This article first appeared on the IPG website, November 2014
Peter Faber of Fox Williams, shares ten tips for fashion business seeking investment.
1. Choose the right type of investment
The type of investment you need will depend on your aims, but debt finance, angel investment and venture capital or private equity are the main options.
Debt finance tends to fund capital over the medium-term, and is usually secured and / or guaranteed. Angel investment is more suited for start-ups and early growth, and comes from high net-worth individuals, either individually or collectively, for whom there are important tax relief incentives. Their typical investments are between £20,000 and £500,000, though the average is below £100,000. You will usually be expected to give up some equity ownership, with the rate of return reflecting the investors’ perceived risk. Venture capital or, at the higher end, private equity is for more ambitious projects, with investments ranging from £200,000 upwards. It often funds business expansion or acquisitions or the development of major new products or IT.
2. Satisfy your investors’ criteria
Potential investors look for businesses with a quality product, good cashflow and the potential for growth. A robust digital presence, a strong backlist and evidence of international potential can also be attractive. Investors invariably look carefully at the quality of management teams too, and like to see evidence of capable and committed leaders and efficient structures. And of course they will be seeking a return on their investment and a route map to an exit in due course.
3. Pick the right investor
Choosing your investor should be about much more than the money on offer. Make sure yours has a good understanding of the publishing sector, and consider if they will be able to contribute strategic or management advice. Can they help you find new business or recruit the right people? Might they be able to source more funding for you? And are their ideas about an exit from the business in tune with yours?
4. Get good advisers
Appoint advisers early on, and look for those with plenty of experience of the commercial and legal issues so you can reduce your burden. Advisers will help with the valuation, selection and terms of potential investors, and can assist in preparing and presenting your financial information and business plan and subsequently with documenting and managing the investment process. It obviously helps if they understand the fashion sector.
5. Be ready for due diligence
The scale of the investor’s due diligence will depend on the size and nature of the investment, but it can be substantial. Prepare for it by readying your business plan, accounts and statutory information, and get all your contracts—with authors, rights partners, distributors, staff and so on—in good order. Polish up your tax affairs and property arrangements, and try to forecast any issues that might be raised during due diligence. It will all help to make the process much smoother.
6. Understand the value implications
You will need to work out how much equity you want to release, as well as the balance between options like preference shares and debt as well as equity. Extra costs like investors’ fees and various professional fees will also need to be factored in.
7. Realise what it means for management control
Getting investors on board generally requires more corporate governance. Investors are likely to want to be represented on the board, and may wish to have consent rights for any important decisions taken by management or shareholders. You will also need to provide them with good and timely management and accounting information.
8. Know what will happen to equity
Investment has implications for management’s equity in the business. Think about how much you are prepared to dilute your equity, and if there are any issues around it that might arise in the future.
9. Understand your personal liabilities
External investment is likely to mean some additional personal liabilities for management. New service agreements and non-compete restrictions are quite possible, and personal undertakings about the current business and its future conduct will have to be considered. Advisers will be able to help with tax implications too.
10. Control the investment process
Remember that you need to control the process. Plan it in detail so you can minimize disruption to your day-to-day business and maintain confidentiality throughout. Good legal advisers will be able to help with this and with the key documents like non-disclosure agreements, heads of terms and shareholders’ and service agreements. Inevitably it is a process that takes time—but the benefits to your business at the end of it can be huge.