That’s why entrepreneurs and SEIS investors need to focus on their exit strategy from day one, writes Steve Smith of specialist web site SEIS.co.uk.
Of course, developing and growing the business is important, but that SEIS bubble will burst after three years – and no one wants to be left scratching their head about what to do next when that happens.
Many SEIS companies are designed with a three year lifespan in mind to match the timescale of tax breaks offered by the funding program.
Shaping the company
Then, the owners and investors are looking for a white knight to come along and pick up the business through a merger or acquisition.
So, from day one, everyone involved in SEIS should be shaping the company for the right exit.
That could be graduating into an Enterprise Investment Scheme (EIS) to grow the business even more over another three-year term, delaying those difficult exit decisions.
Or, the business could be a failure, in which case, SEIS has a built-in fail-safe for setting off investor losses against other income.
Three key exit factors for a SEIS
But if you want to be attractive to a buyer, three key factors make a SEIS company attractive to an outside investor.
- Profits – Starting a SEIS business is about turning an idea into money. If the business has no profits, the idea is probably going to be despatched to the junk pile
- Paper chase – Auditors of any prospective buyer will want to look at every detail of the business, so keep effective and complete financial records
- Build a brand – The product is important, but so is the brand, so do not forget to let customers know who you are by standing out in the market
“Experienced investors will probably enter the deal with their exit ideas in mind, but if the business is a smaller friends and family affair, that three year SEIS period can pass quickly and the deadline can creep up on the firm,” said Steve Smith.
Don’t forget the exit tax breaks of a SEIS when structuring any new deal – any increased value on a SEIS equity stake is tax-free as are the proceeds of selling the shares.
To find out more about the SEIS, download the complete SEIS Guide here