Size up Your Investment
Published: 13 July 2017
Are you looking to invest in a business? It’s so easy to dive straight in and transact on a handshake. This could be a costly mistake. Pause and consider the risk profile of investing in the business, as well as the threats to which the business is exposed to. Set out all the terms of the deal in writing.
In this opening article, we highlight some of the fundamental considerations when you are looking at investing equity capital in a business and in a series of EIGHT bite size articles, we examine each of these areas in more detail.
Does the target business have a legal structure that will achieve your investment objectives?
There are a number of different legal structures available to business owners, the most familiar one being a ‘company limited by shares.’ In the first article, we will examine the different legal structures available to business owners and assess the importance of choosing the right one for an investor.
How important is tax relief?
Tax may be an important consideration for investing. There are several government approved tax investment schemes available to unlisted small businesses (typically early-stage businesses) to help incentivise investors to plough money in (in return for some generous tax breaks) and in our second article we will consider some of the popular schemes available to investors.
Sign up to a Shareholders’ Agreement.
A Shareholders’ Agreement is a private contract entered into between the shareholders of the company in which they agree how to run the business. In our third article, we will examine the importance of a Shareholders’ Agreement and the key provisions to include in a Shareholders’ Agreement to protect you, the investor.
Make sure the business owns the assets which are key to it.
Any ideas, inventions or intellectual property that is used by the business should be owned and in the name of the business that the investor is committing funds to. Article four will discuss this in more detail and how to ensure the business gets proper legal title to the assets.
Commit the founder to the business and its growth plans.
The business know-how and client network are typically in the hands of the founder. How do you lock-in the founder and ensure he remains committed to the growth of the business, to ensure you achieve the return on investment you were looking for? Article five examines ways you can lock-in the founder’s commitment to help protect your investment. In this article, we will also examine how an investment can be protected in unforeseen circumstances, such as death or critical illness of the founder.
Protect the Client Relationship.
The seven articles will identify a number of important matters which an investor should incorporate in the legal document between the investor and the business. Equally important, is the relationship between the business and its clients, which should be formalised with terms and conditions of business. In article six we will discuss terms and conditions in more detail. We will explain why they are so fundamental to an investor and we will examine some of the most important terms that should always be covered without exception.
The last article of the series will be assessing what other checks an investor can make before investing to ensure his or her investment is protected as best it can. In this article, we will be exploring due diligence from an investor’s perspective, as well as the actual investment process and some key practical considerations you should consider during the process.
In summary – by the end of the series, you will see how much we love paper – even in a digital era! But you will see why and along the way we will show you how we, at Fletcher Day, can help you, the investor, evaluate the investment risks so you can make a return on your investment.
The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.