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Thinking ahead to make your business an attractive acquisition proposition

  • For most angel investors the day they invest is the day they begin to think about their exit from the company. So what can this teach business owners who are keen to attract start-up capital? Damien Callaghan from Clarendon Fund Managers, who manage HBAN, in Northern Ireland looks at some of the key learnings from a recent HBAN webinar on the theme of ‘Guiding Companies to an Exit’.

    No investor will ever commit to an investment if they don’t believe that, at some point, they will be able to get a return on that investment. For angel investors who are getting involved at an early stage, there is often a limited amount of due diligence that can be done before making an investment, so they rely on a high level knowledge of the sector and a prediction on how the business might add value to a future buyer.

    Business angels are a vital part of the investment eco-system, often investing alongside others into companies seeking typically up to £500,000 in funding. Since HBAN Ulster launched in late 2018 members have completed 30 deals in NI-based companies with individual investments ranging from £25,000 to £100,00 per investor, per deal.

    One of the biggest things to consider is how the company’s value proposition could play into a larger entity to see if there would be a potential to sell to the larger entity in the future. That future could well be five plus years away, and a lot can change in that time, so once an investment is made the focus moves to building a great company. Once you build a great company the exit ambition is so much easier to realize.

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    Angel investors are typically looking for several factors which will make a company stand out. The market size being targeted has to be substantial, the founders need established business relationships in the industry eco-system and critically they will need a protectable, technology differentiator. Ultimately, angels invest in people so the calibre of the CEO and management team is fundamental and a shared alignment when thinking about the future of the business is essential.

    Experienced angels advise that the best funding model is one which places all investments on a value equivalent – so no preference is given to VCs over angel investors. It is important that the angel investment round remains a voice within the company should it take on additional capital in future rounds. Often the chair of the board plays an essential role in keeping the connectivity to all of the shareholders as the company accelerates through funding rounds.

    One of the questions often asked is - how do you know when the time is right to seek an exit? Companies rarely grow in straight lines. Value moves in step functions, so picking the time is usually a judgement call rather than an exact science. With that in mind, it is important to begin to build relationships early on with companies you think your proposition might be of strategic value to. You need to make them aware of your company and begin to demonstrate how you are offering a piece of their future jigsaw.

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    When it comes to ensuring that a sale goes smoothly the chair has a crucial role to play in bringing all of the shareholders along on the journey. In America, acquisitions now often require 100 percent shareholder sign off so this relationship with all shareholders can be deal breaking. The CEO is equally as important and needs to be incentivized to grow the company, push through the sale and then be prepared to exit if that is part of the agreed terms.

    There are several steps that business owners can take now at a start-up stage to prepare for an exit strategy which at the same time make them an attractive investment for an angel. Make sure that all of your documentation and data is available for due diligence. Most importantly, it is vital that before you even speak to an angel investor you have all of the required IP ownership tied down. That can be an early deal breaker.

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    Usually acquisitions are completed because of synergies between two businesses. If you have a multi-national company in mind for a future sale you can prepare for that by adopting a similar ethos within your own model.

    The journey from investment to sale is an exciting one, and often comes with unexpected challenges, as we have seen in particular this year. While angel investors may have their eyes on the exit door, they also bring with them a wealth of experience which can really boost your company for its next stage of growth. As long as everyone has the same goal for the future of the business then this investment structure could be just what your start-up needs to get on course for an exit.  

    The full webinar featuring angel investors Michael Black and Bernard Collins can be viewed at https://www.hban.org/learning-centre/videos

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