Is it still possible to find investors in small SMEs?
Discussion
I've been running a small digital agency for 3 years now. We've enjoyed growth every year, and this financial year we've just finished with a low 6-figure revenue and ~18% net profit. I'm looking to potentially sell a stake in my company in order to help raise a house deposit. Has anyone gone through this in the last year or two? Any tips on where one might find potential suitors?
Lol I don’t think that’s quite what he was saying!
I also run a digital agency (bit bigger but not massively so) and we seem to get emails all the time from people claiming to be ready to sell our business at the drop of a hat - whether they could I not I don’t know tho
I always feel the issue with a service based company like ours is it’s entirely based on what clients and projects you have - and very often this is tied specifically to individuals and relationships…so poss a harder sell than someone who makes and sells widgets
In your case though, I assume the person buying in will be literally owning a stake and getting a profit out related to that stake regularly? If the company sells then they get value related to their percentage back? For someone with spare cash that seems a pretty reasonable thing to invest in…. not really sure how you look for those sorts of people admittedly but I bet they’re out there.
I also run a digital agency (bit bigger but not massively so) and we seem to get emails all the time from people claiming to be ready to sell our business at the drop of a hat - whether they could I not I don’t know tho
I always feel the issue with a service based company like ours is it’s entirely based on what clients and projects you have - and very often this is tied specifically to individuals and relationships…so poss a harder sell than someone who makes and sells widgets
In your case though, I assume the person buying in will be literally owning a stake and getting a profit out related to that stake regularly? If the company sells then they get value related to their percentage back? For someone with spare cash that seems a pretty reasonable thing to invest in…. not really sure how you look for those sorts of people admittedly but I bet they’re out there.
Dynion Araf Uchaf said:
I would imaging that approaching an investor to fund your business so that you can spend the money on a house is maybe not the best way forward.
Yea, this isn't what I was proposing. I'm proposing the sell some of the shares that I personally own in the business to someone who wishes to buy a stake.Nightmare said:
In your case though, I assume the person buying in will be literally owning a stake and getting a profit out related to that stake regularly? If the company sells then they get value related to their percentage back? For someone with spare cash that seems a pretty reasonable thing to invest in…. not really sure how you look for those sorts of people admittedly but I bet they’re out there.
Exactly this. Ideally I would find someone who operates in my industry and/or niche and who thinks they could bring value to the company that would help take us to the next level, and therefore improve the returns they'd get from their stake.I imagine it's going to come down to networking with the right people and having the right conversations in the right places....
jammy-git said:
Yea, this isn't what I was proposing. I'm proposing the sell some of the shares that I personally own in the business to someone who wishes to buy a stake.
Most investors would want their money invested to grow the business unless they are buying 100%. They aren't generally just after an income, they want that plus growth. It does happen in some sectors though.I think there is often a mix up in understanding the various options...
from what the OP is saying he wants to sell some shares - the upside for the purchaser is simply any dividends they may receive out of nett profit based on current figures and anticipated increases in income / profits.
that is quite different to an investor's expectations which is to sell shares for an investment into the business where the money invested is funding an accelerated growth
So, there is no 'investment' case in the OP's scenario -at it's most basic he is effectively swapping shares for cash - as shares have no intrinsic value, the value to the person buying them is simply in the timescale over which they get that money back, for which there are two scenarios:
- the shares maintain value (or hopefully grow) and can be sold in the future to regain the capital / the dividends replace interest (if you banked the money) and hopefully the dividends outpace interest and balance the risk that the share value might also go down...
- the shares have no external value (the OP's scenario as there is no real market for a small digital agency's shares), so the dividends need to repay capital as well as balance the loss of interest elsewhere (harder now with higher interest levels)
to put some rough figures against that...
the OP mentions low 6 figures t/a - so let's assume worst case scenario of £100k
nett profit is c. £18k
we can assume minimal assets in this type of business
there is little value in the brand or even the order book as it is very often relational with the owner
so in this sector top end might be 2-2.5x multiplier
so the company value might be £36k -> £45k at a theoretical highest level...
what are the shares worth and how many need to be sold?
assuming a £20k deposit desired then the OP is looking at selling c. 50% of his shares (arguably a higher % might be needed).
this would allow the share purchaser to balance savings return and capital return against the risk of no return - so they would get £9k p/a back - their £20k on deposit at 5% return would give them £25k in 5 years - £9k p/a would give £27k in 3 years, but with the alternate risk of everything lost...
the other issue with that of course is that it dramatically changes the balance of figures for a mortgage if the OP wants a house - while it might be assumed that the OP is paying an initial salary from income, and that would remain - the loss of a significant chunk of dividends would have an impact on a mortgage application.
obviously rough figures and they are simply to illustrate a principle (we don't need full details) - they do raise some questions
- for anyone to see this as a more traditional small company investment would be challenging as it is not looking for the investment to grow the company - and most of the available funds in this sector would be in angel investors etc. who would want to see it as being a company growth exercise...
- for anyone to see it as a simple share purchase with a return is viable albeit at a considerable cost for the OP it is also very risky for anyone - a 3 year history on a company is still rather young to predict future success
maybe the best option (if possible) is to find someone in the family / friend network who has the cash and can see it more as a loan, but do it through share purchases as a means of security - it might be much easier. Doing this as well might mean that a deal could be fixed where £20k is based on a return of £25k over 5 years (i.e. c. 5%) allowing a much smaller chunk of the dividends as the OP would need to personally underwrite the loan and therefore there is much lower risk - it would come at much lower cost to the OP (but then the OP would take the risk on the business failure and having to still repay the loan).
the reality is that there is very little intrinsic value to a small digital agency - esp. only 3 years old, it makes it very difficult to use it as a vehicle to raise funds...
one thought - if the OP does manage to find someone wanting to do this, look at how you might set up share classes so that you can separate out the dividend payment from the voting / control / power...
from what the OP is saying he wants to sell some shares - the upside for the purchaser is simply any dividends they may receive out of nett profit based on current figures and anticipated increases in income / profits.
that is quite different to an investor's expectations which is to sell shares for an investment into the business where the money invested is funding an accelerated growth
So, there is no 'investment' case in the OP's scenario -at it's most basic he is effectively swapping shares for cash - as shares have no intrinsic value, the value to the person buying them is simply in the timescale over which they get that money back, for which there are two scenarios:
- the shares maintain value (or hopefully grow) and can be sold in the future to regain the capital / the dividends replace interest (if you banked the money) and hopefully the dividends outpace interest and balance the risk that the share value might also go down...
- the shares have no external value (the OP's scenario as there is no real market for a small digital agency's shares), so the dividends need to repay capital as well as balance the loss of interest elsewhere (harder now with higher interest levels)
to put some rough figures against that...
the OP mentions low 6 figures t/a - so let's assume worst case scenario of £100k
nett profit is c. £18k
we can assume minimal assets in this type of business
there is little value in the brand or even the order book as it is very often relational with the owner
so in this sector top end might be 2-2.5x multiplier
so the company value might be £36k -> £45k at a theoretical highest level...
what are the shares worth and how many need to be sold?
assuming a £20k deposit desired then the OP is looking at selling c. 50% of his shares (arguably a higher % might be needed).
this would allow the share purchaser to balance savings return and capital return against the risk of no return - so they would get £9k p/a back - their £20k on deposit at 5% return would give them £25k in 5 years - £9k p/a would give £27k in 3 years, but with the alternate risk of everything lost...
the other issue with that of course is that it dramatically changes the balance of figures for a mortgage if the OP wants a house - while it might be assumed that the OP is paying an initial salary from income, and that would remain - the loss of a significant chunk of dividends would have an impact on a mortgage application.
obviously rough figures and they are simply to illustrate a principle (we don't need full details) - they do raise some questions
- for anyone to see this as a more traditional small company investment would be challenging as it is not looking for the investment to grow the company - and most of the available funds in this sector would be in angel investors etc. who would want to see it as being a company growth exercise...
- for anyone to see it as a simple share purchase with a return is viable albeit at a considerable cost for the OP it is also very risky for anyone - a 3 year history on a company is still rather young to predict future success
maybe the best option (if possible) is to find someone in the family / friend network who has the cash and can see it more as a loan, but do it through share purchases as a means of security - it might be much easier. Doing this as well might mean that a deal could be fixed where £20k is based on a return of £25k over 5 years (i.e. c. 5%) allowing a much smaller chunk of the dividends as the OP would need to personally underwrite the loan and therefore there is much lower risk - it would come at much lower cost to the OP (but then the OP would take the risk on the business failure and having to still repay the loan).
the reality is that there is very little intrinsic value to a small digital agency - esp. only 3 years old, it makes it very difficult to use it as a vehicle to raise funds...
one thought - if the OP does manage to find someone wanting to do this, look at how you might set up share classes so that you can separate out the dividend payment from the voting / control / power...
The problem right now is that investor money is expensive (much more so than a couple of years back) and, as others have said, really needs a credible growth plan to support any investment case.
The hardest thing with knowledge based SMEs if they don’t have a plan, and management/other investors aligned, is that it’s way too easy for an investor to get screwed by the original owner especially if he/she remains a major shareholder.
When you talk about wanting someone who can add value, that gets even more expensive (because you want more from them) than simply wanting a silent investor happy to take a dividend.
Really what it sounds like what you want/need is someone willing and able to buy in, effectively as a co-founder/partner, to actively grow the business. That is something that happens, but the match ends up needing chemistry as well as money. And a clear plan about what you both want to achieve.
The hardest thing with knowledge based SMEs if they don’t have a plan, and management/other investors aligned, is that it’s way too easy for an investor to get screwed by the original owner especially if he/she remains a major shareholder.
When you talk about wanting someone who can add value, that gets even more expensive (because you want more from them) than simply wanting a silent investor happy to take a dividend.
Really what it sounds like what you want/need is someone willing and able to buy in, effectively as a co-founder/partner, to actively grow the business. That is something that happens, but the match ends up needing chemistry as well as money. And a clear plan about what you both want to achieve.
"Low six figure revenue" - say £300,000
18% net profit = £54,000
Selling what percentage of shares? Say 20%. So the buyer gets the chance to get an annual return of about £11,000 if it all goes well.
What would I pay for a minority stake in a business where I had no say in the management and potential upside of £11,000 p.a.?
Absolutely £zero.
amongst other problems, the management could pay all profits to themselves as salary and stick two fingers up at the minority shareholder.
Ah, but we could get a proper shareholders agreement in place. Yes, but at what cost? And what would be the cost/prospects of enforcing anything under that agreement?
18% net profit = £54,000
Selling what percentage of shares? Say 20%. So the buyer gets the chance to get an annual return of about £11,000 if it all goes well.
What would I pay for a minority stake in a business where I had no say in the management and potential upside of £11,000 p.a.?
Absolutely £zero.
amongst other problems, the management could pay all profits to themselves as salary and stick two fingers up at the minority shareholder.
Ah, but we could get a proper shareholders agreement in place. Yes, but at what cost? And what would be the cost/prospects of enforcing anything under that agreement?
Thank you, some good advice.
akirk said:
maybe the best option (if possible) is to find someone in the family / friend network who has the cash and can see it more as a loan, but do it through share purchases as a means of security - it might be much easier. Doing this as well might mean that a deal could be fixed where £20k is based on a return of £25k over 5 years (i.e. c. 5%) allowing a much smaller chunk of the dividends as the OP would need to personally underwrite the loan and therefore there is much lower risk - it would come at much lower cost to the OP (but then the OP would take the risk on the business failure and having to still repay the loan).
the reality is that there is very little intrinsic value to a small digital agency - esp. only 3 years old, it makes it very difficult to use it as a vehicle to raise funds...
one thought - if the OP does manage to find someone wanting to do this, look at how you might set up share classes so that you can separate out the dividend payment from the voting / control / power...
And I would say this the best of all; I'll certainly investigate this as an option.the reality is that there is very little intrinsic value to a small digital agency - esp. only 3 years old, it makes it very difficult to use it as a vehicle to raise funds...
one thought - if the OP does manage to find someone wanting to do this, look at how you might set up share classes so that you can separate out the dividend payment from the voting / control / power...
jammy-git said:
Thank you, some good advice.
If you’re looking at going down that route a convertible loan (a loan that converts into equity if certain triggers occur) may be simpler approach and more attractive for you of short term cash is all you need. akirk said:
maybe the best option (if possible) is to find someone in the family / friend network who has the cash and can see it more as a loan, but do it through share purchases as a means of security - it might be much easier. Doing this as well might mean that a deal could be fixed where £20k is based on a return of £25k over 5 years (i.e. c. 5%) allowing a much smaller chunk of the dividends as the OP would need to personally underwrite the loan and therefore there is much lower risk - it would come at much lower cost to the OP (but then the OP would take the risk on the business failure and having to still repay the loan).
the reality is that there is very little intrinsic value to a small digital agency - esp. only 3 years old, it makes it very difficult to use it as a vehicle to raise funds...
one thought - if the OP does manage to find someone wanting to do this, look at how you might set up share classes so that you can separate out the dividend payment from the voting / control / power...
And I would say this the best of all; I'll certainly investigate this as an option.the reality is that there is very little intrinsic value to a small digital agency - esp. only 3 years old, it makes it very difficult to use it as a vehicle to raise funds...
one thought - if the OP does manage to find someone wanting to do this, look at how you might set up share classes so that you can separate out the dividend payment from the voting / control / power...
Neither fully addresses the underlying risks for the party with the cash. What both amount it is obtaining/borrowing money from a friend/family member by giving them considerable leverage over you. That could be a very good way to fall out with someone.
Be realistic about rates though. Unless someone is actively doing you a favour, they’d be better off leaving the money in the bank if you’re only considering paying them 5%.
Btw, take comments about investors not wanting people to take money off the table with a pinch of salt. Many recognise that building a business can be a long hard slog and sometimes allowing a founder to take a little part way through the process can make sense, especially if it helps secure the ongoing support of a significant other who may otherwise be questioning whether it’s all worth it. It’d be a very different situation if there wasn’t a credible growth plan and the founder simply wanted money out because the business was unable to generate enough to extract through salary/dividends.
I must admit I got the amounts wrong - sorry I thought it was low millions so assuming selling a small amount for enough for a deposit. Definitely agree that the finding a friend/family person would be the best option here
Also, if you fancy a chat regards your plans please shout (bear in mind that I apparently don’t know the difference between 6 and 7 figures tho!)(but I have owned a digital agency for nearly 20 years)
Also, if you fancy a chat regards your plans please shout (bear in mind that I apparently don’t know the difference between 6 and 7 figures tho!)(but I have owned a digital agency for nearly 20 years)
dazmanultra said:
What are the growth prospects for the business with or without the additional money?
I would be investing your time and energy on this very point.Even if you were able to find an investor that enabled you to extract sufficient cash for a house deposit, in two year's time, you could be sharing your business with someone you no longer need or want but are lumbered with. Conversely, apply yourself and in two years time, you may have grown the business to such a level that your dividends would more than cover the deposit - even buy a house outright.
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