Equity Funding Costs

[Manuela]

Hi Everyone,

I am in the process of setting up an online business and want to raise money through Equity Funding. It's taken 5 months to finalise the busines plan and I have now been invited to present at an investors luncheon. I am seeking a min of £70K.

My question relates to the costs associated with raising finance in this way. I have recently discovered that I might face large legal bills to draft up the contracts and Accountants fees for due diligence. As I have very little funds to put into the business myself, once I have successfully raised the £70K how much should I expect to pay extra? And should I factor those costs into the business plan beforehand and reflect it in the money I am seeking to raise?

Any advice would be appreciated.

Thanks
Manuela

[Ozzy]

Hi Manuela,
If you do not have the funds to raise the contracts (and I'm afraid I don't know how much they would be) then yes you should include them in the business plan. How favourable that would look though I don't know.

[Manuela]

Hi Richard,

Thanks. To be honest that's what I expected. I guess I'll have to be over cautious in order to cover myself, probably looking at another £10K.

Regards
Manuela

[james constant FCCA]

Hi

I agree with the previous person that you should include all start-up costs in your business plan. One more thought for you:
From professional experience -and although by no means I want to discourage you, quite the opposite- unless you have a collateral or deposit, you may find it difficult to find a willing investor.

You should know that banks are not in the business -and they are not allowed to do so by their constitutions- of risking their depositors' money into untested business ideas, no matter how good they are. Nevertheless, business plans are required to present the idea.

And it would improve your chances having a good plan that makes sense, is based on reasonable assumptions, financial projections that reflect those assumptions and show substantial growth and is supported and backed by independend research. I would suggest that you submit your plan to a professional qualified accountant for review.

Wishing you every success
James Constantine FCCA
Chartered Certified Accountant
http://www.taxadviceuk.com
FREE Tax Tips for the start-up and the small business owner in understandable language

[Strategist]

Hi,
It is quite normal for the company to bear the costs of an outside investor and therefore you should include 'professional fees' in your plan. Acquiring small amounts of equity capital is very expensive in this respect. I would stand back for a moment and consider whether the sum requested is going to be sufficient. Is this to fund a one off development or is it part of a longer-term starategy to develop the business. In my experience most entrepreneurs do not ask for enough cash. You need to be sure that the cash flow will be sufficient to ensure that there is adequate working capital at all times. This needs to cover three months salaries, rent and other overheads. If your plan does not include this, then an investor may be put off as the business runs the risk of tradining insolvently. Finally, coming back to my earlier point, a very clear idea of where the business is heading (i.e. the five to ten year prospects) will increase the chances of getting the investment in the first place. Good luck.