One of the most important aspects of Prime Minister Malcolm Turnbull’s newly announced innovation initiative is the focus it brings on the opportunity to invest in the small business sector.
The tax incentives will undoubtedly attract more investment, and the loosening of capital insolvency regulations will compliment this by providing less downside to entrepreneurs from taking some necessary risks; collectively the measures will also have the overall effect of raising the profile of small business finance to a national level.
Whether it is a new tech start-up, or an existing “traditional” small business, access to capital can be make or break for local SMEs. According to the latest MYOB Business Monitor, released this month, access to finance or investment will create significant pressure for 14 per cent of Australian SMEs in the coming year, with a further quarter expecting at least some pressure.
Currently, ‘angel investment’ is an option for only a very small number of businesses, with fewer than five per cent of local SMEs using equity investors, according to our nationwide research.
The increased attention and financial opportunity provided in the Government’s innovation statement, however, is only part of the picture if we are to boost investment in local start-ups and SMEs.
These businesses themselves must become more ‘investment-ready’, using the best advice and support available in order to appeal to a sophisticated investment market, and negotiate the best deal for each party.
For a business preparing to attract investment, there are a number of key areas to consider:
Understanding the value
Business operators need to be able to articulate why their business matters. What will change because of them, what problem are they solving? They then need to translate this market opportunity into a financial opportunity for their business. More important than the financial assets that appear on the balance sheet, capturing this opportunity requires business systems they have put in place, IP that the organisation has created and the value of its brand.
Backing the right people
Investors back people. An important part of raising money to fund your business is building report with the financier. Showing a depth of understanding in your market is important, but as humans we often make emotional decisions and then rationalise them with numbers. Showing the business has the right talent – both in terms of management and key staff – for success is key, but so is making a good impression.
For a business seeking investment, the current financial position shown in the balance sheet and P&L is only part of the picture of how the business is performing. What potential investors are looking for is the growth potential of the business. Being able to demonstrate this through accurate forecasting, as well as the modelling of scenario trends with their investment applied, will greatly increase the chances of successfully attracting funding.
The right advice
Although good accounting and business software can provide businesses with the sort of detail they will need, getting expert help with financial modelling and pre-investment planning is always a good idea. An accountant or financial advisor can also provide advice on the potential structuring of an investment and help an owner set a realistic value for their business.
The right fit
Businesses should also be careful not to focus solely on the size of the investment, but also look at what else the investors might bring to the business – such as governance experience or access to new markets – and how their goals and values are aligned with the business owners. The right fit can make all the difference in establishing a successful partnership.
About the author:
This article was written by Tim Reed, CEO of MYOB. MYOB is an Australian multinational corporation that provides tax, accounting and other services to small and medium businesses.