatible with one's own
A shareholder with exactly 50% of the shares in a company does not have
control, but then, no-one else has control either (unless there is some
additional factor such as casting votes being given to Chairmen of
In the event of real control accompanying an exact 50% shareholding, then
the same principles apply as to a 50%+ shareholder. Although real control
is absent, there may be effective control if all the other shareholders have
minority interests such that the 50% shareholder has only to secure the
agreement of one other shareholder to obtain control. But, without real
control, the holder of 50% of a company's shares cannot force a liquidation
and his expectations of profit would be dependent upon the future earnings
of the company and the translation of those earnings into dividends.
If there is no likelihood of the company being wound-up, and if there is no
likelihood of sufficient earnings being made to declare dividends, then the
owner of 50% or less may not be able to identify great value in his
shareholding. This problem is intensified for the smaller shareholdings so
that, for example, a 10% shareholder would in the normal course of events
have no influence over the conduct of the business, and it is quite unlikely
that in an open market sale this shareholding would be able to achieve
anything like 10% of the underlying value of the company.

As mentioned previously, a valuation of the shares will depend upon a
number of factors.
In the case of a trading company being sold as a going concern, the valuer
would seek to establish what level of future maintainable profits can be
expected. Usually, these would be the profits after the deduction of
corporation tax. Apart from any particularly valuable assets that may be
owned the company, it is the level of future maintainable profits that the
purchaser will be interested in, for that is in reality what he is
There are questions of growth expectancy, management expertise,
know-how and exploitation possibilities that may all have an influence and
the purchaser may see (or perceive) potential that he can develop using his
own available resources.
In any arm's length negotiation, a knowledge of such a perception will be of
considerable value in negotiating a high price, but, essentially, the
purchaser is acquiring what is currently in the company, and if the existing
management does not have the ability or intention to develop the business
beyond its obvious potential, then the risk attaching to the purchaser's
development of that business must lie with the purchaser and may not have
an effect on the current value of the shares.
On a total disposal of 100% of the shares in the open market, it is unlikely
that minority shareholders would receive less than the full pro-rata value of
their shareholding because what is being acquired would be 100% of the

Minority shareholdings:
What has been said in relation to the percentage of shareholdings applies in
respect of individual disposals of that percentage.
In the case of minority shareholdings, an entitlement to dividends has
tended to be more relevant than the profit expectations of the company,
although in recent years, a greater emphasis has been placed on investment
growth (via retained earnings) rather than on shorter-term income
It is often assumed - mistakenly - that the value of a company is its net asset
value as shown in the annual balance sheet. This can be most misleading and
the real value of the company may be greater or less.
It is necessary first to distinguish between business assets and investment
The company's business assets are all those that contribute to creating the
profit that the company makes. These will include premises, fixed plant and
machinery, cash at bank and even cash reserves that are required for
business liquidity.

Earnings valuation:
A company's valuation by reference to its earnings - future maintainable
profits -will in most cases reflect the value of such assets because when the
future maintainable earnings have been ascertained, they would then be
'capitalised' by applying a factor which is usually regarded as a number of
years' purchase of those earnings.
To determine what this factor should be requires some considerable
It may be with reference to current price-to-earnings ratios of quoted
companies (and discounted to reflect the fact that the subject company does
not have the strength nor the market for its shares available to public
companies). If the valuer discovers that the profits derived from the assets
are unacceptably low, he may look at the net asset value to see what could be
realised on a sale of those assets after losses on realisation, sales costs etc.,
and if that 'break-up' value is greater than the capitalised value of
maintainable earnings, then that is where the main value of the company
would lie. In most cases of healthy going-concern businesses, the net asset
value would not displace the earnings value.

Investment assets:
If the company owns assets which are not used directly in the business or for
the purposes of the business, then the value of those assets may be brought
in as additional value to be added to the capitalised value of earnings. But if
the business assets are of very considerable value themselves, then even
though they are reflected in the earnings, the capitalisation factor that the
valuer would use may be higher than if the assets were the bare value
necessary to generate the earnings.
In ascertaining the future maintainable earnings of the company, the valuer
will probably start with the historical profits to see whether there is a
discernable trend. He will also look at the management projections and
profit forecasts, if any, and will require reasonable evidence of their
Management review:
Very important is the question of working directors and the personnel
because it has been proved time and again that a company's fortunes are
largely dicatated by the efficiency of its management. Therefore to some
extent a management review of the business may be necessary.

Additional considerations:
Other factors which would be considered would be contingent liabilities
such as leasehold obligations, any current litigation, research expenditure
commitments and so on; the current state of the company's order book may
have a bearing on substantiating any management projections; the
relationship with suppliers and customers can have a considerable impact
on a business and, for example, a single customer would probably indicate
that there is very great goodwill as between an individual in the company
and that customer and a disposal of shares without a commitment of that
individual may mean that tthe shares themselves have little value; the
company's history of bad debts and debt collection may also be of
Apart from the internal factors, the valuer will wish to identify the
company's place in the market and to gain a view as to the general economic
outlook for the sector in which the company trades.
At the end of the day, the deal will be done by a willing buyer and a willing
seller and despite the formal estimate of the company's worth, other factors
may intervene such as a vendor's personal requirements to raise finance
very quickly or the purchasers desire to invest very quickly. But these,
external matters fall not within the realm of share valuation but within the
realm of negotiation - and that is a different kettle of fish.

Tax implications:
Finally, with any disposal of shares there is likely to be some tax
consequence and special valuation rules and principles apply for these
purposes if a disposal of shares takes place between parties who are
connected with each other for tax purposes. It is always important to have
the tax implications in mind in any proposed transactions and these
implications can include corporation tax, capital gains tax, income tax,
inheritance tax, and value added tax. Tax consequences could also dictate
that instead of shares being disposed of the company disposes of its assets.
Obviously, it makes good sense to take timely and professional advice.

This is included as an example of an agreement which may be used to allow

two parties to disclose information of a sensitive nature prior to arriving at a
final contract. Before using such an agreement, legal advice should be
sought on its suitability.
Reproduced by kind permission of the Centre for Product Development,
THIS AGREEMENT is made the.. of.. ............ 19.. ....
between the FIRST PARTY, namely: : inventor's
: name

: inventor's
: address :

and the SECOND PARTY, namely: : correct

: name of
: Company

having a place of business at : address of

: Company

1 The purpose of communication between the Parties to this Agreement
is to explore co-operation with a view to establishing a further
Agreement covering development and exploitation to the mutual
benefit of both parties.
2 The information to be communicated in strict confidence between the
Parties to this Agreement includes demonstrations, commercial and
technical information, all forms of intellectual property and includes
material for which patent or similar registration may have been filed.


FIRST Each Party hereto agrees to maintain as confidential and not to
use any of the information directly or indirectly disclosed by
the other Party until or unless such information becomes
public knowledge through no fault of the recipient Party, or
unless the Parties to the Agreement complete a further
Agreement making provision for utilisation of information
disclosed. Each Party undertakes to prevent the information
disclosed from passing to other than those representatives who
must be involved for the purpose of this Agreement.

SECOND In the event that no further Agreement on utilisation or

publication of information is concluded each Party hereto
undertakes to return to the other all confidential items
submitted and to furnish certification that no copies or other
records of those items have been retained.

THIRD In the event that either Party requires the assistance of a

further party in pursuing the purposes of this Agreement the
approval of the other Party to this Agreement shall be

FOURTH Any information which either Party can prove was in his
possession prior to disclosure hereunder and was not acquired
from the other Party or his representatives is excepted from
this Agreement.

FIFTH The construction, validity and performance of this Agreement

shall be governed in all respects by Law and the Parties hereto
submit to the jurisdiction of the Courts.

SIGNED for the SIGNED for the

First Party Second Party

Position: Position:

For and behalf of For and on behalf of

In the presence of In the presence of

The correct names of companies must be used in this Agreement and the
Managing Director or his equivalent must sign for and on behalf of a
Reproduced by kind permission of the Kent Economic Development Board,
I am pleased to tell you that Kent Economic Development Board
through its wholly owned subsidiary Kent Investments Limited
("the Investor") is prepared to make available purchase
shares to the value of.. ..........This offer is subject to:
(i) Our being satisfied on the affairs of the Company;
(ii) A formal Contract between the Investor the Company and its
Shareholders which sets out in detail the terms and proposals
contained in this letter;
(iii) The Memorandum and Articles of the Company being altered
to reflect the proposals;
(iv) Confirmation that .......... will grant the Company an
overdraft facility of &. .........;
(v) Our receiving written acceptance from you by ...........
The Company is to use the funds provided by the Investor for the
purpose of the fixed and working capital requirements of the
Company and for no other purpose.

Cumulative Participating Preferred Ordinary Shares to be
subscribed for & ..........
The Investor is willing to subscribe & .......... for new
Cumulative Participating Preferred Ordinary Shares of £1
each (representing .......... per cent of the equity share capital
after subscription), having the rights as set out in the attached
Rider I.

3. Other Terms
While the Investor is a shareholder:
(a) The Investor may appoint a Nominee Director to the Board of
the Company. His fees shall be ..........per annum, subject to
the annual revision by agreement, and he shall be reimbursed
for all expenses properly incurred by him on the Company's
business. This Director may not be required to retire by
(b) The Company is to supply any financial or other information
regarding the Company as the Investor may request. In
particular, the Company will provide the following:-
(i) monthly financial and progress reports within 3 weeks of
the end of each period;
(ii) budgets and cash forecasts for each financial year, by the
beginning of that financial year;
(iii) Balance Sheets and Profit & Loss Accounts covering
operations for each quarter within 4 weeks of the end of
such period, and revised and up-dated cash forecasts
when so requested;
(iv) the annual audited Profit & Loss Account and Balance
Sheet for each financial year within 3 calendar months of
the end of that financial year.
The Investor may appoint an Accountant of its choice to
prepare the above information if the Company does not
produce the above information when due. The Accountant's
fee will be the Company's responsibility.
The Investor is to have the right to obtain information from the
Company as if it were a Director regardless of whether it has
appointed a Director to the Board.

(c) Without prior written consent of the Investor, the Directors of

the Company will not:
register any share transfers;
change the issued share capital, or grant any options over
share capital, whether issued or to be issued;
allow the indebtedness of the Company to exceed
...........per cent of net tangible assets;
create any subsidiary company or any other company to
undertake any part of the Company's business;
dispose of any assets representing a substantial part of
the Company or of any subsidiary company and without
prejudice to the generality of the foregoing 'not to dispose
of any assets representing ..........per cent of the gross
value of the Company or any subsidiary;
make any material change in the business of the
purchase any capital items at a cost exceeding ......... Per
cent of net tangible assets;
(viii) The Company or any subsidiary will not give any
guarantees or make any loans without the prior consent
of the Investor in writing.

(d) The Investor's legal costs arising from these proposals are to be
paid by the Company. In addition, an investment fee of
& ........... will be paid to the Investor by the Company for
services prior to investment.
(e) The aggregate of the salaries of the Directors is not to exceed
& ........... in the year ended ............ and & .......... in any
subsequent financial year without the written agreement of the
Investor. Other benefits including company car are subject to
the Investors agreement.
(f) The Company will maintain 'Key Man' policies for the benefit
of the Company as hereunder:-
(i) No Director of the Company is to be engaged or
concerned with any commercial undertaking other than
the Company;
(ii) If the Directors who are shareholders whish to sell or
otherwise dispose of all or any part of their shares, they
shall first notify the Investor who shall have the right to
require its shares to be purchased at a price acceptable to
the Investor as a condition for giving its consent to such
sale or disposal.
Rider I
Rights Attaching To The Cumulative
Participating Preferred Ordinary Shares As
A Class
l . Dividend
1.1 Fixed
A cumulative annual dividend each year of ......... per cent,
payable half-yearly on and commencing with the year beginning

l .2 Participating
A cumulative dividend payable in relation to each year from 1st
January .......... of such sum (if any) as represents the greater of
.......... per cent of the "Net Profit" of the Company or the
dividend paid on the ordinary shares.
The participating dividend is to be paid within 14 days after the
Annual General Meeting at which the Accounts for the relevant
year are adopted.
The "Net Profit" means the Audited Consolidated Net Profit for
the relevant year, but;
(a) before charging exceptional or non-trading items;
(b) before making provision for any dividends other than the fixed
dividend referred to at 1.1 or any transfers to reserves;
(c) after payment of Corporation Tax on profits earned.
Thereafter, dividends are to be payable on both the Preferred Ordinary
and Ordinary Shares as if they were all shares of the same class.

2. Rights on Widing Up
The Shares will carry the right in a winding up to a repayment at the
issue price plus any arrears and accruals of dividend in priority to the
Ordinary Shareholders. Thereafter, subject to the repayment of each
Ordinary Share of an amount paid on each Preferred Ordinary Share,
any surplus is to be distributed to both the Preferred Ordinary Shares as
if they were all shares of the same class.

3. Voting
The Shares will carry ......... per cent of the voting rights.
At any General Meeting of the Company where the dividend on any of
the Investor's Shares is in arrears or it is proposed to wind up the
Company or modify the rights attaching to the Preferred Ordinary
Shares, the Investor shall not hold not less than .......... per cent of the
total votes.
The following section was written by Brian Warnes (and also has been used
in 'The Genghis Khan Guide to Business'; and 'The Cash Flow Handbook')
and provides an example of business plan guidelines which have been
offered by a private sector venture capital fund to the owners of small
businesses when approached by them for equity capital. It also includes a
'Procedure for drawing-up forecasts' which explains in detail how the
various figures are derived.
Reproduced by kind permission of Brian WarnesM A F C A (Business Dynamics
It is recommended that their applicants should submit a brief Proposal (of not
more than say 4 to 5 pages, plus attachments), carefully and accurately covering
all the points set out below. Any other relevant information should be included.

Date of Incorporation. Date of start of trading. How did the Company
come into being? What identified need in the market-place led to the
setting up of the company and development of its products/services?
Any other significant events. Date of any Inventions or Provisional or
Final Patents.

Description and nature of product or service. Why is it special? What
has the Company got that other companies have not? Please attach
product brochures, if any. Details of Research and Development
Expenditure. To what extent is product fully developed? And fully


Describe nature and present structure of overall market (size, rate of
growth, price structure from Producer through to End-user, main
Operators and their market share, ImportIExport proportion, etc.).
How have these factors changed over the past 5 years? How may they be
expected to change over the next 5? What dangers (e.g. from cheap
imports) and opportunities does this provide?
Identify that part of the total market you expect to capture (by
geographical area, type of customer - End-user, Retailer, Wholesaler,
OEM's, etc.). List main customers. Specify the key factors that will
induce your customers to buy (price, quality, service, technical
innovation, financial benefits to them, etc). Identify competitors
(prices vs. your own products, etc.).
Detail your selling methods (direct selling, mail order, distributor
network, agencyllicence agreements, advertising expenditure, number
of salesmen employed, discount and commission structure, etc.).
Background and curriculum vitae of Managing Director, showing in
particular his qualifications, where and how he acquired his Business
Skills and his Product Development/Production/Sales/Finance skills.
The extent to which such skills are spread within the Company, give
background and CVs of other executives. Number of employees -
qualifications/unqualified, direct productioniindirect.

Brief details of buildings - freehold/leasehold/rented;square footage of
production area, offices, storage, etc.; site acreage; plant -
ownedlleased; vehicles; fixtures; and production methods -
manufacture, assembly only, salesidesign only. Brief details of sources
of raw materials/sub-contract parts.

Who financed the Company? Brief background of controlling interests
(company or individuals). List shareholdings.


Please attach:
(a) For existing Company, last 3 years Audited Accounts and any
available budgets and monthly management accounts for the
current year to date.
(b) Cash Flow and Profit Forecast in detail for the next 12 months and
in outline for the following 2 years.
(c) Where available, accounts covering any previous business
experience of MD.
(d) Detailed schedule of orders currently in hand by customer,
product, value, gross margin and projected net margin.
(e) Company's Memorandum and Articles of Association (or those
(f) Details of existing and proposed funding (equity, loans, hire
purchase, leasing, overdraft, etc .).
Procedure For Drawing-Up Forecasts
A s a condition of investment, most funds will specify their requirements for
monitoring actual vs. estimated financial performance. A deadline of 14 days
after the end of each month will entail a simplifed recording system to allow a
company reasonable time to meet such a deadline. The ultimate aim of the
following guidelines is to provide the managers of the Company "fingertip
control" and understanding for a minimum of time, cost and effort as events
unfold. They should be read in conjunction with the enclosed sample forecast.

I Estimate Monthly Sales (Line 1) pre VAT, allowing for the fact
1) For starts-ups, build-up is nearly always much slower and
takes longer than expected, and starts later.
2) Holiday months (e.g. JulyIAugust, December) are usually
3) Seasonality should properly be taken into account (e.g. peak
sales pre-Christmas, poor January etc.).

I1 Deduct Direct Sales Costs (2) namely:

1) Trade discounts
2) Any other discounts or commissions, calculated as a percentage
of sales price
3) Outward delivery costs, freight, duty etc.
I11 Decide on pricing policy e.g. percentage mark-up on labour and
material costs to arrive at sales price. Express the resulting labour,
and direct sales cost (Step I1 above) as a percentage of sales price.
The balance will be the Gross Margin percentage. Most companies
need to ahcieve at least 30% Gross Margin to survive, and really
need between 40% and 70% to do well.
Insert Gross Margin Percentage at (23) and apply to Sales at (1) to
give Gross Margin (12) by value, allowing for:
1) (in the case of start-up businesses) additional costs incurred in
completing design and development work and to produce,
test, finalise and production-engineer any prototypes
2) problems likely to be encountered in early months of
production until procedures are improved (resulting in extra
material wastage, excessive labour hours etc.)
3) defective work e.g. rejected products returned by the
4) pilferage of materials
5) supplier problems - late deliveries, wrong specification,
additional costs from last minute buying etc.
All of which may result, particularly for start-ups, in low and
possibly even negative, margins for a period, until the various
problems can be identified and put right.

IV Estimate Material Deliveries (5) (including sub-contract parts)

needed to build up stocks to maintain uninterrupted production.

V Estimate the Labour Costs (6) needed to support production,

allowing for:
1) the addition to basic wages of Employer's NHI, Pension
Contributions etc.
2) ditto Holiday pay entitlement.

V1 Insert Opening Stock (4) for month 1, from the 'Opening Balance'
+ +
figures at (32) (33) (34)

V11 Derive Closing Stock (10) for month 1, having summed lines (1) to
(12). Insert as opening stock (4) for month 2. Repeat through to
month 12. Check the above stock figures are approximately correct
as follows (Material and Labour content only):
Raw Material (32) If say 6 weeks' production requirement is
carried, January's Stock should total January's Material Deliveries
(5) plus half December's (5).
Work in Progress (33) If work takes on average one month to pass
through the factory, January's Work in Progress should be
equivalent to January's Cost of Sales (1 1).
Finished Goods (34) If say 2 months stock is carried, January's
Finished Goods should be broadly equivalent to December's plus
January's Cost of Sales (1 1).
+ +
Check Closing Stock (10) = (32) (33) (34) for same month
+ +
Check Opening Stock (4) = ( 3 2 ) (33) (34) for the previous
Note 1: If the above vety approximate calculations show the
opening and closing stocks previously inserted at (4) and
(10) are seriously understated, monthly Material
Purchases (Stage IV) and Labour costs (V) should be
increased and the stock figures (Stage VII) reworked.
Note2: Stocks of packing materials, publicity leaflets, etc.
should be included with Finished Goods (34). Any
amounts actually used in the month, in sales at (l),
should be included in Costs of Sales (1 1).
Note 3: The following complexity is not recommended and for
forecasting purposes, should, if possible, be ignored, but
if the company insists on showing an 'overhead' content
in stocks, rather than valuing stocks at just labour and
material cost, the content should be separated out of (33)
and (34) and the total shown at (19), with (20) being the
equivalent for the previous month.

V111 Estimate Overheads (marketing administration, legal,

accountancy, office, travel, etc.) and insert at (13). Allow for:
(1) Additional legal, etc. costs at start of new business
(2) Any building renovation, removal, machinery installation,
(3) During year, such factors as inflation of pay and staff
Note: Ignore Interest (16) for the time being (see later)

IX Estimate the finance needed to support credit given to customers.

If say 2 months' credit given, Trade Debtors (30) will be the total of
last 2 months' sales, so January Debtors will total January's sales
(1) plus December's sales (1). Include any element of debtors
financed by factors, i.e. show the gross amount owing to the
company plus what is owing to the factors. Assume Other Debtors
(3 1) are zero for forecasting purposes.

X Progress Payments (35) can also be ignored for forecasting

purposes. (These are amounts invoiced to the customer, whether
or not yet paid for by him, before a contract is technically
'completed'; and down payments or advances before the contract
starts; or progress payments during it. Note that such amounts
should not be regarded as 'sales' at (1) until the contract has been
'completed', whereupon the whole contract value should be treated
as a sale, regardless of when invoiced and when the work was

XI Trade Creditors (37). If suppliers give say 2 months' credit,

January's trade creditors will be December's + January's material
deliveries (5).

XI1 Other Creditors (38). Include PAYE, VAT, Interest owing and
accrued expenses, etc. Assume, say, equivalent to current month's
overheads (17), or ignore for forecasting purposes.
XI11 Derive Net Current Assets (40) by deducting (39) from (36). (This
figure should approximately equal total sales for the past 3 months,
for a typical manufacturing company).

XIV Moving now on to the Cash Flow as such, derive the Increase or
(Decrease) in Net Current Assets (41). January's (41) will be
January's (40) less December's (40).

xv Estimate gross Capital Expenditure (42) in the month, for

purchase of buildings, plant, vehicles, etc. (before deducting, for
example, any Hire Purchase arrangements).

XVI Research and Development Expenditure. Ignore (43) for

forecasting purposes. Any labour and material cost included in (5)
and (6), which has been diverted to Research and Development in
the month, should be taken out again as a Credit at (7). Include
total labour and material costs together with all direct salary costs
etc. in administration (13).

XVII Derive (44) = (41) +(42) + (43), giving the gross additional
funding need in the month.

XVIII The contribution from Cash Profits (48) i.e. (22) plus
Depreciation, will reduce the monthly net cash requirement; Cash
Losses (45) on the other hand will of course increase it.
Profits are however reduced by interest charges (16) calculated on
total borrowings (57), which in turn depend upon profits. To break
the vicious circle, assume, initially, that interest (16) is zero and
derive rough profit (loss) figure for month 1 by deducting (13) from
(12). Insert at (45). Add Depreciation (46) and Amortisation (47) to
extent included in Administration Costs (13). Derive (48) and
deduct, if a profit, from (44) to arrive at the rough net cash
requirement (49). Add if a loss.

XIX Insert Opening Balances prior to the start of the 12 month period
at (50) to (56) and total (57). Add to this the rough cash
requirement at (49) for month 1 to arrive at a new total borrowing
figure (57) as at end of month l.

XX Calculate Interest, for one month, on the total (57) and insert at
(16) for month 1. Derive (17), (18) and (22). Insert the more
accurate figure at (45) and rework Total Borrowings (57), derive
Closing Overdraft (56), having inserted the relevant closing
balances for Factoring (54), Loans (51), (52), and Hire Purchase
(53) for month 1.
XXI Work through the same cycle for month 2 and so on to month 12,
which will then show peak funding need and in what month it

XXII Calculate Breakeven Point (24) i.e. the level of turnover needed
needed just to cover overheads (17), at the gross margin percentage
in question (23) i.e. (17) X 100 t (23).
At 25% gross margin, every £4000 of sales above breakeven will
produce a profit of £1000; every £4000 below breakeven, a loss of
£1000. The company can be controlled accordingly by comparing
order intake (25) and orders in hand (27) with actual sales (1).

If the Gross Margin the company thinks it is achieving (26) and (28)
as worked out from its Costing and Pricing data begins to be
substantially higher than is actually being achieved (23), the
Costing and Pricing assumptions should immediately be rechecked
to bring the two into line. The accuracy of the gross margin
percentage calculated at (23) in turn should be frequently checked,
particularly in the early months of a new company, by basing
closing stock (10) on physical stocktakes (Labour and Materials
only) until broad agreement begins to emerge. The task is often for
a period a tedious one, but any company that does not know its real
gross margins is likely to fail, possibly quite quickly.

Within 14 days of the end of each month, at least approximate
results for the month should be inserted (January Actual in the
example) for comparison with Budget. Next month, February's
Actuals will over-write January's Budget to give comparison with
February Budget; and so on.
Immediate rebudgeting for the rest of the year should take place if
it becomes apparent from the emerging pattern of Actuals that the
basis on which the Budget has been compiled is inaccurate, in
order to give maximum advance warning of impending
Actual Budget
Months D T J F M A M J J A S O N D T o t a l
1 Gross Sales
Direct Sales Costs
Opening Stock 22.0 25.0 25.0 27.0 29.0 30.8 32.6 32.7 32.8 31.0 26.8 28.8 35.3 37.8 25.0
Material Deliveries - 7.0 3.0 5.0 6.0 6.0 5.0 5.0 - - 7.0 10.0 10.0 - 57.0
Labour 5.0 4.0 5.0 3.0 3.0 3.0 3.5 3.5 5.0 3.0 4.0 4.5 4.5 5.0 47.0
(R& D)
Closing Stock
Overheads in Closing Stock
(Less in Opening stock)
(Sundry Income)


(12) X 100 t (1) 23.3% 10.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 5.0% 30.0% 30.0% 50.0% 30.0% NEG 29.4%
. . X 100 + (23)
(17) . . - 25.0
15.4 7.0 7.0 7.6 10.0 10.0 10.0 80.0 10.0 11.7 7.0 11.7 NEG 127.5
ORDERS Taken In Month 1.0 10.0
Estimated GM % 40.0% 26.0%
ORDERS In Hand at Month end 1l .0
- 16.0-
Estimated GM % 27.0% 27.0%
- pp-pp - -

Actual Budget
Net Current Assets Per Balance Sheet

Raw Material
Work in Progress
Finished Goods
(Progress payments) - - - - - - - p - - - - - - -

Sub-Total - 41.5
- 40.0
- 49.0
- 52.8
- 56.6
- 58.7
- 53.0
- 55.8
Creditors Trade 9.0 15.0 3.0 8.0 11.0 12.0 11.0 10.0 5.0 - 7.0 17.0 20.0 10.0
Other -
- - - - - - - - - - -
Sub-Total 9.0 16.0 3.0 8.0 11.0 12.0 11.0 10.0 5.0 - 7.0 17.0 20.0 10.0
- -- - ----- - - ----
- 37.0
- 41.0
- 41.8
- 44.6
- 47.7
- 50.8
- 48.0
- 46.8
- 48.8
- 53.3
- 57.8
- 51.1
Cash Flow Total
41 Increase (Decrease) NCA
42 Capital Expenditure Assets
43 R&D
44 Sub-Total
45 Profits (Losses)
46 Depreciation Assets
47 Amortisation R & D
48 Sub-Total
MONTHLY CASH FLOW (S'000) cantinued
Closing Balances per Balance Sheet
Actual Budget
New Equity
Medium Term Loan
Hire Purchase
(Cash in Hand)
The 'A' scores were originally developed to help predict company
failure (in conjunction with other techniques such as 'Z' scores and
accountants' ratios) and they are based on the argument that failing
businesses are characterised by the following stages:
Defects -+Mistakes -+ Symptoms.
They have been included as a general guide, indicating which
characteristics could be seen by prospective investors as potential
weaknesses in an investment opportunity.
A company is assessed and marked against the following factors (note
the relative marks awarded to different factors), and a score of 25, or
greater, means that danger signs are evident. This system will have
limitations regarding the assessment of the very smallest businesses,
and so the scores should not necessarily be taken at face value.
DEFECTS: (maximum: - 43)
Management Score
Autocratic chief executive who dominates his company
and will hear no advice 8
The chief executive is also the chairman 4
The skills on the board are unbalanced 2
(e.g. too many engineers)
There is no strong finance director 2
Members of the board do not actively participate in decisions 2
There is no depth of management below the board 1
There is no budgetary control system, maybe not even a budget 3
There is no cash flow plan or it is not updated 3
There is no costing system, no one knows what the
product costs
Response to change
There are clear signs of failure to respond to change - an ageing
product, old factory, out of date attitude to employees 15

THE MISTAKES: (maximum: - 45)

Gearing: the company's gearing is noticeably high 15
Overtrading: the company is growing faster than its finances 15
Projects: the company has launched a project of such a size
that, if it goes wrong, the company will be crippled. 15
THE SYMPTOMS: (maximum: - 12)
Financial signs: the ratios and 'Z' scores start to deteriorate 4
The company begins to 'improve' profits by creative accounting 4
The office needs painting, quality falls, many signs of distress 3
e Writs, rumours, resignations 1

GRAND TOTAL (maximum) ............ 100

'Predicting Corporate Failure' Argenti J. ICAEW Notes for Businessmen 1984


Borrowing from the main clearing banks is a common form of financing
by all types of businesses (reckoned by NEDO in 1984 to be some
&20,00Omof outstanding loans and overdrafts to UK businesses with a
turnover of less than & l mp.a.), and whilst it is important to be able to
assure the lender - by offering security - that he or she can be
reasonably certain of seeing his money again, other factors must also be
taken into consideration.
For example, the belief that a bank manager will be only too happy to
lend money against the full value of new assets is dispelled in Chapter 2
(bankers prefer not to invest more in a business than the owners
themselves, which at best, tends to halve the borrowing limit).
Security never made a bad proposition good, and the pledging of
personal assets in support of weak business proposals was roundly
condemned in a study of Loan Guarantee Scheme failures.
Bank managers using a traditional approach to evaluate borrowing
requests sometimes refer to a mnemonic check list; for example:-

'Three CS': 'Campan":

C haracter C haracter
C apital A bility
C apability M eans
P urpose
A mount
R epayment
I nsurance (security)
'Lending to Small Firms' NEDO 1986
However, the authors of the 'Lending to Small Firms' (NEDO 1986)
concluded: "The best kind of checklist for managers is one which covers the
functional areas of the business proposition upon which the manager needs
to be satisfied. Such areas can be comprehensive without seeking to be too
detailed and answers may be brief or lengthy depending on circumstances.
An example of an aide-memoire in use is set out (below) which seems to us to
be on the right lines."

- Bank Manager's Aide Memoire -
2. OCCUPATION (outline of products/services)
3.1.1 Technical
3.1.2 Financial
3.1.3 Administrative
3.1.4 Marketing
3.5.1 Book-keeping system
3.5.2 Profit and loss reporting
3.5.3 Budgets - cash flow forecast (3 years' sales)
3.5.4 Costings and breakeven calculations
3.5.5 Pricing
3.6.1 Cash
3.6.2 Debtors
3.6.3 Stock
3.6.4 Creditors

'Lending to Small Firms' NEDO 1986

The following publications have been used as guidebook reference
sources. You may find one or more of assistance, for example: - when
tackling a specfic problem associated with the raising of external share
capital, or perhaps when seeking background information.
A brief synopsis of each publication has been included to give some
indication of its contents and hence its potential relevance to a given line
of enquiry. Hopefully, any subjective views have been kept to a strict
minimum. The figures shown in square brackets e.g. [0 900 939 29x1
refer to the corresponding international standard book number -
'ISBN' - which should help to facilitate the processing of any orders or
inter-library loans.

Guidelines For Directors [0 900 939 29x1

Pub. Institute of Directors 3rd Edition 1985 (96pp)£7.95
Subtitled 'Recommendations and Guidance on Boardroom Practice'
and offers a comprehensive guide to the duties of directors (as is
possible within 96pp), describing in 3 parts: 'The Company and its
Board' (definition of 'company'; the parties associated with a company
- customers, employees, creditors, government & the community,
shareholders; the functions of direction; how the board operates; the
board's relationship with associated parties; the board's members;
diasgreement on the board etc.); The Director's Legal Status, Powers
and Duties (the powers; duties - general, disclosure, reporting and
accounting, shares and capital; conflicts of interest etc.); and, 'The
Director as an Individual' (employment; tax - salaries and
emoluments, share incentive schemes, close companies etc.). Further
Reading section and index.

How to Form a Private Company by Goldstein B. [0 85308 05851

Pub. Jordan G.' Sons 1985 30th Edition (107pp)£5.00
Gives guidance on the formation and administration of a private
company and includes: - benefits of limited liability; privileges of a
private company (over a public company); incorporation and required
documentation; articles of association; converting an existing business;
restrictions on the transfer and issue of shares; powers of directors; and
principal statutory requirements. Further Reading section and index.
Going Public by Bannock GJDoran A. [0 06 318370 61
Pub. Harper 6.'Row Ltd. 1987 (105pp)£19.95
Subtitled 'The markets in unlisted securities', it provides a detailed
review of the 'junior' equity markets. Chapters include an overview of
the market tiers; 'The practicalities of a USM flotation'
(advantages/disadvantages/eligibilitylhidden costsltiming &C.); 'The
OTC markets' (methods of flotationlproblems of trading in an
unregulated market1 practicalities &C.); 'OTC markets in the USA' and
other countries; and a view of the future outloook. Glossary,
bibliography & index.

Lending to Small Firms [0 7292 0802 81

by NEDC Committee on Finance for Industry
Pub. National Economic Development Office 1986 (103pp)£5.00
Subtitled 'A study of appraisal and monitoring methods' and based on a
series of interviews with bank managers (and others), its chapter
headings are:- Introduction; The Banking Industry Context; The
Small Firms Context; The Appraisal Process (inc. review of
applications and evaluation of propositions); Appraisal Outcomes (inc.
rejection and acceptance of business plans, financial structure
appropriateness); Monitoring; Wider Issues (inc. equity sources and
financial reconstruction of small businesses); Conclusions.

Money For Business [0 903312 74 31

Pub. Bank of England 1985 5th Edition (139pp)£3.00
Offers an introduction, in some detail, to the different types of finance.
Chapter headings:- Assessing financial needs; Introducing new equity
capital; Borrowing for the right term and purpose; Weighing up the
possibilities (8 illustrative examples of different financing
arrangements, quick check list of opportunities and pitfalls);
Presenting a case to providers of finance; Equity capital; Short-term
finance; Medium-term finance; Long-term finance; Finance for
exports; Public sector finance and assistance; Finance from European
sources; Sources of finance (giving address details for:- clearing
banks, discount houses, credit insurance companies, finance houses,
leasing companies, factoring companies, pension funds, the Stock
Exchange, venture capital funds, export houses &c). Index.
Presenting Financing Proposals to Banks [0 406 10070 51
by Bloomfield C. A.
Pub. Butterworth & CO1986 ( l 17pp)£12.00
The title may lead you to think that it covers only bank lending, but this
is not so. The book contains a useful insight to the presentation of both
loan and equity based funding and the chapter headings are: - 1) The
bank's decision-making process; 2) Financing requirements; 3) The
risk reward relationship - lending; 4) the risk reward relationship -
equity investment (including: - Institutional approach to equity risk,
Equity investment risk, Reward, Pricing, Protecting the investment,
The shareholders' agreement, 15pp); 5) An example of a funding
package; (6) Constructing a financing proposal; 7) Presenting the
application (3pp). Index.

Routes to Success by Barrow C. [0 85038 955 01

Pub. Kogan Page l986 (414pp)£9.95
Subtitled 'Case Studies of 40 UK Small Business Ventures', this book
includes a brief overview of 12 key issues which should concern small
business management, e.g. choosing and using professional advice;
developing a product market strategy; winning the cash flow war;
breaking even; understanding the nature of profit; management
accounts; funding; and, the business plan. The bulk of the text,
though, deals with: "the problems and opportunitiesfaced by entrepreneurs
as they tackle decisions about thefuture of theirfirms". It covers 3 phases of
business development: - pre-start up, 1-3 years old, and 3 years plus;
and its scope covers high-street retailing (e.g. chocolates, property
development), industrial products (e.g. machine tools),
'high-technology' (e.g. medical systems) plus others. Index.

Share Valuation Handbook by Livens L. [0 906840 98 81

Pub. Fourmat Publishing 1986 (207pp)£12.95
Subtitled 'Techniques for the valuation of shares in private companies'
and intended to: "simplify the underlying principles and present the broad
techniques in a useful format". Chapter headings include: - Concepts in
valuation; Shares (inc. shareholders' agreements; The dividend basis;
The earnings basis; The assets basis; The hybrid basis and the
combination basis; Taxation; The share valuation report; Dealing with
the Shares Valuation Division (Inland Revenue). Index.
The Genghis Khan Guide to Business by Warnes B. [0 9509432 071
Pub. Osmosis l986 4th Imp. (176pp)£25.00
A straight-forward and readable book on profit improvement and the
crucially important subject of cash flow; written from the viewpoint of
an experienced venture capitalist involved with smaller businesses.
Chapters (18 in all) include:- The Break-even Concept in Action;
"Vu1nerab1e" v "Safe" Business; Cash Flow Forecasting & Control;
Improving Gross Margins; and, Control and Evaluation of Stock. The
book also has a sister guide entitled The Genghis Khan Guide to Business
Cash Flow Handbook. It is written in a similar vein and covers business
planning and monitoring and also includes 2 case histories (available
from Business Dynamics Ltd., Talbot Place, Blackheath, London.

The Innovators Handbook by Lowe J & Crawford N [0 86197 061 01

Pub. TechnologyManagement Publications 1986 (449pp)£68.00
The result of several years research at Bath University Management
School which: "highlighted the difficulty that many (particularly smaller)
companies encountered in identifying suitable contract research, licensing or
other specialist organisations in seeking to overcome such problems".
Designed to provide: "a basic reference source for those seeking external
assistance in the innovation process". Chapter headings: - Technology
from non-industrial sources (using universities and contract R & D
companies plus directory of organisations); Design (using a design
consultant plus select directory); Protecting and exploiting intellectual
property (patent licensing plus directory of selected patent agents &
licensing lawyers); Funding technology (sources of funds for
innovation plus directories of venture capital funds and
facilitators/sources of grantslloans); Licensing consultants (the need for
the middleman, plus directory of licensing consultants); Databases and
publications (including directory of new product opportunity
publication and databases); Index of organisations by name and by
geographic location. All chapters contain key references and details of
other information sources.
The Inventors' Information Guide [0 95076261
by Eisenschitz T. S. & Phillips J.
Pub. Fernsway Publications Undated c . l984 (88pp)£2.95
Written for those lacking the corporate resources and know-how of the
professionally-employed investor, and to help to make it easier to locate
and evaluate skills and resources. "Where possible some idea is given as to
the usefulness or suitability of organisations which can help in the inventive
or developmental process". Chapter headings: - Information sources
(including national, academic and public libraries, Science Reference
Library, provincial patent libraries, industrial property literature);
Acquiring a patent (including British Patent Office, patent application
processing, services available to the public, European Patent Office);
Developing an invention (including higher education bodies,
government schemes, co-operatives, private sector organisations);
Some professional services (including patent agents, lawyers,
accountants, management consultants &C.);Finance (including how to
ask for money and how much to ask for); Marketing (including the need
for market research, making a plan); Registered designs; The Institute
of Patentees and Inventors; Useful international and foreign addresses;
Useful publications for inventors; Appendices (including flow-charts
for UK and EPC patent applications).

The Shareholder's Rights and Responsibilities [-l

Pub. WiderShare Ownership Council 1980 (20pp)£0.50
Written for the benefit of the (prospective) investor in public
companies, and usefully summarises: - different types of shares and
shareholders' meetings; reports; resolutions; voting powers; protection
of shareholders' rights; dividend payments and other important

The Small Business Action Kit [l 85091 089 81

by Rosthorn J. & Dicken A.
Pub. Kogan Page l986 (128pp)£9.95
Produced by the business counsellors of a local enterprise agency
(Macclesfield Business Ventures) and based upon the experience of
fifteen hundred counselling interviews. Terse style, but very
comprehensive; includes a number of specimen work sheets. Chapter
headings: - Am I Up T o Running My Own Business?; What Are The
Options; What Has To Be Done? Who Will Help?; No Customers-No
Business; Now I Need The Cash ...;... And Premises; Legal And Tax
Matters; Beginning To Manage; Employment; Are Big ~robiemsOn
The Way? Index. Also available in a loose-leaf format.
The Small Business Guide by Barrow C. [0563211105]
Pub. B B C 1984 Revised Edition (399pp) £6.50
Containing: "details of all the sources of practical information and help
needed by anyone who runs, or who wants to start running their own
business"; a comprehensive listing of addresses and supplementary
information on various types of organisations. Chapter headings: - The
need for information; Sources of direct help and advice (including
national/local agencies, local councils, property services, enterprise
zones, business associations); Business opportunities (new products or
businesses, co-operatives, franchising); Exploiting high, and not so
high, technology (science parks, research associations, computers,
industrial organisations); Finding out about your market (information
available, finding the information, marketing organisations, specialist
importinglexporting services, books and periodicals); Raising the
money (preparing your case, different types of finance, directory of
sources contacts, controlling the money, organisations and
publications for finance); Business and the Law (review of reference
publications, choosing the form of the business, business names,
protecting ideas, premises, trading laws, employing people, insurance,
national insurancelPAYENAT &C.);Training for business (courses at
colleges, directory, small business courses, distance learning, the
National Training Index); Youth opportunities for self-employment;
Starting up overseas; Glossary of key business terms. Index. (Under
further revision during 1988).

The VCR Guide to Venture Capital in the UK

by Cary L. [0 9508734 1 l]
Pub. Venture Capital Report l987 3rd Edition (464pp) £25.00
(Review based on 2nd Edition) Produced by the Editor of 'Venture
Capital Report' and subtitled 'How and where to raise risk capital'.
Chapter headings: - The Business Plan (what it should contain, how to
present it, example cash flow projection, purchasing a shelf company);
Personal experience (in raising venture capital in 1972); Venture
Capital Report (what it is, how it works); Case Study (from VCR,
viewpoint of an investor); Directory of UK Sources of Venture Capital
(the bulk of the book showing contact information plus fund
investment profiles in some detail). Indexes. (A new edition is due out
in 1988).
Venture Capital Today by Lorenz T. [085941 275 X ]
Pub. Woodhead-Faulkner 1985 (214pp) £25.00
Subtitled 'A guide to the venture capital market in the United
Kingdom'; broken down into 5 main parts, namely:- The UK
Scenario (the background and structure, the different types of investors
and their interests); The Venture Capital Spectrum (early-stage and
later-stage financing, buy-outs); The Investment Process (fund
selection, investment criteria, negotiation, post-investment activity,
exits); Some Key Issues (UK entrepreneurship, fund management
style, role of the State, European overview); and, Deal Structures
(examples: early-stage and later-stage financing, buy-outs). Lists major
sources of UK venture capital and members of the European Venture
Capital Association. Index.
The terms used have been adapted using the following references:- 'A
share in the action' (CBI); 'International Dictionary of Management'
(Kogan Page); 'Venturespeak' (39; 'A Study of businesses financed under
the Small Business Loan Guarantee Scheme' (Robson Rhodes); 'Bank of
England Quarterly Bulletin'; 'Going Public' (Harper & Row); 'How to
Form a Private Company' (Jordans); 'The Economist Pocket Style Book'
and 'The Economist Pocket Accountant' (both Economist Publications).
Fuller descriptions for each of the main types of shares are shown in Chapter
2, and the terms known as 'key ratios', and identified '*KR', are more fully
described in the appendix entitled 'Key Ratios'.

Amortisation See DEPRECIATION

Annual Report A statutory report to shareholders on the

activities and performance of a company
which includes the Auditor's Report, the
Chairman's Statement and the Director's
Approved Investment A fund approved for the purposes of the
Fund Business Expansion Scheme by the Inland
Revenue. Fund Managers will invest money as
nominee for the investor by bringing together
the funds of a number of investors and
spreading them over a number of unquoted
~ 0 m p a n i see

Articles of Association These regulate the relationship between the

company and its shareholders, and the
relationship of the shareholders between
themselves. They cover:- share classes;
restrictions on the issue and transfer of shares;
company buy-back of shares; number and
appointment of directors; directors' powers
and remuneration; and, general provisions.
The Articles of Association are drawn up on
the formation of a company together with the
Memorandum of Association, and, combined,
they represent the company's constitution see
Asset Something of (quantifiable) value owned by a
Current assets - those assets held temporarily by a business
in the normal course of trading, all of which
will become cash within 12 months e.g. stock,
raw materials, money owed by debtors
Fixed assets - the capital equipment, or possessions of a
business, used to carry out its activities and
not held for resale in the normal course of
trading. Such items are gradually written-off
through depreciation and would include:-
buildings, plant and machinery
Net assets - the total assets of a business minus its
liabilities. This is equal to the owners' equity
Net assets per share - the net assets + by the number of ordinary
shares issued. A measure of the underlying
asset value of a share
Net current assets - the excess of current assets over current
liabilities. Also known as working capital
Quick assets - current assets minus stocks i.e. total cash
plus money owed (debtors)
Return on net assets - pre- or post-tax profits expressed as a

(RONA) percentage of net assets. A measure of the

efficiency with which the net assets employed
in a business generate profits

Auditor's Report A statutory report on the annual accounts of an

organisation resulting from an audit by an
independent firm of accountants appointed by
shareholders at the annual general meeting. In
the UK, the auditor has to record his opinion
as to whether the accounts represent a true and
fair view of the company's transactions and
financial structure

Balance Sheet A snapshot of the assets owned and liabilities

owed by a business at a point in time; includes
the source and application of funds
Business Expansion Allows private investors to offset the cost of
Scheme (BES) buying shares in unquoted companies
(incorporated in the UK) against their top
marginal rate of tax. They are allowed to invest
up to £40,000 annually, but will lose tax relief
if they sell within 5 years. No single investor
may buy more than 30% of the issued ordinary
share capital. (A fuller description can be
found in the appendix entitled 'Business
Expansion Scheme')

Capital Various meanings - normally fixed assets such

as buildings, plant and machinery or the
money available to obtain them
(gross) - the resources used to finance a business; all
Capital employed fixed and current assets see ROCE
Capital expenditure - used in the purchase of fixed assets
Development capital - finance for growing companies which are
profitable or almost profitable
Net capital employed - gross capital employed minus current
Seed(-corn) capital - investment which enables a project or idea
to commence development so that it can grow
into an early stage company
Share capital - the cash subscribed (and promised) by the
various shareholders of the business. Entitles
the owners to the business's net assets
Working capital - (net current assets) the resources necessary
to finance the short-term needs of a business
for cash, stocks and debtors

Capital Gains Tax (CGT) Tax levied on the gains made on the disposal of
goods or assets when their value has increased
from the date of acquisition to the date of
disposal. CGT is levied above a certain
threshold. Some types of gains, such as the
sale of BES shares (when satisfying
appropriate criteria), are exempt from CGT
Certificate of Document confirming that a company has
Incorporation been legally incorporated - issued by the
Registrar of Companies

Clearing Bank The major retail banks - the banks such as

Barclays, Lloyds, Midland and National
Westminster who handle current accounts for
individual customers -are generally described
as 'clearing banks'. Derived from their ability
to exchange or 'clear' each other's cheques
through the Bankers' Clearing House of which
they are members

Company Association of people constituted as an

artificial 'legal person' quite separate and
distinct from people who may form its
membership. It acts in its own name, has a
common seal enabling it to identify its own
acts and may sue or be sued see MEMBER
Close company - a company with not more than five owners
or shareholders. Normally a small family
Listed company - a company whose shares may be quoted on
the Stock Exchange, it having signed the
Stock Exchange's Listing Agreement
Off-the-shelf company - a ready-made company which exists only on
paper and can be bought at a very low cost
Private company - a company which is not allowed to offer its
shares for sale to the general public and cannot
be quoted on the Stock Exchange or the USM.
It is subject to fewer legal requirements on
accounting, disclosure of information and
other matters in comparison to a public
company. The company name will be followed
by 'Ltd.', rather than 'plc', which denotes a
public company see STOCK EXCHANGE and
Public company - a company which is entitled to offer its
shares for sale to the public (e.g. its market
capitalisation must exceed £500,000) and must
meet strict standards of accounting and
disclosure of information. The company name
will be followed by 'plc'. All quoted
companies must be plcs, although not all plcs
Quoted company - a company whose shares are quoted on the
Stock Exchange. Nowadays, the existence of
the USM and the OTC markets means that
there is no longer a simple division of
companies into 'quoted' and 'unquoted'. They
may also be 'USM-quoted' or 'OTC-quoted'
Unlisted company - a company which is not listed on the Stock
Exchange; its shares cannot therefore be
traded there though they may be traded
outside the Stock Exchange. All private
companies are unlisted see STOCK EXCHANGE
Unquoted company - a company that does not have its shares
quoted on any market

Corporate Venturing A partnership formed between a large and a

small company to take advantage of
opportunities (often 'new-technology'
oriented) which might otherwise be missed. It
is generally characterised by a sharing of risks
and by a directlindirect minority equity
investment in the smaller (or new) business

Creditor A person or business to whom a trade debt is

owed - either as a result of making a loan or
while they are awaiting payment for a product
or service. When a business is being
wound-up, certain creditors have priority over
others (see the table shown in Chapter 1on the

Debenture Fixed or variable interest loan stock issued by

companies, usually for longer-term purposes,
redeemable at a set date and secured on assets.
Interest is repaid irrespective of the
availability of profits, and debenture holders
have a prior claim over unsecured stock and
ordinary shareholders when a company is
Convertible debenture -offers their owners an opportunity to convert
them into ordinary shares at a fixed price at a
fixed future date
Floating-charge - secured on total assets, rather than on
debenture specific assets
Mortgage debenture - secured on specific assets
Debt Finance Method of financing a business by going into
debt through an overdraft or a loan. The
lender obtains a return through the payment
of interest either for the term of the loan or
until the overdraft is cleared; the latter may be
more flexible than the former. The interest
rate may be fixed for the period or may vary
with changes in interest rates. Debt finance is
repayable before the owners' contributed
capital if a company is wound-up

Debtor A person or business who owes a trade debt

Depreciation Amount by which the value of capital

equipment decreases over a period of time, as a
result of business operations or technological
innovation. It is the gradual exhaustion of
capital assets including wear and tear, and
obsolescence. Most common methods of
depreciation are the straight line (e.g. less 25%
of initial value per year - which means the item
has no value after 4 years) and reducing balance
(e.g. by 25% of previous year's value - which
produces a reduction similar to an exponential

Director A member of the board of directors appointed

to run a company by its shareholders. A
director may or may not be a shareholder him1

Diversification Spreading money invested among more than

one investment. The likelihood of all
investments faring badly is thus reduced see
Dividend The payment by a company of a return from
its profits (or reserves) to shareholders on their
corresponding investments normally expessed
as a percentage per annum on the face value of
any share. There is no automatic entitlement
to a dividend. It is payable at the
recommendation of an Annual General
Meeting of shareholders based on the success
or otherwise of the enterprise and the
recommendation of the directors
Dividend cover - post-tax earnings t total amount of
dividend paid. One measure of a company's
financial performance see EARNINGS PER SHARE
Dividend yield - the dividend paid per share + by the market
price per share. Another measure of a
company's financial performance

Earnings Profits of a company available for distribution

to shareholders after the payment of tax and
any dividends to preference shareholders

Earnings Per Share The after-tax profit made by a company t by

the number of ordinary shares it has issued.
One of the measures used in assessing the
financial performance of a company

Enterprise Agency A local enterprise agency provides free

information and counselling for small
businesses and is usually jointly sponsored by
both the public and private sector. Without
the 'local' prefix, 'enterprise agency' has a
broader interpretation and could include, for
example, the Welsh Development Agency

Equity Finance This results from selling the risk-sharing part

of the company's capital to shareholders.
'Equity' and 'ordinary shares' are, in effect,
interchangeable terms. The holders of equity
are shareholders in the 'equity' of a company.
No returns are guaranteed or known in
Financial Services Act Intended to overhaul earlier legislation
concerning investor protection (the
Prevention of Fraud [Investments] Act, the
prospectus provisions of the Companies Act,
and the Stock Exchange [Listing]
Regulations). It received Royal Assent in
November 1986 and puts into law a structure
of self-regulation within a statutory
framework - this will be overseen by the
Securities and Investments Board

Gearing Generally, the ratio of external borrowings to

shareholders' funds. If there is a high
proportion of borrowed funds the (capital)
gearing is considered high * KR
Income gearing - a measure of the proportion that profit,
before the deduction of interest & tax, bears to
interest. It gives an indication of a business's
exposure to changing interest and its ability to
pay interest when profits drop * KR.

Incorporated Business Business not operated in partnership, nor as a

sole trader, but incorporated under the
provisions of the Companies Act. It thus
becomes a separate legal entity and, for
instance, the business itself is taxed rather
than iust the individuals involved

Inheritance Tax Tax payable on transfer of goods or assets from

one individual to another at death. Subject to
certain personal and business reliefs
(Inheritance Tax replaced Capital Transfer
Tax, which itself replaced the earlier death
Investment Resources put directly or indirectly into an
enterprise or enterprises or some long-term
asset in the expectation of earning a return in
the form of interest, dividends or other
Syndicated investment - an investment which is too large (and
possibly too risky) to be handled by one
investor and will therefore be shared among
several partners

Key Ratios Important (management) ratios which provide

a measure of a business's performance - the
'breakeven point' (i.e. fixed costs gross
margin) is an example. Several key ratios are
described in the appendix entitled 'Key

Licensed Dealer A dealer in securities licensed by the

Department of Trade & Industry (formerly
under the Prevention of Fraud [Investments]
Act 1958, but now under the Financial
Services Act), though not necessarily a
member of the Stock Exchange

,iquid/Liquidity Available (or availability of) funds and

therefore a company's ability to pay its way. A
simple measure of a company's liquidity is the
ratio of its current assets : current liabilities.
The more quickly and easily that assets can be
converted into cash, the more liquid they are
said to be * KR

Liquidation Legal procedures which cause a company to be

formally closed down and cease its existence
Loan Guarantee First launched in 1981 (and subject to several
Scheme (LGS) changes since) to encourage banks to provide
medium-term finance up to £100,000 where
the risks were too great to warrant
conventional loans. Intended to help
businesses where insufficient security could
be pledged, 70% of any such loan is
guaranteed repayable by the government to
the lender should the borrower default. The
borrower pays a premium of 2.5% on the
guaranteed portion over and above the interest
charged by the lender

Margin (Gross) The gross profit expressed as a percentage of

sales (taking account of variable, but not fixed,
Marginal Rate of Tax An individual's highest rate of income tax and
therefore the rate at which any additional
earnings are taxed

Market Capitalisation The total value at market prices of the

securities issued by a company (or of a market)
i.e. the number of shares issued X market price
per share

Marriage Bureau A service provided by a local enterprise agency

acting as a linking mechanism between small
businesses in need of risk capital and potential
investors. A broader interpretation would
include the matching of other resources e.g.
regarding premises see ENTERPRISE AGENCY
Member (of a company) Shareholder

Memorandum of Lays down a company's powers and its

Association relationship with the outside world.
Contains:- the name of the company; its
registered office; the purpose for which the
company has been formed; liability of
members; share capital (any division into
different classes and nominal value of shares)
Merchant Bank UK bank providing longer-term venture
capital or risk capital rather than the
shorter-term loans handled by, say, the
clearing banks. They also advise on mergers
and take-overs and deal in specialist services
such as those of investment trusts, insurance,
gold and foreign currency &c.

Option In principle, usually an opportunity to

purchase shares at a future date. E.g. an
'approved share option scheme' could allow
directors of a company to purchase certain
shares several years hence at a fixed price

Over-The-Counter Share market operated by a licensed dealer

(OTC) Market outside the control of the Stock Exchange.
Some dealers provide a service to match
previously identified buyers and sellers.
Others are market-makers acting as principals
themselves see STOCK EXCHANGE
Partnership Form of business association or company in
which the partners are fully responsible for the
partnership's liabilities. Such liabilities may
render investment in a partnership an
unattractive proposition to many potential

Portfolio A range of investments owned by a person or

institution. A portfolio of different
investments, rather than a single investment,
reduces the overall risk taken

Premium Amounts paid into a company (by

shareholders when purchasing shares from the
company) in excess of the nominal or face
value of the shares. E.g. shares of face value £1
could be sold at, say, £3 each (the premium
being £2 .)

PriceIEarnings Ratio(P1E) The market price of an ordinary share +

earningslshare after tax. The PIE ratio
expresses the market value placed on the
expectation of future earnings; i.e. the
number of years required to earn the price
paid for the shares out of profits at the current
Principal Someone involved in securities transactions is
acting as a principal if he or she at some point
owns the securities (and hence takes a risk on
any movement in prices) rather than acting as
an agent for someone else

Profit The difference between the wealth of a

business at the start of a period of trading and
its greater wealth at the end of that period. Out
of its profits, a business:- pays corporation
tax; reinvests for the future; and pays
dividends to shareholders see RESERVES and GROSS

Prospectus Document giving considerable details on a

company, its activities, track record and
future intentions required to support any new
public issue of shares and which must be
lodged with the Registrar of Companies before
they can be offered for sale

Reserves Accumulated profits attributable to

shareholders which have not been distributed
as dividends but have been reinvested in the

ROCE Return on capital employed * KR

R01 Return on investment

Securities Stocks and shares of all types. Stocks are fixed

interest securities; shares are the rest.

Security Stocks, shares, insurance policies &c. pledged

by the lender in support of a loan or

Shares The ownership of a company (or partnership)

is divided up into a number of shares held by
the shareholders. Each share is a fixed and
indivisible section of a company. Shareholders
have a certificate signifying that they have a
claim to the assets of the company see
Shareholders' Funds The share capital plus capital reserves plus
retained profits (or minus retained losses)
minus intangibles (such as R & D and
goodwill). This represents the borrowing base
of a company. Early losses reduce the
borrowing base, profits increase it

Spreadsheet Spreadsheet software is a purpose-designed

computer program to assist with the
manipulation of figures arranged in rows and
columns (as in the case of cash flow forecasts).
Such software will allow a rapid recalculation
when figures are altered; some programs can
plot charts too

Stamp Duty Tax levied by the Inland Revenue on various

legal transactions

Stocks Fixed interest securities. They may be issued

by Government or by companies in order to
raise finance. (In the USA the term 'stocks' is
used to mean 'shares') see SECURITIES
Company loan stock - fixed interest stock issued by companies.
The term is sometimes used to exclude loan
stocks which are secured on specific assets and
are referred to as 'debentures'

Stockbroker Member of the Stock Exchange who acts as an

agent for hidher clients, seeking to buy and
sell stocks and shares on their behalf in the

Stock Exchange An independent UK organisation providing a

market place where existing stocks and shares
are traded and both com~anies and
Government can raise capital by issuing new
stocks and shares see OVER-THE-COUNTER
Third Market Launched in 1987, by the Stock Exchange; an
organised market for smaller, newer
businesses which may not meet the conditions
for the requirements of the USM or a full
listing. Potential candidates could include: -
start-ups, businesses having a one-year
trading record and businesses trading
securities on the OTC. An applicant
company's holding of cash (or 'near cash')
assets, holding of minority interests in other
companies, and trading in certain activities
(e.g. investment or property dealing) must
normally not exceed 10% of its profits or
Unlisted Securities 'Unlisted' is a misnomer, since companies on
Market (USM) the USM are just as much listed as if they were
on the full stock market - of which, the USM
is a part. Launched in November 1980 to
attract smaller companies in the stock market,
it is available to businesses with a three-year
trading record (though there are exceptions)
and it offers an opportunity of raising capital at
a lower cost than would be possible via a full
listing. USM candidates must sell at least 10%
of their shares to the public, as against the 25%
required for a full listing see STOCK EXCHANGE
Venture Capital Used to support businesses - in either or both
forms of share and loan capital, often
accompanied by business skills - to obtain
(appreciable) long-term capital gains.
Described by 'hands-on' venture capitalists as
the concept of adding value to investments by
participating in management and offering
advice. 'Hands-off venture capitalists use a
wider definition: "risk investment in
unquoted companies with high growth