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Buying a business / Investing in an SME - why?

With depressed asset prices, across all classes, traditional investment policies are being questioned. Cash? Interest rates are at an all time low, and are expected to decrease. The stock market? Not exactly a safe haven – too volatile and prone to the irrational movements caused by agitated city investors. Property? Possibly, but who knows where that will end up…? 

A number of people are now looking at investment in private companies. Why? In my experience people traditionally invest in small businesses for one or more of the following reasons:

  • Many investors are entrepreneurs, who have run their own successful companies. This makes you aware of the issues – financial, commercial and otherwise that businesses face in this sector.
  • Small companies are transparent. They can be ‘touched and felt’ and are not a ‘black box’ like their stock market relatives. Even a minority investor in an SME company can help manage and influence the future of the business.
  • Investment in private companies has distinct tax advantages – some will qualify for the Enterprise Investment Scheme, in which HMRC will reduce the income tax liability of the individual for 20% of the investment value, offer capital gains tax / other advantages (subject to conditions). There are also Inheritance Tax reliefs for shares in private companies. 
  • Involvement at these private rounds of financing often offers the highest risk/return on investment

I have been asked by clients on a number of occasions where to look for investment / acquisition opportunities in small companies. I will return to this in a blog, later this week or early next week.

It is important to obtain proper investment advice, by an individual or body regulated by the FSA – please speak to one our colleagues at Nightingale Associates if you would like any such advice. It is also important that sufficient ‘Due Diligence’ is performed on prospective investments to ensure that representations made are factually correct.

 

 

Date: 18th February, 2009
Author: Julian Dobbin

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