 Good morning everybody. My name is John Taylor from Big Innovation. This is the webinar for other people's money. So we're going to talk about equity finance. Joining me this morning is Jordan Thomas from Capital Law, Mark Neath from Old Mill Finance. Alan Thomas from Development Bank Wales, Anthony De Souza from Crowdfunding and Hugh Thomas from Puffin Produce and also from the Welsh Food and Drink Board. So Hugh, over to you. Thank you, John. Good morning everybody. Just a bit of an introduction from me to explain how this work has come about. I sit on the Food and Drink Wales Industry Board, as John has just mentioned, and one of the work streams that we developed a few years ago now was a work stream that will generally help business with kind of financial matters. Out of that came the Investor Ready programme, and this seminar is part of that work. We've had a number of very useful seminars over the last couple of months. I think this is now, you know, it's building on the control mechanisms you need to run a business well and I think we now get on to the next stages today, which is, you know, expanding businesses, seeking equity finance, you know, M&A, these sort of things. I think it should be very useful and, you know, BIC doing an excellent job supporting the sector in Wales through the Food and Drink Wales Industry Board. Thank you, Hugh. So, other people's money. Today we want to talk about ways of raising capital on the back of what we've previously talked about, which has been things like debt, asset financing, voice finance, and sorting out some forecasting work in capital. So, for more on those, see you morning. What happened? But I'm back. Okay, so what is equity finance? Equity finance is where you exchange shares in your business, assuming that you're a limited company, in return for capital. You've probably seen Dragons Den and seen people pitching for a small proportion of their company for a vast sum of money on something that is difficult to quantify in terms of the value. In other instances, we've seen crowdfunding where people have got a business idea and they haven't got the assets as in they haven't got a home they can mortgage or assets that they can finance. So they go to the share market if you like. They go and ask other people, would they exchange capital for stake in their business? And of course, it really depends on the strength of the business and the potential for future revenues. It is seemingly complicated because there are different forms of this. We have different players. We have the private equity funds. It could be a pension fund who's looking for a return. They don't want to invest in many companies. Sometimes I could think of one pension fund that bought a food and drink company because it provided them with a reliable source of revenue. So there are all manner of ways that people might look at the equity market, so to speak. So on our panel today, we have Jordan from Capital Law who's going to talk about or is going to be able to talk around the subject of the governance and the share agreement that you might have because of course you're ending up essentially ending a type of contract with the people who you're taking money off. We have Alan Thomas from Development Bank Wales because not only do Development Bank Wales lend money, they also sometimes, and he'll explain this, they'll sometimes take a stake in the business as part of security for raising capital, so they'll take some equity. And Mark, Mark's from Old Mill Financial Services and Accountants. They're one of the largest food and drink and agriculture services in the Southwest. Mark's going to talk about those slightly bigger deals that we sometimes see where we've got mergers and acquisitions. So sometimes, you know, two wrongs can make a right in as much as if you've got food and drink companies that push themselves together, they can, they can much more quickly grow and scale. So I think we'll kick off if you don't mind with Alan. Just want to talk about really the difference between short term debt and equity finance because of course Alan, we're talking about something that's a big decision. It's a long term decision. You just don't dip in and out of equity finance, do you? No, you don't. It's a big commitment. It's an important commitment. It's there if debt capital isn't available, as you've said, you haven't got security or you haven't got means or even in some cases, you haven't got the income flow to show that you can pay for debt. But it can work. It can be very successful. It's important to understand that the equity provider is taking the same risk as you, the founder really, putting the same capital in or similar capital. But then because it's the risk, they will need a reasonable rate of return or actually quite a strong rate of return normally. And normally they're looking for a reasonably quick exit. For our institutional investors, it normally takes the form of preference or preference cumulative shares or cumulative preference shares. That means, as it says in the tin, they will get a preference on the dividend they're going to pay and if you can't pay it when it's due, it will accumulate and they'll get paid eventually. I think for me it's very important that you don't do this quickly if you ever do it and that you align yourself with the right equity provider. At the end of the day, they're going to have a say in how you run your business and they're going to be involved in your business. So you want it to be the right partner who's going to hopefully on the best sides will open doors for you, help you create the business you're trying to create and grow your business. On the worst side, there can be bad news if you don't align, if they are goals are not aligned with you as, then you've got a problem. Because if they are trying to get out when you're still trying to expand and you can't afford to get them out or they've got any other agendas. And if we've seen this John and we were people have had other agendas, it can actually be very detrimental to your business. So it's something you should take a long time over considering you should look at your opportunities in the market and look at the potential partners and what their goals are if you like. Every equity partner is going to want to make money because they're taking a risk with their own money, but you've got to see what their other goals are and what their experiences are where it sort of suits you if it suits your business. And there's two elements of that time and cost isn't there so we often talk about weighted average cost of capital that calculation that says well if you ended up all your debts and the cost of raising equity. What's the real interest rate that you've that the business is paying for money. Now, you know, it's easy to calculate in a way what the debt is costing you not so easy to do. What are your experiences that is the rule of thumb that you can maybe use for thinking about how much is this really going to cost us. The cost is sort of time and energy. It takes generally a minimum of two months to put an equity investment together, and that's quite quick. So it always it often surprises people, but really it's going to take two or three maybe four months, even more. There's going to be your, your time and energy that's going to be consumed on that. And even when it's done, then your reporting has got to be spot on your management accounts, your KPIs because your equity provider will want all that information wanted timely. So there is a cost to it. So your coupon if you like your dividend is your, your six or seven percent compared to your loan rate of your six and seven percent. There's a lot more rigor around the time effort, legal fees, as I'm sure Jordan would agree, and accountants fees. So yes, it is going to cost you more than normal debt because it is the riskier capital and it takes a lot more rigor to put it in place. And that cost, in a way, it's a sunk cost, isn't it? It's money that you invest in the process that the longer that you can amortise that cost over in a way the cheaper that you're defraying that cost over, hopefully, growth and scaling of a business. Correct. And that's that's again about aligning the goals of the equity provider with the business. If you get an equity provider who thinks he or she or institution is going to get the money back through three times multiple in 18 months. And yet you've got a long term plan that's a 10 year plan. You obviously got an issue. You haven't matched up with the right investor. And we'll come come come back to that because I think some people think crowdfunding is the solution for getting a quick deal. And I think Anthony is going to disappoint them in a moment. But Jordan pointed out Alan raised about the getting making sure that you've got an agreement apart from the sharing the vision and the mission of the of the organization so people understand what they're investing in. There's also some detail that they need to think about in the shareholders agreement. Yeah, yeah, absolutely. And I think a lot of the common areas where, you know, it goes to the heart of the relationship with that investor are obviously a lot of time written down into the documents. So it's things as Alan touch upon information and financial information that investors will require or your consent rights of certain things that you, you can't do without first you can invest the consent they'll be set out quite fully in the documents and often need to be sort of a bit of a balancing act that won't detract from what you do day to day in the business. But, you know, it's absolutely, you know, I can only echo what Alan said about, you know, the relationship and having that right partnership with an investor because those are kind of the two key areas where things do start to go wrong. You know, if you're not transparent with your investor and they start losing trust in you that it's going to be a really difficult, long laborious process. Obviously, all that does is detract from from what you should be doing in running the business and progress in it. So that as well, you know, the transaction itself three, four months you will have something else on your plate to have to worry about. So the finances you're quite all consuming. So you've got to have that in mind as well. So it's a distraction from running 100% Yeah, it's in effect selling some of the business because you're introducing capital and return for a stake in the business. But there's also that shared vision. I mean, I know people who've invested in businesses successfully. It took them a year before they'd, they've been rubbing along together happily before they all agreed. Yes, they could work together. Some people seem to think they can do that much, much more quickly. Is there a sort of generic shareholder agreement? There are some general rules that people could look at to sort of say, is this a sort of agreement I want to get into? Yeah, so, you know, whatever, whatever form of equity finance you're looking at, if it's angel crowdfunding institutional, there's always going to be the common area. So it'll be, you know, warranties you have to give to that investor to say, you know, yes, my business is is all OK, you know, we own our IP, we're not involved in any disputes is all those sorts of things you'll have obviously you'll set out what what does happen if things go wrong. So restrictive covenants bar and user founder from actually going up and setting up a competing business. If you do leave what happens to your shares, if it's within a certain timeframe, you know, in line with that exit point, obviously, if you leave the business within three years of an investor putting their money into the business, they're obviously investing in you. So that's going to be something they're going to want to recoup on their investment and show that you don't benefit from it. So yeah, so in terms of the shells agreement, they're often normally very much the same form, regardless of what the type of investment is, it's just obviously they become a bit more more meat on the bones, the more kind of professional and sophisticated investment gets. So it's it's it's what you would otherwise call due diligence is effectively understanding what you're getting into, not just from the investor getting into the business, but what you are offering the investor. Yeah, and I think it's often maybe a bit of a culture shock and, you know, a lot of founders they they're only really got themselves to answer to with with businesses and it's almost like like handing over a set of keys to to house, you know, you've got somebody else that's got an interest now that you're accountable to. And that cannot, as you say, it might take a year or it may never match up in terms of you being on the same page with the investors, but there is that kind of phase where actually you need to realize that it's not just your money anymore that that is in the business and you are accountable to other people and need to be open and transparent with them. It's what it's what we call a fiduciary duty isn't it really of you're there to be there for the benefits of the shareholders, you might be the biggest shareholder but you still other shareholders to consider. Yeah, absolutely right so you know if obviously the most of the investments we do involve companies taking on investment so the directors of those businesses will have statutory duties which are written into law that mean that you have to put the best interest of the company and by virtue of the shareholders sitting behind that first you know you've always got to have their interests in mind and make sure you know things like not putting yourself in conflict with your own personal interests or other directives or other things you may have going on so yeah very much. It's a bit of a shift I think when you take on investment because it's it's quite a gray area where it's just you as a sole founder of a company you are doing everything for your own benefit whereas when you take on investment as a shareholder you are you are working with other people and you've got other people's money money to think about. Yeah. So there's management buyouts and there are angel investors there's crowdfunding and of course it could be that you get a stake taken in you buy another company you've got a vested interest in realising the synergies of more than one company Mark and facilitate those sorts of agreements where where do you look for the people who are aligned and how do you understand if they're aligned and we'll just take you off mute if we can. Yes. Well I've gone on mute and I must apologize. So it's law someone's digging up the road outside so I apologise for the background noise and why they decided to start that now whilst we're on a webinar but here we go. So the shared vision I mean when when when companies are looking for mergers and acquisitions surely they're looking for companies that are a genetic fit, but but also it's not just a financial calculation the management fit the the sort of shared vision of where the market is going and how that opportunity can be realised. That's right. And also where additional profit can be generated is often with particularly sort of early stage businesses and those that are on a growth path. You have to make kind of step investments in fixed costs. So, you know, it's hard to recruit part of a person, you have to have generally whole employees full time employees. You need a certain size of building and enter into a lease for a period and a lot of businesses tend to operate under capacity. There aren't generating the profit that they ought to be from the overhead base that they've got. We see that across, you know, all sorts of industries or sorts of businesses. If you are in that sort of situation or you have a couple of businesses in that kind of situation then combining their two revenue streams into one set of overheads. So, you know, it is possible to to run the two businesses together. Could it be to make a lot more profit together than you would have alone. So the companies that where you've got particularly in food and drink where you've got either spare capacity because you have a seasonal peak that you've got to you've got to be available for or where you're looking at joint buying and other competencies within the business that can be maybe diversified if somebody else has got a brand that can exploit the capacity that's available for run part of the year. That's right. Or it may be financial strength. So, getting together with a business that has the money to invest in marketing and getting your product to market or into the multiples. And you may find that by partnering with a larger company that's already established within a couple of the major supermarkets gives you the contacts and ability to step forward that you wouldn't otherwise be or would take a long time to achieve from your own efforts. So, just for everybody on the webinar we have the chat function. So if you've got any questions, please do pop them up on the chat function and we will try and address those as we go along. So, crowdfunding has become very fashionable for food and drink companies, particularly those who don't have a lot of asset backing. Seemingly you can raise money very quickly from crowdfunding or can you Anthony what's what's the secret to getting other people's money through a crowdfunding platform. Well the secret to crowdfunding is in the name. In other words you need a crowd in order to go crowdfunding. So, that means you've got to bring along your own crowd to your crowdfunding campaign first. In fact, a lot of these campaigns will actually have that as a requirement. So in other words within the first studies have shown that within the first 24 hours of launching your crowdfunding campaign and you need to have at least a third of your funding in at that particular point. So, that gives you an idea, firstly of how much you can set your target at and also, yeah, I mean it's a psychological thing so in other words the first third of your funders come from your immediate network. The second third of your funders will probably come from the investors who are actually registered on the platforms themselves. For example, CrowdCube, which is one of the two biggest equity crowdfunding platforms in this country, they have over 750,000 potential investors. So typically that's where the next third of your funding comes from. And then obviously when it comes to the last third, well, you know, those are other people's crowds. In other words, you need to somehow make connections with other people's crowds so that your message can be put in front of other people's crowds. So typically that's how a crowdfunding campaign's money would flow through a campaign. So normally there's, so when it comes to crowdfunding, I mean it's now a fixed part of the financial landscape as it were. The UK is the world leader when it comes to equity crowdfunding because they were allowed by the regulators, the Financial Conducts Authority to establish themselves and there was a sort of like touch regulation over the years. And it allowed them to get out of the starting gates and the two biggest platforms that serve this space is CrowdCube which is based out of Exeter and Cedar's based out of London. And both of them have helped raise a lot of money, in fact close to a billion on each platform for about a thousand businesses on each platform since they've been going. So a lot of businesses have actually benefited from a lot of investment from a lot of people. Crowdfunding is often referred to as a democratic form of finance. So in other words, people can invest as little as 10 pounds in a particular campaign. So you get lots and lots of people coming in with small amounts and at the end of the crowdfunding campaign you end up with a large amount and that's, you know, it's quite an exciting way forward for any business to consider. The World Bank reckoned that this year crowdfunding globally would become $100 billion industry and what I have found is during COVID, for example, that there's been a tremendous increase in crowdfunding as a way forward for businesses. But yes, there are a lot of things you've got to take into account when it comes to crowdfunding. It's not a quick fix as it were. And to me, probably the best way to figure out equity crowdfunding is to go to one of these two platforms, register on them as a potential investor yourself and go back some crowdfunding campaigns. For example, in the last since COVID, I've backed I think five, five different companies on these websites. And what you do is when you do that, you get a feel for how this works from an investor's perspective. You've got to understand the investor's journey as well as the need for you wanting to raise money for your business as well. So go and do that, become an investor, check out their video, their pitch deck, their financials. In other words, going to have a look at some of the case studies that are actually mentioned on these crowdfunding campaigns because you'll learn a lot by looking at how this all works. I mean, just to answer a question, you've got Crowdcube and we've got Seeders as the two main platforms for this. Now, Alan is saying it's about two months. Jordan was saying about three to four months. Anthony, how long to get a successful campaign that's going to raise the right amount of money? Well, that's a very good question. You need to understand that there are a whole lot of success factors that you even need to have in place before you go crowdfunding. You don't need to have them all in place, but you need to have enough of them in place. And to me, 80% of the work is done before you hit that crowdfunding launch button, as it were. So in other words, you've got to understand all the different components and you've got to make sure that you have enough success factors. And for example, one of the success factors is choosing your actual target. Can your crowd deliver on your target? In other words, have you done enough work to reach out to them? Because fundamentally, you've got to build a base to start with, so you can't just go in cold. You've already got to have, as you said, one third is probably going to come from your own customer base, potentially people who are stakeholders or customers of your business. Correct. There's another factor that a lot of people miss and that is strangers do not back crowdfunding campaigns. So in other words, they either know you or they know someone who is invested in your campaign, or they know someone who has, say, a PR outlet, whether it be online or a blogger or a journalist or whatever the case might be. They know that particular person, but you've developed a relationship with them. So fundamentally, somebody always knows somebody along the line. There's not an army of backers out there or investors wanting to back projects as such. So you've got to bear that in mind. So it doesn't sound quick. You're not bettering the four months or two months of Alan and Jordan. What sort of times should people be planning for? Well, it differs. The needs of each business, it depends on whether they're a real startup or whether they're an existing business and just want a funding for expansion. It all depends on where they are in the startup cycle, if you like, as to how long it'll actually take. The further you are down that from initial startup to a full-on business, the further you are down that line, as it were, the better your crowdfunding campaign is going to be. And what are the similarities between the successful crowd funders and seemingly the ones that are unsuccessful? What are the common factors that you see as differing the two? Well, when it comes to equity campaigns, one of the challenges is valuations because you've got to decide how much equity you want to give away at the end of the day. And so coming up with how much equity you're going to part with is obviously going to impact on an investor's perspective of view and how you're going to go forward. Because ultimately an investor wants some sort of exit at some point in the last cycle of all of this. When it comes to equity crowdfunding, an investor's money is tied up for between five and seven years before they get some sort of exit. And not all businesses are going to exit either. So in other words, you're going to lose all your money. And what's the most often way? Because of course, sometimes you don't have any choice in exiting if you've only had a small portion of the business and somebody that Mark's organised comes along and does a large merger and acquisition. It goes unconditional and you suddenly get a check for the valuation that they put on the business. Correct, correct. So in other words, an exit can provide a return for investors, but there's one in particular that I'm thinking of where the investors only got 10p back on every pound that they invested. So it's considered an exit, but it didn't make the investor any favours as it were. So Mark, is that one of the things that we have to consider that these things equity finance doesn't guarantee a happy ending? Absolutely. I mean, that is the key factor of equity is that your money is at risk and you do have the possibility of total loss. And that's probably something worth touching on the difference between debt risk and equity risk as to why we're even looking at equity. So if, as I said, you're a long way down your startup phase and you're starting to generate reliable consistent predictable revenues, then you are in a position where you can probably go to a bank subject to security and say that we've got this stream of revenue coming in, we can service this much debt as a result and we can borrow. So if you've got stable predictable income cash flow stream, you're at debt risk. If you haven't got that, then you're more into the equity risk territory. But just because you're not able to raise debt does not mean you're going to be able to raise equity. There are some businesses which are not suitable for either. You know, they are more in kind of the lifestyle category or they are individuals, entrepreneurs who only themselves and their friends and family are going to invest in this at that stage. The three Fs of finance. The third F. The fools. But I mean, I don't know what you had there. I was just wondering, the same questions I asked Anthony, you must see common factors that distinguish those companies you think this is going to be one that we're going to get away as opposed to this is going to be a problem. What are those common factors between the success and the failure to get equity finance. The key factor really is that the raising equity isn't raising finance. It's more of a sales job. So a business which is trying has come to you to try and raise equity because they're unable to raise debt is probably not going to get over the line. Whereas one which is coming to you with this is our proposition. We've got a strong sale with built a crowd, as Anthony said, users and advocates of the brand and so forth. Then you've got a proposition that you can sell to investors, be that a crowdfunding platform or individual angel investors. We've mentioned touched on a few times institutional investors, but really that market sort of starts when you're a million of profit. There are a few that play in the smaller space but predominantly if you look at institutions, it's very large businesses that are there. So, yeah, an equity pitch is very much a sales pitch rather than a debt proposal, which is all about here's the stability and security equity investors are wanting the growth because you mentioned the weighted average cost of capital earlier. The cost of debt is very obvious. It's just the interest rate. The cost of equity is far more complex because it's dividends, but it's also capital growth. So investors would be looking for what us accountants like to call the internal rate of return. So that's the kind of effective total interest rate over the whole life cycle of the investment taking into account your your exit, which of course is very difficult to calculate in the absence of a crystal ball. Probably was from the subject of crowdfunding and angels worth touching on EIS. Yes. So EIS is the enterprise investment scheme. And that's a tax advantaged scheme allowed by HMRC and a lot of crowd cube or cedars proposals will go with EIS assurance. And that's one of the things they'll highlight on their on their proposal. What is the advantage because we hear EIS here there's a tax advantage. How is that tax advantage? Again, you've got to stick with it for a bit, haven't you? That's right. So when you invested in the EIS company, assuming it's all eligible and meets all the criteria, then you can get 30% of the investment back as income tax relief. If you put 100,000 in, get 30,000 off your tax bill. You could also defer a capital gains. So if this is quite common for people who've sold their businesses, say they've got quite a large capital gain, you can defer the tax on that by reinvesting the money. So you can potentially get 30% income tax relief, 10-20% capital gains tax relief going in as well. And then if, like the example Anthony gave earlier where the investors only got 10p in the pound back, you can get loss relief should it all go wrong. So it does, it softens the downside as well. And with EIS, if you've got a question here that's very quickly picked up on that point, is what are the qualifications? If you want to get your company investable, what are the rules in terms of its age and or EIS qualifying? There are many rules. So do you think you have CDIS and enhanced version of EIS, which was launched a couple of years ago. So yes, in that case, the business does have to be under two years old. And it has to be the limit on investment is smaller. You can only put in 250,000, no more than 150 per person. Whereas EIS is up to, I think, 3 million. And there's no restriction on the age of the business for EIS. Seven years. Seven years. So it's got to be incorporated in under seven years to qualify for EIS. And it needs to be in a qualifying trade. So there are all sorts of things which are excluded. Sorry, Jordan, law firms don't qualify, nor do accountants, sadly, nor do banks or anything property related. So if you're a property developer or running a care home or a hotel, those don't count. But we're talking mainly to food businesses. So by and large, you would expect them to be EIS eligible. Hugh, just one of the other forms of equity finance, of course, is often attractive for MBOs. Did you want to just give us a fight into MBOs and how they might look at equity finance? Yeah, well, for those that don't know, I was part of an MBO of the Puffin business about four or five months ago. We were all, the three remaining shareholders now were all going to be existing shareholders at the time. But, you know, we were lucky enough to get support from HSBC, High Street Bank and managed to buy for cheap money within the business. So we were lucky on the funding side, to be honest. But I think what Jordan touched on earlier, John, is the shareholder agreement was, you know, something I was completely unaware of how long that was going to take. You know, you can end up spending a fortnight arguing about one point, if you know what I mean. So that was a bit, you know, to keep enough tension within the business so that, you know, everybody is a little bit unhappy instead of one shareholder being really happy and the other one being very unhappy. You know, that's the healthy relationship that we've managed to strike in the end, but that process took, you know, about 12 months. So, you know, it was a long torturous process. And how much of that is about being able to articulate what the business is actually about? And because that's surely what we were investing in, is the future and the direction of the business. I think we were lucky enough for everybody to know where we wanted to go, you know, the three room shareholders now with, you know, we've all known each other and worked together for eight or nine years. We know, but it's all the kind of things that has you couldn't predict in the future if somebody gets run over by a bus or whatever, you know, how does, how is the decisions made in the future, these type of things. So I think, you know, I think it's one thing, you know, one of the lessons I learned was you'd never want to sign something that, you know, would give you a legacy down the line that would cause resentment or not allow you to work as partners. As in not dealing with the problem now but kicking the problem down the road instead of resting it there and then. Exactly. So, you know, we managed to hammer all of that out, you know, so we're all now in line. So, you know, as of the day it was signed, you know, everybody is, you know, back together and aligned and, you know, that took a long time, you know. So anybody that's, you know, looking at an equity investor, don't underestimate how much time it takes to hammer out the detail. So the common, the common things that I'm getting from Mark and from Anthony and from Alan is this, you're actually selling a bit of the business, aren't you? So it's, there's an element of due diligence on the one side. But there's also, of course, the what are you going to do with this money and the shared vision and did everybody agree with where that was going? Alan Thomas coming back to you again. This is, this doesn't sound very different to when you turn up at the bank anyway, you've got to have a business plan, you've got to have the vision, the mission and be able to articulate it. What particularly because I know you sometimes get involved in, in having some equity there as well. Is there any nuance between the two or is it really much the same discipline in that you've got to be able to manage the business well and demonstrate that. I think there's obviously overlaps, but I think there is a difference. If, if you're going to attract somebody to make an equity investment, I think the plan has to really have a focus on what its goal is as well, its end goal. So we can put debt into business because you're buying a factory, you're building a factory or just growing your business. And therefore you grow your business, you grow your profit margins, you can pay your debt. And that's fine. And that employs people and it's great. And that's fine. But if you're asking somebody then to part with equity, real risk money, there needs to be a plan that says, actually, if we have this pot of money, we're going to use it to do this. And this transforms our business. And that's why in three or five years time, we can afford to pay you out, or we become attractive as a target. The most successful ones I've been involved with have usually had a target in mind. They bought a business with the pot of money. Why are they buying that business? Well, it probably integrates them up and down in their hierarchy of where they want to be. Also makes them bigger. And often it is as simple as it gets them to a size where the big guys think, you know what, we need to buy them to get them out of the way. And that can be the goal. We get to a certain size, we've got so much of the market. And these can be 5%, 6% of the market when the big guys have got 30%, once you get on their radar, they get bought. We did one with a telecom firm and it was to buy a telecom, another telecom business and grow. And indeed in fairness within, I think it was a five year plan, but it ended up a plan year seven, they got bought and everybody got paid reasonably well through it. From day one, the guy who was driving that said the reason is not just to grow the business, to grow the business so you get bought. So it's having that sort of, it's not being frightened about saying, look, this is what I want to happen. The objective there then is sometimes, I mean, we've seen this in food and drink and particularly in the 90s where we had dairy companies that would literally go and make and use themselves with the big boys and then somebody from Serviton would drive down in a nice car and before you knew it, everybody walked away and there was a covenant in the building that was never coming back as a dairy. Now that's a growth plan but with an immediate exit. The investors in that must know that's the plan. When it's slightly less defined, when you're saying, well, we're going for growth, how do you define what exit looks like? Yeah, that can be difficult. So often when you go in for growth, and this is the issue as an equity investor, to sustain that growth, you need more money all the time. You're making money but the cash flow cycle says you need more premises. The cash flow cycle, the debt has grown, your stock has grown but also you need more premises. So all of a sudden there's sucking more money in. So it's to show out actually what that growth, how that can become a strong profit margin over a certain time. You can hit a plateau, you can hit a certain length, a certain size. So often we as a small equity investor are probably, as Mark said, there's many who invest some sort of million pound, but we do, which is quite difficult. We often see our exit as the bigger investors coming in. So they will get to a certain point. That's right, so we get paid out so the bigger guys can put more millions in for it really to get bigger again. So and we're not, we are happy to know that's what's happening. We're there to invest in a Welsh business to make it grow. So we're quite happy that at some stage we can get refinanced out and we've done, if we like it, we've performed our role by taking that business from 10 employees to 35 or whatever it is and from 2 million turnover to 10 million turnover. So it needs more money again. And because it's of a certain size, as Mark has said, it's making EBITDA or profit of a million pound, bigger guys will, as you say, drive down from service and then and pay us out. And that's fine. That's fine. What we don't like means we're talking about it is when they pay exactly as you say when they pay it out and then they leave the factory empty. It's very hard with bigger institutions to make sure the people they're introducing keep the employment in Wales and we try to work hard and making sure that happens. It's not always possible, but we try to make sure that the employment is kept. One of the characteristics surely of food and drink, particularly in Wales is that people sometimes want to buy the problem. It's not just a rate of return or capital growth. It's actually something that enhances the brand portfolio or it's something that gives them a point of difference in the marketplace. And of course, that's the pixie dust and why that brand maybe is attractive to people. Yeah, yeah, you're right. And this is somebody else pointed. It's also can be counter cyclical. It can be very different to the other brands because it makes a marriage. Everything's in the same sector for them. Sometimes they want to buy another brand because it's out of that sector and gives them a different angle as well as you say. So there's lots of different reasons why a marriage can work. But it's again going back to our first discussion. It's really understanding what your investors goal is as well. Before I ask Mark the same question, is this point that's been raised about if you've got bounce bank or Sibyl's loans already, that shouldn't be an impediment, should it to an equity investor? Because from their point of view, they're just as interested in you having access to the cheapest money possible and utilising it well within the business? Quite a statement in some ways because it's sort of saying you're putting debt into a business to capitalise it. Now, if it's cheap debt and it's used well, yes, it's opportunity cost. I guess from an investor's point of view, it's something else has got to be serviced. Yeah, before they get their money because they're the secured lenders. So if it's used, it's all about how the money is used for me. If the money is used properly to create opportunity cost, create growth, then I think an investor can see that. If the debt is taken on and not used properly, then an investor is going to see, well actually all that's got to be serviced before my coupon or my preference or my dividend is going to be paid. So there's a couple of ways of looking at that I think. Mark, we often talk about what does the balance sheet look like? Obviously the balance sheet may not be in great shape if you're looking at the equity market because you've exhausted the sources of debt. Possibly. And as Alan says, it's really about the risk to cash flow. So if a company is too highly geared referring to much debt, then the risk to an investor of the company failing or being unable to pay dividends or actually to achieve the growth objectives is that much greater. So potentially makes a company less attractive, but it depends how well structured the business is. If you're a COVID loan has been taken and the cash flow forecast show it can be comfortably serviced over the five years, doing what you're doing, and then the equity investment enables you to make those incremental steps on the top, then that would not necessarily be a barrier. And that, I mean, we've had the question from Stuart, has COVID actually changed the equity scene? And I know we talked prior to the webinar that there seems to be an appetite for investment mainly because of course the wholesale market is a flood with cheap money. So it's difficult to get a return other than by other means and the equity market may offer that mark? That's right. Yeah. We're not going to get any money on our savings in the bank. So there's vast sums out there in private equity firms who are looking for acquisitions. And whilst they might have a criteria which puts them above the market of a lot of businesses that we deal with, typically you would see equity investors have a kind of core company that they will have invested in that meets that criteria and then apply what they call a buy and build. Yeah. So then bolt on smaller businesses, as we were saying earlier, into that to form a group and then exit that to an even larger fund or to IPO. Unless you're the size of Puffin in a way, the smaller food and drink businesses may be looking at the equity market, but via a larger parent company who's much more attractive and therefore the equity guys will be lending them money to buy the smaller food and drink companies to enhance the value of the total business then. That's one way out. Yeah. Yeah. And the characteristics of those businesses then, as Alan mentioned, I suppose it's been able to articulate that vision but also to be able to demonstrate a rate of return internally, is this? Yes. And it's about having the right type of business brand, something which a larger buyer can leverage to realise the value of. Because that's where the return comes to them because they can do something with it that you can't. Right. Anthony, for those people who can't demonstrate those sort of metrics and have more of an affinity brand, I mean, we've talked about some of the provenance elements, but there might be affinity as well where people are doing things on the sustainability fronts. So it's not just an immediate investment in money terms to get a return, but actually to make the world better or whatever it is. Do you see much of that in the crowdfunding side of things? Yes, there is a fair amount of that. You know, there are a lot of businesses that want to launch being aligned with sustainable issues and various things like that. And therefore get a lot of interest in a lot of backing as a result, certainly. Would crowdfunding platforms tend to be almost like that sort of alternative reason for investing, to some extent, sometimes? Yes, very much so. Very much so. Okay. So we're nearing the end and as I've warned, we're going to do our top tips and predictions. But, Jordan, coming back to you, I mean, plainly, having a shareholder agreement that is actually not just off the shelf but rewritten for the circumstances is plainly one thing. What are the key elements that should be in there if you were giving advice to anybody watching this today about what should be in a shareholder's agreement on what they make sure isn't in one in case things come back and bite them? Yeah, so I think, whatever the type of equity finance there is, there's always going to be certain elements of the same thing. So warranties, restrictive covenants, as I said, consent matters, information rights. So I don't think I would be amazed. Pick up on that, the consent. So this is what the management can and cannot do without bringing back to the shareholders and asking their permission? Yeah, so it can be things like giving dividends, acquiring other businesses or changing the nature of what the business does. So they usually are quite big ticket items and the point I was going to make was, although the different aspects of a shareholder's agreement probably won't deviate and I would be surprised if certain things weren't in there. I think what you should try and negotiate and concentrate on is making sure that those things fit for your business and what you need to do. So things like consent matters, you know, financial thresholds on what you can lend. They all need to be set at the right level so that you're not, you know, day in day out having to seek investor approval and it becomes a massive headache for the business. It should be set at a level where, okay, we want to go and acquire a new company now to do a bolt on acquisition. That's a key item that you would expect to go and get investor consent for. So I think it's more a case of being clear and that balancing act with the investor and respect that they have to protect their money as well. And it's a two way street, isn't it? You can have things like preemptive agreements so they can't sell their shares without offering them back to you first or things like that, perhaps? Yeah, absolutely. So the usual things are, you know, everybody should, you know, have a say in things and should be able to participate if they want to. So if, for example, an investor would always ensure that they have an opportunity to invest further sums of money in the business, if you go on and seek further investment down the line as well. And it's the same with transfer in shares. If you found a third party buyer, you would expect to be a participant in that process as well, not to be sort of left behind. But I think just to touch on really what Hugh said as well, I think there's a, you know, you can't really do enough in terms of agreeing things as soon as possible and agree as much as possible in kind of heads of terms and term sheet, because the last thing you want to be doing not when you get into the key documents is having lots of advisors, legal, financial involved then and then obviously the cost is going up every week that you're wasting with it back and forth with the documents. So if you're going to agree as much as possible as early as possible, it's going to save you a lot of time and fees later down the line. It does sound like a top tip, actually. Thank you, Jordan. What's your prediction for the landscape over the next few months? I think, you know, it feels like it's getting a lot busier in the market and we've had discussions with different institutional investors and accounting firms and advisors and I think there's going to be probably more an emphasis on what they call accelerated M&A, so where you may have distressed situations with companies now that all the government funding is coming to an end and furlough schemes are ending, you may see a lot of distressed situations. But I think as well a lot of companies over the last few months will have been, you know, looking inwards and probably stagnating now and need a bit of a boost. So maybe that growth funding and actually funding is something that is going to really be a big push over the next few months. So these issues are going to crystallise out? Yes, at some point I think something's going to have to happen. I think we touched upon it before around the zombie companies and just going along. Something is going to come to a crunch and there is going to have to be something that happens with investment, I think. Anthony, top tip and prediction please. Right, my top tip would be, well it is my understanding that less than one in ten of those who wish to go onto a crowdfunding platform actually get accepted onto a crowdfunding website. So in other words, yeah, it is a big number which means that it's very important from a top to point of view for you to understand all those success factors that you need to have in place before you put in that application. Because it's, you know, it's these, sorry I've just lost my train of thought. Anthony basically is saying that if you haven't got your act together, there's no point going to a crowdfunding platform for a solution of raising short term money because you're just not going to be in a position to attract those people. And back to what you said before about those one-third rules, it sounds very much as if you've got to have an established brand and be able to articulate it before you can even think about attracting more people to your cause. Correct, correct. And when it comes to where crowdfunding is going, you know, I recently attended a two-day crowdfunding summit where this particular issue was discussed at length and there's a tremendous increase in interest around crowdfunding. And I've certainly seen a surge of interest as well. So I think crowdfunding is certainly, people know that it's there and that they're looking for alternative ways of seeing their way through our current crisis. You're predicting more crowdfunding rather than less. So it's going to be even more important that people are able to very well articulate because it could get busy and noisy out there. Correct, correct. Mark, top tip and prediction please. Okay, top tip is to be completely realistic about where you are and what type of proposition you have, whether you're a debt proposition or an equity proposition and then at what stage you are and what type of equity is suitable for you. So whether that is own equity, friends and family investment, business angels, if you're in a sector type of business that's suitable for crowdfunding or if you are suitable for institutional equity and to be very honest with yourself about where you are. And if you can't be honest with yourself, who would you turn to to be honest with you? You're a accountant to financial plan. Help, I think is what you mean next. So your accountant is just being honest with you. Yeah, it's very easy for an advisor to, you know, give a benefit of that out to get carried away with the excitement and want to help out and say, oh yeah, we can do that for you without actually sitting down and thinking, yeah, is this the right route for this business? And don't sleepwalk into even more trouble than you've already got. Absolutely, yeah. And your forecast? Forecast, a cop out forecast would be more uncertainty. But actually, I think to try and not be too gloomy, because although it's easy to talk about all the uncertainty, COVID, government support and all of that. We mustn't forget that there are many businesses which are doing really, really well at the moment. There are many which are carrying on more or less as was and there are a lot that they're suffering, but it is not all suffering and all doom and gloom. So let's remember that. It's not all doom and gloom, Alan Thomas. Oh, that's not the way you should address a banker. Of course it's doom and gloom. I think actually the best thing is to have a plan that's understandable and executable so you've got a goal. You can divulge that to a third party and it's quite easy to understand it. And it seems practical and there's a reason for taking the money on. Not, oh, I'm just going to grow my business. It's got to have, you know, I'm going to grow my business because this means this will happen. I'm going to grow it this way. So you've got to have something a third party can quite quickly grasp and that you believe in and you can understand. I think for predictions is quite really difficult. One of the really interesting things and it's an obvious one is there's a load of sort of government back debt out there right now. Next spring, especially thinking about the leisure and the food sector. If that starts to become difficult, I think something's going to have to happen converting that debt to some other form. And it could even convert in that to equity possibly because it won't be normal equity way expecting good returns. But if they can't pay back and by fortunately repayments that means the business is going to go. That's not really helping anybody. So that would be interesting to see what happens. I think that market always does seem to find adjustments. So the high streets, not lending as much unless you are big strong and got lots of security. But then there's lots then all secondary or different other funders that come to the fore. Again, it goes back to understand what the agenda of that funder is before you just take. Oh, they willing to give me money or lend me money. I'm going to take it and understand what it means when you take it. Big strong and very lendable. That'll be you Hugh. What's your prediction? You know, I think there's great opportunities out there. You know, the the week pound is, you know, always, always provides opportunities for manufacturing and going back to kind of equity bit getting the right people on the bus. Once you've done that, it's great space exciting space to be in, you know, you then got complimentary skills and you know the right amount of money sitting in the business to grow by acquisition or whatever. You know, there's some very sad stories out there, businesses struggling through COVID, but the big businesses that are supplying the retailers have invariably had a very good couple of months, you know, so, as Alan said, you know, when these businesses are the struggling businesses are looking for equity, you know, perhaps in the spring, you know, hopefully is enough Welsh businesses there to join to form partnerships and with hopefully complimentary skills and access to market, you know, the things that we can do to keep growing the sector in Wales. Thank you. Thank you very much indeed. I think in summary then one one bit of advice we've had there is before you try raising equity, you know, go get involved yourself it's like before you you sell something try buying it so see what you look like if you're on the market time seems to be you've got you know, you know, take time and think about it carefully. There's a real cost to equity, and it's maybe some of its hidden getting the right amount, you know, you don't want to keep coming back. If you can avoid it because it's a costly exercise and get professional advice both in terms of the finances of it but also the legalities of it and what you're getting into gentlemen can I thank you all once again for giving up your morning to talk about this. I think we will learn a lot from it. Thank you very much indeed and thank you for all of those people who've taken the time to join us on the webinar. I hope this has been useful for you too. If anybody wants to talk more about some of the issues about equity, the investor ready program is there so please do get in touch and we'll see if we can be any further help so I wish you all a great morning. Thank you very much indeed.