Start-up to Scale-Up: A Practical Guide for Founders
Navigating The Scale-Up Journey
At Dragon Argent we focus on helping clients maximise their business value, minimise their business and commercial risk and enable frictionless change. Scaling up is a crucial phase for any company, marking the shift from the experimental start-up phase to a well-established business poised for significant growth.
The scale-up phase involves more than just boosting sales or expanding market reach. It involves navigating the complexities of scaling operations, it requires a strategic financial function, protection of company assets, expanding a team, and it involves defining a company culture on which you will rely, all whilst maintaining the agility and innovation that drove your initial success.
Did you know that only 4.6% of startups manage to reach the scale-up phase?
In this article, we will explore what it means to scale up your business. We will share insights from our experiences working with scale-ups and provide guidance on how to successfully navigate this critical transition in your business’ journey.
Table of content
Essential factors for a successful growth strategy
The importance of Corporate Governance for SMEs
Why is financial planning needed?
How R&D Tax Credit Schemes help businesses scale in the UK
Benefits of (S)EIS schemes to raise investments
How to give out shares and share options in your business
Essential company and HR Policies required by UK Law
How to protect company’s assets (e.g. physical and intellectual property)
The importance of enterprise value and how to build it
Raising investment: Angels, Family Offices and VCs
Essential Factors for a Successful Growth Strategy
Determining the right time to scale up involves transitioning your focus from merely sustaining the business to actively fostering its growth.
Scalability is the ability of a business to manage an increasing workload or expand in response to growing demand. A scalable business can significantly boost its revenue without a proportional rise in costs. Entrepreneurs should look for several indicators to assess scalability:
Market Demand: An expanding market with rising demand for products or services suggests a business may be ready to scale. Analysing market trends and customer needs can help determine if the market can support growth.
Consistent Sales Growth: A history of steady sales growth indicates a successful business model and a growing customer base.
Strong Value Proposition: A distinct and compelling value proposition that sets the business apart from competitors can signal readiness for scaling.
Systematized Operations: Standardized and documented business processes indicate that the business can handle growth without operational disruptions.
Financial Health: A solid financial position with reliable cash flow and access to investment capital signals readiness for scaling up.
People and culture challenges: As you grow, it can be tough to find and keep the right people and maintain a strong company culture.
While the transition is challenging, there are essential due diligence and strategies that founders can take to manage this process of scaling and valuing their business successfully.
💡 Useful Resources: Sole Trader or Limited Company in the UK: Which is best for you?
The Importance of Corporate Governance for SMEs
Appointing an outsourced corporate governance advisor for a growth-focused business can bring several strategic benefits, enhancing the overall governance framework and driving sustainable growth. Corporate governance advisors bring in-depth knowledge of best practices, regulations, and compliance requirements, which are crucial for maintaining robust governance structures.
Here are some key points outlining the importance of such an appointment:
Enhanced Credibility and Trust:
Investor Confidence: Sound corporate governance practices boost investor confidence, making it easier to attract and retain investment.
Reputation Management: Strong governance helps in building a positive corporate reputation, which is vital for business growth and market positioning.
Regulatory Compliance:
Up-to-date with Regulations: Advisors ensure that the company stays compliant with ever-changing regulatory landscapes, reducing the risk of legal issues and penalties.
Proactive Compliance: They help in anticipating regulatory changes and preparing the business accordingly.
Risk Management:
Identifying Risks: Corporate governance advisors assist in identifying and mitigating risks related to business operations, finance, and compliance.
Crisis Management: They help in developing robust crisis management frameworks to handle unexpected challenges effectively.
Board and Management Support:
Board Development: Advisors assist in building a strong, diverse, and effective board of directors, which is crucial for steering the company towards growth.
Management Training: They provide training and development programs for management to enhance their governance skills and understanding.
Facilitating Growth Transitions:
Scaling Operations: Advisors help in establishing governance frameworks that support scalable growth and smooth transitions during expansion.
Mergers and Acquisitions: They provide critical support during mergers, acquisitions, and other significant business transformations, ensuring governance continuity and compliance.
Improved Accountability and Transparency:
Clear Reporting: Advisors help in setting up transparent reporting mechanisms that enhance accountability at all organizational levels.
Stakeholder Communication: They assist in developing effective communication strategies with stakeholders, which is essential for maintaining trust and support.
Sustainability and ESG Initiatives:
Sustainability Practices: Advisors guide the integration of sustainable practices and Environmental, Social, and Governance (ESG) criteria into the company’s operations.
ESG Reporting: They help in establishing comprehensive ESG reporting frameworks, which are increasingly important for investors and stakeholders.
💡 Useful Resources: Watch the recorded webinar with our strategic partner Seedling discussing on what an Environmental, Social and Governance (ESG) is, what its benefits are, and how can your business become a certified Carbon Neutral business to attract investors. You’ll gain a comprehensive, detailed, and future-proof strategy for dealing with ESG risks. ESG: Climate action, for any business.
In summary, appointing an outsourced corporate governance advisor can significantly benefit growth-focused businesses by providing specialized expertise, enhancing compliance and risk management, supporting strategic planning, and facilitating sustainable growth.
Why is financial planning needed?
Financial planning is an essential component for any growth-focused business, especially in a competitive and dynamic market like the UK. This strategic process helps businesses manage their finances efficiently, ensuring they are well-positioned to scale and thrive.
Financial planning provides a roadmap for sustainable growth. By forecasting future revenues, expenses, and capital requirements, businesses can avoid overextending themselves and ensure they have the resources needed to support expansion. This foresight helps in balancing investment in growth opportunities with the maintenance of financial stability.
Here’s why financial planning is crucial for growth-focused businesses in the UK:
Risk Management: Scaling a business involves inherent risks. Financial planning helps identify potential financial pitfalls and develop strategies to mitigate them. This includes maintaining adequate cash reserves, managing debt levels, and planning for unexpected expenses. A robust financial plan ensures that the business can weather economic uncertainties and market fluctuations.
Regulatory Compliance: The UK has a complex regulatory environment. Financial planning helps businesses stay compliant with tax laws, employment regulations, and other legal requirements. By planning ahead, businesses can avoid costly penalties and ensure that all financial practices adhere to the legal standards.
Cash Flow Management: For a growth-focused business, managing cash flow is critical. Financial planning ensures that businesses have adequate liquidity to meet their operational needs and invest in growth opportunities. It helps in planning for seasonal variations in revenue, managing accounts receivable and payable, and avoiding cash crunches that can hinder growth.
Attracting Investment: Investors are more likely to fund businesses that have a clear financial strategy. A comprehensive financial plan demonstrates to potential investors that the business is well-managed, understands its financial needs, and has a clear path to profitability. This can be critical for securing venture capital, loans, or other forms of financing necessary for growth.
Long-Term Vision: Finally, financial planning helps businesses articulate a long-term vision and set achievable goals. By setting clear financial targets and developing a strategic plan to reach them, businesses can maintain focus and direction, ensuring that every step taken is aligned with their growth ambitions.
Financial planning is not just a necessity but a cornerstone of successful growth. It enables businesses to manage their resources effectively, mitigate risks, attract investment, and make informed strategic decisions. For any growth-focused business, a robust financial plan is indispensable for navigating the complexities of scaling up and achieving long-term success.
💡 Useful Resources: Watch our recorded webinar below which will help founders to plan their business finances efficiently.
How R&D Tax Credit Schemes Help Businesses Scale in the UK
Research and Development (R&D) tax credit schemes play a crucial role in helping businesses scale in the UK by providing financial incentives for innovation and technological advancement. These government-backed schemes are designed to encourage companies to invest in R&D, thereby fostering growth and competitiveness.
The UK’s R&D tax credit schemes are designed to be accessible to both small and medium-sized enterprises (SMEs) and larger companies. SMEs benefit from more generous rates under the SME R&D Relief, while large companies can take advantage of the Research and Development Expenditure Credit (RDEC). This inclusive approach ensures that businesses of all sizes can leverage these incentives to fuel their growth.
The table below shows how R&D tax relief rates have changed in recent years. The new merged scheme applies for accounting periods beginning on or after 1 April 2024.
| Current incentives | Current incentives | Merged scheme | ||||
|---|---|---|---|---|---|---|
| Your business | SME R&D tax incentive | RDEC | Merged scheme | SME intensive scheme | ||
| Company type | Before 1 April 2023 | After 1 April 2023 | Before 1 April 2023 | From 1 April 2023 | From 1 April 2024 | From 1 April 2024 |
| Loss-making SME | Up to 33.35% | Up to 18.6% | 10.50% | 15% | 16.20% | |
| Profit-making SME | Up to 24.7% | Up to 21.5% | 10.50% | Up to 16.2% | Up to 16.2% | |
| R&D intensive SME | Up to 27% | Up to 27% | ||||
| Large company | 10.50% | Up to 16.2% | Up to 16.2% | |||
R&D tax credit schemes are a powerful tool for businesses looking to scale in the UK. By providing financial support and encouraging innovation, these schemes enable companies to invest in crucial R&D activities, improve their competitiveness, and achieve sustainable long-term growth. For any business aiming to expand and succeed in the dynamic UK market, leveraging R&D tax credits is a strategic move that can significantly enhance their growth trajectory.
Our team of tax experts can help companies of all sizes claim R&D tax credits which they are entitled to. Find out if your business is eligible by requesting a call back from our R&D tax credits experts.
Benefits of (S)EIS schemes to raise investments
The Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) are UK government initiatives designed to encourage investment in early-stage and growth-focused businesses. These schemes offer significant benefits to both investors and companies seeking investment.
Below are some the key provisions for SEIS and EIS schemes:
Seed Enterprise Investment Scheme (for investment in early-stage companies)
Trading period at date of investment - less than 3 years
Base – must have a permanent establishment in the UK.
Maximum number of staff at the date of investment – less than 25 full time equivalent employees
Maximum amount that can be raised under SEIS - £250,000
Company maximum gross assets when shares issued - £350,000
Corporate group – it must not be controlled by another company or control another company that isn’t a qualifying subsidiary
Investment from other schemes: no funds can be raised from Venture Capital Trusts or under EIS
Income tax relief for investors: Investors can claim up to 50% income tax relief on investments up to £100,000 per tax year.
Capital Gains Tax (CGT) Relief: Gains on SEIS shares are free from CGT if the shares are held for at least three years and income tax relief was claimed. Investors can also get tax relief on any losses made at highest rate tax paid for net investment
Enterprise Investment Scheme (for investments in larger and more established businesses)
Trading period at time of investment – less than7 years (less than 10 years for a knowledge intensive company)
Maximum number of staff - less than 250 full time equivalent employees
Maximum inward investment eligible - £5,000,000 (in a tax period) and £12,000,000 (company lifetime) (£10,000,000 (in any tax period) and £20,000,000 (company lifetime) for a knowledge intensive company).
Company maximum gross assets when shares issued - £15,000,000 and not more than £16,000,000 after investment.
Corporate group – it must not be controlled by another company, or it must not control another company that isn’t a qualifying subsidiary. Where a company does control a qualifying subsidiary, it must own more than 50% of that qualifying subsidiary.
Income Tax Relief for Investors: Investors can claim up to 30% income tax relief on investments up to £1 million per tax year, or £2 million if at least £1 million is invested in knowledge-intensive companies.
Capital Gains Tax (CGT) Relief: Gains on EIS shares are exempt from CGT if the shares are held for at least three years. Investors can also get tax relief on any losses made at highest rate tax paid for net investment
Inheritance Tax Relief: EIS investments qualify for Business Property Relief, meaning they are exempt from inheritance tax if held for at least two years.
In summary, SEIS and EIS schemes offer substantial benefits that make them attractive options for both investors seeking tax-efficient investment opportunities and companies looking to raise capital to fuel growth and innovation.
💡 Useful Resources: SEIS and EIS Do's and Don'ts for Founders
Apply for SEIS/EIS Scheme:
Maximize your business potential with SEIS or EIS. Dragon Argent can assess your eligibility and guide you through the application process, including (S)EIS Advance Assurance. Book a consultation with our corporate solicitors or tax advisors now.
Allotment & Transfer of Shares: How to give out shares and share options in your business
When founders are scaling up their business, giving out equity is a valuable asset to help them in this process and should be allocated judiciously.
Equity in a company is distributed through shares, which are divided among co-founders, used to incentivise early employees and advisors, and allotted to investors in return for investment until the company can fund its own growth. If too little equity is given, it may not be appealing enough to attract employees and investors. However, if too much equity is given away in early funding rounds, there may not be enough left for future investors or employees.
However, it's not only the quantity of equity given away that matters but also the manner in which it is distributed.
Issuing shares and granting share options is a key strategy for attracting investment, rewarding employees, and ensuring long-term commitment to your business. In this section, we outline the key considerations for allocating shares to investors and your team, explain why share options are often preferable for employees, and detail the steps involved in issuing both shares and share options.
Understanding Shares and Share Options
Shares: Represent ownership in a company, and generally entitling shareholders to a portion of the profits and decision-making power. Holders of shares will participate in the success of the company straight away.
Share Options: A contractual right that be granted to employees and other third parties, granting them (usually once certain conditions are met) the right to buy shares in the company at a predetermined price in the future. Holders of share options will not participate in the success of the company until they exercise their right to acquire shares and pay for them.
Steps to be taken when Allotting Shares
Valuation: Determine the value of the shares to be allotted. This can be based on current market value or a valuation by a financial expert. For shares options, you may need to agree the valuation with HMRC before granting them.
Corporate Approvals: The board of directors must approve the issuance of new shares, ensuring compliance with the Companies Act 2006, the company's articles of association and any shareholders’ agreement. Directors must first be authorised to allot shares by the company’s shareholders before they can issue new shares.
Documentation: Prepare the necessary documents to evidence the authorisation of the allotment of shares. This is likely to include board resolutions, shareholders’ resolutions and consents (if required) application/subscription documentation and share certificates.
Administration: Update the statutory register of members and other company registers to formally document the legal ownership of the new shares and file relevant forms with Companies House to update the company's records.
Transfer of Shares
Sale or Gift: Shares can be transferred through a sale or as a gift. Shares are formally transferred by completing a stock transfer form.
Stamp Duty: Where shares are sole for a price of £1,000 and above, stamp duty is payable at 0.5% of the transaction value.
Corporate Approvals: The board of directors should approve the transfer of shares, ensuring compliance with provision around transfer of shares within the Companies Act 2006, the company's articles of association and any shareholders’ agreement.
Documentation: Prepare the necessary documents to evidence the approval of the transfer of shares. This may include board resolutions, shareholders’ resolutions and consents (if required), and share certificates for the new owner of the shares.
Register Update: Once stamp duty has been paid, and stock transfer forms have been adjudicated, the company’s will need to update its statutory register of members to reflect the new legal ownership of the shares transferred.
Issuing Share Options
Option Pool: It is important to establish an option pool, typically around 10-15% of the company’s total equity, to be allocated to employees.
Type of Share Option: determine whether the share options should be tax advantaged or non-tax advantaged based on the company’s and the employees’ circumstances.
Option Agreement: Draft a share option agreement detailing the terms, including the exercise price, vesting period, and expiration date. If options are being offered to a large base of employees, it may be better to draft scheme rules instead with a simplified option agreement in support.
Valuation: Determine the fair market value of the shares to set an appropriate exercise price and agree the price with HMRC where appropriate.
Legal and Regulatory Compliance
Companies Act 2006: Companies must ensure compliance with the Companies Act 2006, its articles of association and any shareholders’ agreement, which governs the allotment and transfer of shares in the UK.
HMRC Approval: For tax-advantaged schemes like EMI (Enterprise Management Incentives), seek HMRC agreement around valuation before granting EMI share options to benefit from tax reliefs.
We help startups and SMEs with their fundraising rounds and find the most tax efficient ways to incentivise employees with Enterprise Management Incentives (EMI) share option schemes. For an initial discussion, please book an appointment with one of our advisors: / https://www.dragonargent.com/corporate-law-advice
Communication with Stakeholders
Transparency: Clearly communicate the terms and benefits of share allotments and options to employees and investors.
Education: Provide resources to help stakeholders understand the value and implications of holding shares or share options.
Tax Implications
For the Company: Issuing shares or options can have tax implications for the company, including potential National Insurance contributions.
For Employees: Educate employees on the personal tax implications, including potential capital gains tax upon selling shares.
By carefully managing the allotment and transfer of shares and share options, you can attract and retain top talent, align the interests of your employees with the success of your business, and secure the investment needed to fuel growth. Ensure all actions are documented and compliant with legal requirements to maintain transparency and trust.
💡 Useful Webinar:
A roundtable discussion and Q&A on what an Enterprise Management Incentives (EMI) Scheme is, what its benefits are, and how it can be used to incentivise key employees in a tax-efficient way.
💡 Useful Articles:
Disclaimer: the guidance contained in this article is not a substitute for legal advice. Before implementing any option scheme, you should seek appropriate advice from a qualified legal professional. For any questions you may have setting up a Share options scheme contact us by scheduling a discovery call with one of our legal experts and we will be happy to help you.
Employment Contract and Essential Staff Policies Required by UK Law
Employment law requires specific provisions that must as a minimum be contained in an employment contract that is provided to your employee on or before day one of employment. Alongside the employment contract, a company is required to have certain staff policies in place that are easily understandable and accessible. We have outlined the minimum documents and procedures that a company must have in place for their first hire:
Employment Contracts
Purpose: To outline the terms and conditions of employment. Take a look at our blog post that outlines each provision that must be included in an employment contract.
Implementation: Providing detailed and clear contracts to all employees and ensuring any changes are documented and communicated to employees.
⚠️ Failure to provide a compliant employment contract to an employee can result in 2-4 weeks salary compensation at the employment tribunal as well as significant commercial and reputational damage.
Disciplinary and Capability Procedures
Purpose: to ensure that all employees of the company are treated fairly and consistently. A disciplinary procedure will be used where there are possible issues of misconduct, and a capability procedure will be used where an employee fails to perform to the required standard as a result of lack of skill, capability or training.
Implementation: Documented procedures, including steps for disciplinary and capability actions and hearings, and training for managers on fair treatment.
⚠️ Companies who fail to adopt a disciplinary and capability procedure will leave the doors wide open for employees to bring unfair/wrongful dismissal claims at the Employment Tribunal – the repercussions will be both financially and reputationally damaging.
Privacy Policy (Employee Data)
Purpose: To protect the privacy and rights of your staff by outlining how their personal data is collected, used, stored, and destroyed.
Implementation: Data protection training, regular audits, and clear procedures for data breaches and subject access requests.
⚠️ Failure to comply and implement a Privacy Policy will result in potential breaches of the UK GDPR. Breaching the UK GDPR could result in fines of up to 4% of a company’s annual global turnover.
Health and Safety Policy (only required where you have 5 or more employees)
Purpose: to set out the company’s commitment to ensuring that health and safety is managed effectively. It should provide details of those responsible for specific actions (first aiders, fire marshal’s) and who individuals can report their concerns to.
Implementation: Regular risk assessments, employee training, and a clear reporting system for health and safety concerns.
⚠️Failure to implement a Health and Safety Policy will result in sanctions ranging from fines of up to £20,000 for a company and imprisonment or disqualification of a director. It will also leave the company at risk of claims at the Employment Tribunal.
Implementing the above required policies not only ensures legal compliance but also promotes a positive and fair workplace culture. Regularly reviewing and updating these policies in line with legal changes and best practices is crucial for maintaining a compliant and thriving business environment.
However, whilst the above guidance sets out what MUST be provided to an employee, these particulars are only the bare minimum and do not provide much protection for an employer on a commercial level. Provisions protecting an employer’s confidential information and intellectual property are strongly encouraged to be inserted into all employment contracts. Additional provisions such as restrictive covenants, caps on sick pay and paying notice in lieu are other commercial provisions we recommend are inserted and often are ones which investors request are included when they are looking to invest in your business.
💡 Useful Resources:
How to create a legally compliant staff handbook policies for UK employees: Protect your business further and do not just meet the bare minimum. Click the below link for further guidance on other staff policies to better protect your business: Essential Staff Handbook Policies in the UK
If you would like us to carry out a free audit of your employment contract to determine whether your employment contract opens your business to risk, send a copy of your template contract to legal@dragonargent.com and one of our employment solicitors will be in touch!
If you would like to discuss any other employment law related topics or questions, book a discovery call with one of our employment solicitors by clicking the link below.
💡 Useful Employment Law Related Articles:
How to protect company’s assets (e.g. physical and intellectual property)
For many businesses, the initial emphasis is on their product or service. However, an often overlooked but vital element is intellectual property (IP). IP can either be the secret weapon that drives your business to success or the Achilles' heel that leads to its downfall.
IP is the collective term for creations of the mind and the fixed formats in which they can be protected. At its core, IP protects your business’ unique ideas and creations. This can include:
Patents: grant exclusive rights for inventions for a limited period. To be patentable, an invention must be new and have a technical effect. Patent applications are filed with UK Intellectual Property Office (“UKIPO”). Once granted, patents can last for 20 years from the date of registration, subject to renewal fees every 5 years.
Copyrights: protect literary, dramatic, musical and artistic works such as books, music, photographs, art, films and sound recordings. Copyrights protect the expression of an idea, not the idea itself. There are no official registers in the UK, but you do not need to register protections for copyrights to arise. Copyright protection is obtained automatically upon the creation of the original work.
Trade Marks: protect the signs and names used to distinguish the goods and services of one business or enterprise from another. To be eligible for trade mark protection, a mark must be distinctive for the goods or services provided. Trade mark applications are filed with UKIPO. These registered protections can last indefinitely (subject to renewal fees every 10 years) provided the marks are still being used.
Registered Designs: protect the overall visual appearance of a product such as the physical shape, configuration and decoration. To be registrable, the design must be new and have ‘individual character’. Registered design applications are filed with UKIPO and can last for 25 years from the date of registration (subject to renewal fees every 5 years).
Trade Secrets: includes any information that has an economic value, is kept confidential and is protected through proper measures. Trade secrets are difficult to categorise because they result from the combination of different types of technical and commercial information. Technical secrets can include drawings, formulae and recipes, and commercial secrets may relate to customer and supplier lists, business strategies or cost and price lists. Ultimately, if the expression of an idea gives your business a competitive advantage, it may be a protectable as a trade secret. There is no register to protect trade secrets, in the UK but they can be protected through contractual agreements.
Importance of IP:
✔️ Protecting IP is crucial for businesses as it enables them to safeguard their ideas, inventions, brands, and creative works from exploitation.
✔️ Strong IP protections also attract investors and partners by signalling that there is a commitment to innovation and development of opportunities through monetisation such as, licencing IP and other commercial agreements.
✔️ Protection of IP mitigates risk and liability in infringement claims which could result in loss of revenue.
✔️ IP protections serve as a foundation for businesses to thrive in a global marketplace.
How to Protect Company Assets:
Stage 1: Conduct IP Audit
✔️ Review and identify your business IP.
✔️ Compile a list of IP assets.
✔️ Conduct thorough IP searches (e.g., UKIPO and WIPO databases).
Stage 2: Implement Agreements & Policies
✔️ External: Have agreements in place with any partners, contractors, or suppliers to protect the business’ assets.
✔️ Internal: Create policies for employees to understand the importance of protecting IP and confidentiality whilst preventing unauthorised use of business assets.
Stage 3: Secure Registered Protections
✔️ Register IP as early as possible to secure ownership to ensure a competitive advantage.
✔️ Bear in mind that it is a ‘first to file’ system across the world.
Stage 4: Monitor and Enforce
✔️ Monitor the market for potential infringements of your IP.
✔️ Monitor changes in IP laws and review and update IP strategy accordingly.
✔️ Adapt business policies to mitigate risk.
IP has a two-fold function for any growth-focussed business. It can serve as a shield to protect innovations and as a sword to drive growth. By grasping the power of IP and implementing a robust strategy, any business can turn this silent powerhouse into a tool for success, attracting investors, forming partnerships and ultimately achieving sustainable growth.
Our IP lawyers in London help founders and businesses properly register, protect and manage their IP assets through various non-contentious measures (e.g. registering protections or preparing contractual protections) and contentious measures (e.g. fighting against IP infringements or claims). This is vital for ensuring owners of IP maximise the commercial value of their work.
Book a 30-minute call to find out how our specialist IP lawyers can support you and protect your business.
💡 Useful Articles:
The importance of enterprise value and how to build it
Enterprise value (EV) essentially tells you the total value of a business, considering all its commercial, financial and legal obligations. It's like a buyout price, looking at both the market value, company's debt situation and how well the company is protected by its corporate governance.
When is it important to think about the value of the business you are building?
Want to exit from it?
A few years out from exiting?
When you commercialise your offering?
When you start?
We strongly advice founders to think about EV from the day you incorporate your business.
What steps can I take to build a sustainable business model that generates consistent value for investors, ultimately boosting its enterprise value?
Ensure there is an integrated step-by-step plan with broad, strategic and holistic understanding of you and your business. Use the below three stages of due diligence that an investor or potential acquirer would use when valuing your business
Commercial due diligence: Identifying the product market fit and go-to-market (GTM) strategy ensuring each piece of the jigsaw fits wider growth plan.
Legal due diligence: Ensure legal professionals are properly instructed to build a well-protected legal framework.
Financial due diligence: EV is used as the basis for various financial ratios, like EV/EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), which helps assess a company's profitability relative to its enterprise value.
Importance of Company Structure & Governance:
Consider the structure and operations of the business itself against future and possible eventualities.
✔️ Does your company structure enable or hinder commercial opportunities?
✔️ Does it offer the flexibility to enter or exit from operations?
✔️ Does it protect tax statuses like (S)EIS, R&D, EMI etc?
Crucial to get the company structure right at the outset.
Essential Legal Framework:
Protecting the value, the business is built on
✔️ Investors control over the business
✔️ The cash reserves contained in the business
✔️ Any intellectual property belonging to the business, such as product designs, technology or brand
✔️ Physical assets owned by the business such as stock, buildings or machinery
✔️ The relationships the business has with 3rd parties, as outlined earlier
By implementing these strategies, you can build a resilient business model that delivers consistent value for investors. Remember, a high EV is not just about short-term gains; it's about building a company that thrives in the long run, creating a win-win situation for both your business and those who invest in it.
Finally, in any startup or SME it is essential that the key shareholders and leaders achieve consensus over the long-term objective of the business. Once this has been agreed, it can be used as a point from which to reverse engineer the enterprise value required to realise that objective.
Supercharge Your Enterprise Value with Dragon Argent: Our team of experts can apply their in-depth knowledge of the Enterprise Value Diagnostic methodology to provide a comprehensive analysis of your business, pinpointing opportunities to enhance your value proposition for investors.
How we can support:
✔️ Establish shareholder objectives, timelines and outcomes to agree a realistic strategy towards a liquidity event.
✔️ Perform a 360-degree diagnostic to create a comprehensive analysis of the business that identifies strengths and weaknesses to maximise enterprise value.
✔️ Analyse the financial performance of the business, highlight risk and create a plan to maximise enterprise value.
✔️ Perform a legal health check to mitigate factors that could impact enterprise value that due diligence by an investor or acquirer would uncover.
✔️ Perform acquirer research and run a valuation model to add external factors into the internal analysis of the business.
We can help you in your business valuations and can carry out valuations to allow a shareholder to exit a business, or for companies looking to separate different trades within their business, or for employee share scheme. Discover your company's value for growth, sale or funding. Get an expert valuation today.
Raising investment: Angels, Family Offices and VCs
Investment is something you may need to help you scale your for business, proving the cash to fuel not only growth but the key building blocks that create enterprise value. But with a variety of options available, navigating the investment landscape can be daunting. You may wish to consider one of these three key investor types: angel investors, family offices, and venture capitalists (VCs).
Angel Investors: High-net-worth individuals, angel investors typically provide seed funding to early-stage ventures they believe have high growth potential and can generate a strong return on investment. They will consider elements including the robustness of your business idea and potential for it to scale, and your entrepreneurial ability including industry expertise and leadership skills.
Pros:
✔️ Provide patient capital i.e. are prepared to wait longer for returns
✔️ May offer valuable mentorship based on their own experience.
✔️ More flexible investment terms.
Cons:
❌ Invest smaller amounts compared to other options.
❌ May have less experience in investing in start-ups.
❌ May want more involvement that you necessarily require
Family Offices: These private wealth management firms manage investments for wealthy families. They can be a good fit for businesses with a strong track record and a clear path to profitability.
Pros:
✔️ Provide larger investments than angels.
✔️ Offer a long-term investment horizon, allowing you to focus on growth.
✔️ May have industry-specific expertise.
Cons:
❌ Highly selective and can be slow to make decisions.
❌ May have stricter investment criteria.
❌ Hard to find as tend to operate discretely
Venture Capitalists: VC firms raise capital from institutions and invest in high-growth businesses with the potential for significant returns. They typically target businesses in specific industries with innovative products or services.
Pros:
✔️ Provide the largest investment amounts.
✔️ Offer valuable connections and expertise in scaling businesses.
✔️ Can significantly boost your company's profile.
Cons:
❌ Most selective investor type, requiring a strong business plan and proven traction.
❌ Often seek significant equity ownership and a fast exit strategy (IPO or acquisition).
❌ Are playing the venture game and can shift focus away if progress not forthcoming.
Choosing the Right Fit:
The best investor type for your business depends on your specific needs and stage of development. Here are some additional considerations:
Investment amount: How much capital do you need to achieve your growth goals?
Investor expertise: Do you require industry-specific guidance or mentorship?
Investment timeline: What is your acceptable timeframe for securing funding and achieving an exit?
Remember: Preparation is key. Develop a compelling business plan, financial projections, and a passionate pitch to attract the right investors for your journey.
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Conclusion:
Scaling a business from startup to scaleup is a complex journey requiring a multifaceted approach. This article has highlighted key areas that are crucial to your success: from establishing robust corporate governance and financial planning to leveraging growth opportunities like R&D tax credits and investment schemes. Protecting your intellectual property, building enterprise value, and understanding the investment landscape are equally vital.
Navigating these complexities can be overwhelming. That’s where we come in. Our team of experienced business advisors, accountants, and legal experts is ready to guide you through every step of your growth journey. Whether you need help with financial planning, corporate governance, or securing investment, we have the expertise to support your business's ambitions.
Ready to take your business to the next level? Book a call with one of our specialists today to discuss your specific needs and explore how we can help you achieve your goals. From formation to exit, we support our founders’ commercial objectives and love nothing better than joining courageous founders on their scaleup journey!
Speak to one of our experts today ↓
Article Contributed by the Dragon Argent Team
Head of Employment and Legal Operations
Head of Accountancy
Founder, Chairman & Head of Advisory
Senior Advisor
Head of Litigation, IP & Art Law
Senior Corporate & Commercial Solicitor