Business Organisation

Introduction to business planning

What is the Business Plan?
The business plan sets out how the owners/managers of a business intend to realise its objectives. Without sucha a plan a business is likely to drift.
The business plan serves several purposes: it
(1) Enables management to think through the business ina ligical and structured way and to set out the stages in the achievement of the business objectives.
(2) Enables management to plot progress aganist the plan(through the management accounts)
(3) Ensures that both the resources needed to carry out the strategy and the time when they are required are identified.
(4) Is a mean for making all employees aware of the business' direction (assuming the key features of the business plan are communicated to employees)
(5) Is an important document for the discussion with prospective investors and lenders of finance (e.g. banks and venture capitalists).
(6) Links into the detailed, short-term, one-year budget.

The Link Between the Business Plan and the Budget

A budget can be defined as " a financial or quantitative statement". prepared for a specific accounting period, containing the plans and policies to be pursued during that period.

The main purposes of a budget are:
(1) to monitor business unit and managerial performance ( the latter possible linking into bonus arrangements)
(2) to forecast the out-turn of the period's trading (through the use of flexed budgets and based on variance analyses)
(3) to assist with cost control.

Generally, a functional budget is prepared for each functional are within a business(e.g. call-centre, marketing, production, research and development, finance and administration). In addition, it is also normal to produce a "capital budget" detailing the capital investment required for the period, a "cash flow budget", a "stock budget" and a "master budget",which includes the budgeted profit and loss account and balance sheet.

Preparing a Business Plan
A business plan to be particular to the organisation in question, its situation and time. However, a business plan is not hust a document, to be produced and filed. Business planning is a continuous process. The business plan has to be aliving document, constatily in use to monitor, control and guide the progress of a business. That means it should be under regular review and will need to be ameneded in lin with changing circumstances.

Before preparing the plan management should:
-review previous business plans( if any) and their outcome. This review will help highlight which areas of the business have proved difficlut to forecast historically. For example, are sales difficlut to estimate? If so why?
-be very clear as to their objectives- a business plan must have a purpose
-set out the key busineess assumptions won which theor plans will be based(e.g.inflation, exchange rate, market growth, competitive pressures, etc.)
-take a critical look at their business. The classical way is by means of the strengths-weaknesses-oppurtunities-threats analysis, which identifies the business/'s situation from foue key angles. The strategies adopted by a business wll be largely based on the outcome of this analysis.

Preparing the Budget
A typical business plan looks up to three years forward and it is normal for the first year of the plan to be set out in considerable detail. This one-year plan, or budget, will be prepared in such a way that progress can be regularly monitored (usually monthly) by checking the variance between the actual performance and the budget, which will phased to take account of seasonal variations.

The budget will show financial figures(cash, profit/loss working capital, etc) and also non-financial items such as personnel numbers, output, order book,etc. Budget can be produced for units, departments and products as well as for the total organisation. Budgets for the forthcoming period are usually produced before the end of the current period. While it is not usual for budgets to be changed during the period to which they relate (apart from the most extraordinary circumstances) it is common practive for revised forecasts to be produced during the year as circumstances change.
A further refinement is to flex the budgets, i.e. to show performance at different levels of business. This makes comparisons with actual outcomes more meaningful in cases where activity levels differ from those included in the budget.

What Providers of Finance Want from a Business Plan?
Almost invariably bank managers and others providers of finance will want to see a business plan before agreeing to provide finance. Not to have a business plan will be regarded as a bad sign. They will be looking not only at the plan, but at the persons behind it. They will want details of the owners/managers of the business, their background and experience, other activities, etc. They will be looking for management commitment, with enthusiasm termpered by realism. The plan must be though through and not be a skimpy pience of wor. A few figures on a spreadsheet are not enough.

The plan must be used to run the business and there must be amesns for checking progress against the plan. An information system must be in place to provide regular details of progress against plan. Bank managers are particularly wary of businesses thatare slow in producing internal performance figures. Lenders wll want to guard against risk. In particular they will be looking for two assurances:
(1) that the business has the means of making regular payment of interst on the amount loaned, and
(2) that if everything goes wrong the bank can still get its money back(i.e.by having a debenture over the business's assets). Forward looking financial statements, particularly the cash flow forecast, are therefore of critical importance. The bank wants openness and no surprises. If something is going wrong it does not want this covered up, it wants to be informed-quickly.


Introduction to Budgets
Budgets and budgeting
-Budgets is a future plan which sts out a business's financial targets.
-Budgeting referes to the prepartion of budgets- the drawing up of financial plans and monitoring the performance of a business in attaining them

Formal definition of a budget
-"A budget is a quantitative statement, for a defined period of time, which may include planned revenues, expenses, assets, liabilities and cash flows. A budget provides a focus for the organisation and aids the co-ordination of activities and facilitates control".
-Budgets are prepared in advance of a defined period of time. They are based on the objectives of the business and are intended to show how policies are to be pursued in order to achieve objectives.


What is a budget?
A budget
-is a financial plan.
-sets out a businesses financial targets.
-is a plan expressed in money.
-an agreed plan of action over a given period.
-an agreed plan establishing, in numerical or financial terms, the policy to be pursued and the anticipated outcomes of that policy.

Forecasts, plans and budgets
-A forecast is a prediction of future events and their quantification for the purpose of planning.
-A forecast relates to events in the environment over which the business has either no control or only very limited control.
-Hence we have a weather forecast-not a weather plan.
- A forecast is not a budget but a prediction of the future.
-However, a forecast of future sales is the starting point in the budgeting process.
- Planning is the establishment of objectives and the formulation, evaluation and selection of the policies, strategies, tactics and action required to achieve the objectives.
- A plan is the end product of planning.
-Whereas a forecast is simply a prediction, a plan is what we are going to do about it.
-A budget is a plan because it concerns actions to be taken rather than a passive acceptance of future trends.

Time horizons for a budget
-Budget time horizon- this referes to the immediate future where on the basis of past business decisions and commitments the consequences are action can be predicted with a reasonble degree of certainity e.g. the next 12 months.
- Business planning horizon- the period over which future forecasts can be made with a reasonable degree of confidence e.g. 3-5 years
- Strategic planning horizon- far into the future- it is concerned with the long term aspirations of senior managers e.g. 5+ years.

Purpose and Role of Budgets
Six key Purposes of Budgets
-A method of planning the use of resources
-A vehicle for forecasting
-A means of controlling the activities of various groups within the firm
-A means of motivating individuals to achieve performance levels agreed and set.
- A means of communicating the wishes and aspirations of senior management.
- A means of resolving conflicts of interest between groups with the organisation

Role of Budgets
-To aid the planning of the organisation in a systematic and logical manner that adhers to the long term strategy
- To determine direction
- To forecast outcomes
- To allocate resources
- To promote forward thinking
- To turn strategic objectives into practical reality
- To establish priorities
-To set targets in numerical terms
- to provide direction and co-ordination
- to communicate objectives, oppurtunities and plans various managers
- to assign responsibilities
- to allocate resources
- to delegate without loss of control
- to provide motivation for managers to achieve goals
- to motive staff
- to improve efficiency
- to establish targets and standards which employees are motivated to achieve
- to evaluate performace against the budget
- to provide a framework for evaluating the performance of managers in meeting individual and department targets
- to control activities by measuring progress against the original plan, making adjustments where necessary
- to control income and expenditure
- to facilitates management by exception
- to take remedial action when there is deviation from the plan

Incremental Budgeting
Incremental budget
- This is a budget prepared using a previous period's budget or actuial performance as a basis with incremental amounts added for the new budget period
- The allocation of resources is based upon allocations from the previous period.
- This approach is not recommended as it fails to take into account changing circumstances.
- Moreover it encourages "spending up to the budget: to ensure a resonable allocation in the next period. It leads to a "spend it or lose" mentality.

Advantages of incremental budgeting
- The budget is stable and change is gradual.
- Managers can operate their departments on a consistent basis.
- The system is relatively simple to operate and easy to understand.
- Conflicts should be avoided if departments can be seen to be treated similarly.
- Co-ordination between budgets is easier to achieve.
- The impact of change can be seen quickly.

Disadvantages of incremental budgeting
- Assumes activies and methods of working will continue in the same way.
- No incentive for developing new ideas.
- No incentive to reduce costs.
- Encourages spending up to the budget so that the budget is mainitained next year.
- The budget may become out of date and no longer relate to the level of activity or type of work being carried out.
- The priority for resources may have changed since the budgets were set originally.
- There may be budgetary slack built into the budget, which is never reviewed managers might have overestimated their requirements in the past in order to obtain a budget which is easier to work to, and which will allow them to achieve favorable results.

Zero Based Budgeting(ZBB)
- Start each budget period afresh-not-based on historical data
- Budgets are zero unless managers make the case for resources the relevant managers must justify the whole of the budget allocation.
- It means that each activity is questioned as if it were new before any resources are allocated to it.
- Each plan of action has to be justified in terms of total cost involved and total benefit to accrue, with no reference to past activities.
- Zero based budgets are designed to prevent budgets creeping up each year with inflation.

Advantages of ZBB
- Forces budget setters to examine every item.
- Allocation of resources linked to results and needs.
- Develops a questioning attitude.
- Wastage and budget slack should be eliminated.
- Prevents creeping budgets based on previous year's figures with an added on percentage.
- Encourages managers to look for alternatives.

Disadvantages of ZBB
- It a complex time consuming process
- Short term benefits may emphasised to the detrimet of long term planning.
- Affected by internal politics- can result in annual conflicts over budget allocation


Legal Structures of a business
The legal structure a business chooses is fundamental to the way it operates. This legal framework determines who shares in the profits and losses, how tax is paid, where legal liabilities rests. It also deternines the nature of a business' relationships with business associates, investors, creditors and employees.

There are three options for a business's legal structure:
(1) Sole Trader
An individual who runs an unicorporated business on his or her own. Sometimes otherwise known as a "sole properietor" or (in the case of professional services) a "sole pratictioner".
The sole trader structure is the most straight forward option. The individual is taxed under the Inland Revenue's self assessment system, with income tax calculated after deduction for legitimate business expenses and personal allowances. A sole trader is personally liable for the dets of the business, but also owns all the profits.
(2) Partnership
A partnership is an association of two or more people formed for the purpose of carrying on a business. Partnerships are governed by the Partnership Act (1890). Unlike an incorporated company, a partnership does not have "legal personality" of its own. Therefore the Partners are liable for any debts of the business.
Partner liability can take several forms. General Partners (the usual situation) are fully liable for business dets. Limited Partners are limited to the amount of investment they have made in the Partnership. Nominal Partners also sometimes exist. These are prople who allow their names top be used for the benefit of the partnership, usually for remuneration, but they doe not get a share of the parrtnership profits.
The operation of a partnership is usually governed by a "partnership Agreeement". The specific terms of this agreement are determined by the partners themselves, covering issues such as:
-profit sharing-normally, partners share equally in the profits;
-Entitlement to receive salaries and other benefits in kind
-Interest on capital
- Arrangement for the introduction of new partners
- Arrangement for retiring partners
- What happens when the partnership is dissolved
(3) Incorporated Company
Incorporating business activities into a company confers life on the business as a "separate legal person". Profits and losses are the company;s and it has its own debts and obligations. The company continues despite the resignation, death or bankruptcy of management or shareholders. A company also offers the best vehicle for expansion and the provision of outside investors.
There are for main types of company:
(1) Private company limited by shares: members liability is limited to the amount unpaid on shares they hold
(2) Private company limited by guarantee: members liabilit is limited to the amount they have agreed to contribute to the company's assets if it is wound up.
(3) Private unlimited company: there is no limit to the member's liability
(4) Public limited company: the company's shares may be offered for sale to the general public and members liability is limited to the amount unpaid on shares held by them.
Specific arrangements are required for public limited companies. The company must have a name ending with the initials "plc" and have an cuthorised share capital of at least $50,000 of which at least $12,5000 must be paid up. The company's "Memorandum of Association" must comply with the format in Table F of the Companies Regulations. The company may offer shares and securities to the public. In return for this right to issue shares publicly, a punlic limited company is subject to much stricter regulation, particularly in relation to the publication of financial information.
The vast majority of companies incorporated in the India and in other major industrliased countries are private companies limite by shares-"private limited liability companies".
The office of the Registrar of Companies" maintains a record of all Indian private and public companies, their shareholders, directors and financial information. All this information. All this information has to be provided by Companies by law and is available to any member of the public for a small charge.

Forming a Company
Who can form a company??
The companies Act generally allows onw or more persons to forma company for any lawful purpose by subscribing to its memprandum of association. However, a public company or an unlimited company must have at least two subscribers.

What needs to be done?
Ready made companies are available from company formation agents whose names and addresses appear in directories such as Yellow Pages. These are essentially "shell companies" where all the relevant documentation has been completed and the company assigned a generic name. Company formation agents charge a fee for providing this service. Individuals can choose to complete the procees themselves by using company formation documents provided by Companies House. These documents are summarised below:
Memorandum of Association
The Memorandum of Association is one of two official documents that describe the company's constitution( the other being the Articles of Association).
The Memorandum of Association sets out the details of a company's existence. It must be signed by the subscribers and contain the following information:
- The Company's name: the last word of the name must be "limited" or "Ltd".
- Address of the Registered Office- this must be England, Wales or Scotland and means that the company operated under British Law and pays British tax.
- The objects for which the company is formed this sets out the objects for which the company is incorporated(usually a very general statement such as "to carry on its trade and business").
- A statement that the liability of the company memebts is limited. This means that if the company is insolvent, the shareholders are liable to creditors for only the amount of their shares.
- The amount of the authorised shares capital and how it is divided. The amount of share capital subscribed in cash or assets is called the "issued share capital".
- The names of the subscribers

Articles of Association
This document governs the running of the company. For example, it describes the voting rights of shareholders, the conduct of shareholders and director's meetings, and the other powers of manangement.
The artieles constitute a contract between a company and its members, but this applies only to rights of the shareholders in their capacity as members of the company
The contents of the articles include:
Classes of shares- the share capital can be divided into different types of shares which have different rights( for example, in relation to voting in meetings, or relating to the sharing of profits and pyament of dividends)
Restrictions on the issue of shares- the existing shareholders have a statutory right of "preemption". This means that they have "first-refusal" over the issue of new shares.
Restrictions on share transfers- in order to retain control, directors of private companies usually want to restrict the transfer of shares
Purchase by a company of its own shares- Subject to strict regulation, companies can now buy their own shares and assist anyone elst to buy them.
Directors- the articles set out how and when directors are appointed. The operation of the Board of Directors is also set out by the articles.
Form 10
Form 10 gives details of the first directors, secretary and the intended address of the registered office. As well as their names and addresses, the company's directors must give their date of birth, occupation and details of other directorships they have held within the last five years. Each officer appointed and each subscriber must sign and date the form. The same person can be both a director and company secretary, provided there is another director. A sole director also be the company secretary.
The registered office is the address of a company to which official documents are set. The registered office can be anywhere in India. The registered office must always be an effective address for delivering documents to the company, and to avoid delays it is important that all correspondence sent to this address is dealth with promptly.
Form 12
Form 12 is a statutory declaration of compliance with all the legal requirements relating to the incorporation of a company. If must be signed by a solicitor who is forming the company, or by one of the people named as a director or company secretary on Form 10. It must be signed in the presence of a commissioner for oaths, a notary public, a justice of the peace or a solicitor.
Choosing a Company Name
There are some restrictions on the choice of a company name. Briefly, the restrictions are that:
The name cannot be the same as another company. The use of certain words is restricted. These include names likely to cause offence, names that imply connections with the government or a local authority.
Advantages of a limited company
Whilst many businesses prefer to trade as a sole trader or a partnership, nearly all significantly businesses operate as an incorpoarated company. The main advantagees of incorporation via limited company are summarised below:
Separate Legal Indentity
A limited company has a legal existence separate from management and its members( the shareholders)
Member's liability is limited("limited liability")
The protection given by limited liability is perhaps the most important advantage of incorporation. The members' only liability is for the amount unpaid on their shares. Since most private companus issue shares as "fully paid", if things go wrong, a members'only loss is the value of the shares nd any loans made to the compnay. Personnal assets are not put at risk. The protection of limited liability does not, howerver, apply to fraud. Company directors have a legal duty not to incur liabilities in their companies which they have reason to believe the company may not be able to pay. If creditors lose money through director fraud, the director's personal liability is without limit.

Protection of Name
The choice of company namss is restricted and,providing a chosen name complies with the rules, no one else can use it. The only protection for sole traders and partnerships is trademark legislation.
Continuity
Once formed, a company has everlasting life. Directors, management and employees act as agent of the company. If they leave, retire, die- the company remains is existence. A company can only be terminated by winding up, liquidation or other order of the courts or Registrar of Companies.

New Shareholders and Investors can be easily introduced
The issue, transfer or sale of shares is relatively straightforward process although existing shareholders are protected via their "preemption" rights and by company legislation that seeks to protect the interests of minority investors.
The process of lending to a company is also easier than with otehr business forms. The lending bank may be able to secure its loan against certain assets of the business or against the business as a whole
Better Pension Schemes
Approved company pension schemes usually provide better benefits than those paid under contracts to self employed sole trading businesses.
Taxation
Sole traders and partnerships pay income tax. Companies pay Corporation tax on their taxable profits. There is a wider range of allowances and tax-deductive costs that can be offset a company's profits. In addition, the current level of Corporation Tax is lower than income tax rates.



Sources of Finance
Raising Company Finance
When a company is growing rapidly, for example when contemplating invest in capital equipment or an acquisition, its current financial resouces may be inadequate. Few growing companies are able to finance their expansion plans from cash flow alone. They will therefore need to consider raising finance from other external sources. In addition, manages who are looking to buy in to a business("management buy-in"or "MBI") or buy out ("management buy-out" or "MBO") a business from its owners, may not have the resouces to acquire the company. They will need to raise finance to achieve their objectives.

There are a number of potentional resouces of finance to meet the needs of a growing businesses or to finance an MBI or MBO.
-Existing shareholders and directors funds
- Family and friends
- Business angels
- Clearing banks (overdrafts, short or medium term loans)
- Factoring and invoice discounting
- Hire purchasing and leasing
- Merchant banks( medium to longer term loans)
- Venture capital

A key consideration in choosing the source of new business finance is to strike a balance between equity and debt to ensure the funding structure suits the business.
The main differences between borrowed money and equity are that bankers request interest payments and capital repayments, and the borrowed money is usually secured on business assets or the personal assets of shreholdrs and/or directors. A bank also has the power to place a business into administration or bankruptcy if it defualts on debt interst or repayments or its prospectus decline.
In contrast, equity investors take the risk of failure like other shareholders, whilst they will benefit through participation in increasing levels of profits and on the eventual sale of their stake. However in most circumstances venture capitalists will also require more complex investments (such as preference shares or loan stock) in additional to their equity stake.

The overall objective in raising finance for a company is to avoid exposing the business to excessive high borrowings, but without unnecessaily diluting the share capital. This will ensure that the financial risk of the company is kept at an optimal level.

Business Plan
Once a need to raise finance has been identified it is then necessary to prepare a business plan. If management intend to turn aroung a business or start a new phase of growth, a busieness plan is an imporatant tool to articulate their ideas while convincing investors and other people to support it. The business plan should be updated regularly to assist in forward planning.
There are many potential contents of a business plan. The European Venture Capital Association suggest the following:
- Profiles of company foundsrs directors and other key managers;
- Statics relating to sales and markets;
- Names of potential customers and anticipated demand;
- Names of, information about and assessment of competitors;
- Financial information required to support specific projects ( for example, major capital investment or new project development)';
- Research and development information;
- Production process and sources of supply;
- Information on requirements for factory and plant;
- Magazine and newspaper articles about the businesses and industry;
- Regulations and laws that could affect the business product and process protection
The challenge for manangement in preparing a business plan is to communicate their ideas clearly and succinctly. The very process of researching and writing the business plan should help clarify ideas and identify gaps in management information about their business, competitors and the market.

Types of Finance Introduction
A brief description of the key of features of the main sources of business finance is provided below.
Venture Capital
Ventute Capital is a general term to describe a range of ordinary and preference shares where the investing institution acquires a share in the business. Venture capital is intended for higher risks such as start up situations and development capital for more mature investments. Replacement capital brings is an institution in place of one of the original shareholders of a business who wishes to realise their personal equity before the other shareholders. There are over 100 different venture capital funds in the UK and some have geographical or industry preferences. There are also certain large industrial companies which have funds available to invest in growing businesses and this corporate venturing is an additional source of equity finance.

Grants and soft Loans
Governement, local authorities,local development agencies and the European Union are the major souces of grants and soft loans. Grants are normally made to facilitate the purchase of assets and either the generation of jobs or the training of employees. Soft loans normally subsidised by a third party so that the terms of interest and security levels are less than the market rate. There are over 350 initiatives from the Department of Trade and Industry alone so it is a matter of identifying which sources will be appropriate in each case.

Invoice Discounting and Invoice Fatoring
Finance can be raised against debts due from customers via invoice discounting or invoice factoring, this improving cash flow. Debtors are used as the prime security for the lender and the borrower may obtain up to about 80 percent of approved debts. In addition,a number of these souces of finance will now lend against stock and other assets and may be more suitable then bank lending. Invoice discounting is normally confidential ( the customer is not awaer that their payments are essentially insured) whereas factoring extends the simple discounting priciple by also dealing with the administrationof the sales ledger and debtor collection.



Hire purchase and Leasing
Hire purchase agreements and leasing provide finance for the acquisition of specific asstets such as cars, equipment and machinery involving a deposit and repayments over, typically, three to ten years. Techniqually, ownership of the asset remains with the lessor whereas title to the goods is eventually transferred to the hirer in a hire purchase agreement.
Loans
Medium term loans(up to seven years) and long term loans( including commercial mortgages) are provided for specific purposes such as acquiring an asset, business or shares. The loan is normally secured on the assets and the interest rate may be variable or fixed. The small firms loan guarantee scheme can provide up to $250,000 of borrowing supported by a government guarantee where all other souces of finance have been exhausted.
Mezzanie Debt
This is a loan finance where there is little or no security left after the senior debt has been secured. To reflect the higher fisk of mezzanine funds, the lender will charge a rate of interest of perhaps four to eight percent over bank base rate, may take an option to acquire some equity and may require repayment over a shorter term.
Bank Overdraft
An overdraft is an agreed sum by which a customer can overdraw their current account. It is normally secured on current assets, repayable on demand and used for short term working capital fluctuations. The interest cost is normally variable and linked to bank base rate.
Completing the finance raising
Raising finance is often a complex process. Business management need to assess several alternatives and then negotiate terms which are acceptable to the finance provider. The main negotiating poings are often as follows:
- Whether equity investors take a seat on the board
- Votes ascribed to equity investors
- Level of warranties and indemnities provided by the directors
- Financier's fees and costs
- Who bears costs and due diligence
During the finance raising process, accountants are often called to review the financial aspects of the plan. Their report may be fomal or informal, an overdiew or an extensive review of the company's management information system, forecasting methods and their accuracy, review of latest management accounts including working capital, pension funding and employee contracts etc. This due diligence process is used to highlight any fundamangeal problems that may exist.

Business angel finance
Business owners often report that company finance of $10,000 to $250,000 can be very difficult to ontain, even from traditonal souces such as banks and venture capitalists. Banks generally require security and most venture capital firms are not inverest in financing such small amounts. In these circumstances, companies often have to turn to "Business Angels".
Business angels are wealthy, entrepreneurial individuals who provide capital in return for a proportion of the company equity. The take a high personal risk in the expectation of owning part of a growing and successful business.

Business suitable for Angel Investment
Businesses are unliely to be suitable for investment by a business angel unless certain conditions are fulfilled.
(1) The business needs to raise a reasonable modest amount(typically between $10,000 to $250,000 is usually provided by venture capital firms rather than business angels. The exceptions are when seceral business angels invest together in a syndicate or when business angels co-invest alongside venture capital
(2) The owners and managers of the business are willing to develop a personal relationship with a business angel. This is important. Typically, business angels want hands-on involvement in the management of their investment, wihout necessarily exercising day-to-day control. This relationship can be a positive one for the business. A business angel with the right skills can strenghen a business by, for example, offering marketing and sales experience.
(3) The business can, and is prepared to offer the business angel the possibility of a high return (usually an expected average annual return of at least 20%-30% per annum). Most of this return will be ralised in the form of capital gains over a period of several years.
(4) The business can demonstreate a strong understanding of its products and markets. Some business angels speciliase by providing "expansion finance" for businesses with a proven track record, or in particular sectors. This enables an already successful business to grow faster. Business angels are also a significant source of start up and early stage capital for companies without a track record. A business plan based on convincing market research is esential.
(4) The business has an experienced and professional management team- as a minimum with strong product and sales skills. If there are weaknesses in the existing management team, a business angel can often provide the missing skills or introduce the business to new management.
(6) The business can offer the business angel the possibility of an 'exit". EVne if the businsess angel has no plans to realise the investment by any particular date, the angel will want the option to be available. The most common exits are:
- A trade sale of the business to another company.
- Repurchase of the business angel's shares by the company.
- Purchase of the business angel's shares by the company's directors or another investor.

Finding an angel
Many contacts are mode informally. For example: personal friends and family;wealthy business contacts; major suppliers and clients of the business. Investors can also be found by approaching formal angerl networking organisations. Many iof the most active business angels use these networks to find out about interesting investment oppurtunities.


Introduction to Venture Capital
Venture capital is a form of "risk capital". In other words, capital that is invested in a project where there is a substantial element of risk relating to the future creation of profits and cash flows. Risk capital is invested as shares rather tahn as a loan and the investor requires "rate of return" to compensate him for his risk.
What is venture capital?
Venture capital provides long-term committed share capital, to help unquoted companies grow and succeed. If an entrepreneur is looking to start-up, expand, buy-into a business in which he works, turnaround or relitaise a company, venture capital coulp help do this. Obtaining venture capital is substantially diffrerent of the capital. irrespective of the success or failure of a business. Venture capital is investedin exchange for an equity stake in the business. As a shareholder, the venture capitalist's return is dependent on the growth and profitability of the business. This return is generally when the venture capitalist "exists" by selling its shareholding when the business is sold to another owner.
Venture capital in the UK originated in the late 18th century, when entrepreneurs found wealthy individuals to back their projects on ac and hoc basis. This informal method of financing became an industy in the 1970s and early 1980s when a number of venture capital firms were founded. There are now over 100 active venture capital firms in UK which provide several billion pounds each year to unquoted companies mostly located in the UK.
For how long do venture capitalists invest in a business?
Venture capital firms usually look to retian their investment for between three and seven years or more. The term of the investment is kften liked to the growth profile of the business. Investments in more mature businesses, where the business performance can be improved quicker and easier, are often sold sooner than investments in early-stage or technology companies where it takes time to develop the business model.
Where do venture capital firms obtain their money?
Just an management teams complete for finance, so do venture capital firms. They raise their funds from several sources. To obtain their funds, venture capital firms have to demosnstrate a good track record and the prospecct of producing returs greater than can be achieved through fixed interst or quoted equity investments. Most UK capital funds for investment form external sources, mainly insttituional investors, such as pension funds and insurance companies.
Venture capital firms investment preferences may be affected by the source of their funds. Many funds raised from external souces are structured as Limited Partnerships and usually have a fixed life of 10 years. Within this period the funds invest the money committed to them and by the end of the 10 years will have had to return the investors original money, plus any additional returns made. This generally requires the investmens to be sold, or to be in the form of quoted shares, before the end of the fund.
Venture Capital Trusts are quoted vehicles that aim to encourage investment in smaller unlisted UK companies by offering private investors tax incentives in return for a five year capital firms. If funds are obtained from a VCT, there may be some restricions regarding the company's future development within the first few years.
What is involved in the invesment process?
The investment process, from reviewing the business plan to actually investing in a proposition, can take a venture capitalist anything from one month to one year but typically it takes between 3 and 6 months. There are always excaptions to the rule and deals can be done in extremely short time frames. Much depends on the quality of information provided and made available.
The key stage of the investment process is the initial evaluation of a business plan. Most approaches to venture capitalists are rejected at this stage. In considering the business plan, the venture capitalists will consider several principal aspects:
-Is the product or service commercially viable?
- Does the company have potential for sustained growth?
- Does management have the ability to exploit this potential and control the company through the growth phases?
- Does the possible reward justify the risk?
- Does the potential financial return on the investment meet their investment criteria?
In structuring its investment, the venture capitalist may use one or more of the following types of share capital:
Ordinary Shares
These are equity shares that are entitled to all income and capital after the rights of all other classes of capital and creditors have been satisfied. Ordinary shares have votes. In a venture capital deal these are the shares typically held by the management and family shareholders rather than the venture capital firm.
Preferred ordinary shares
These are equity shares with special rights. For example, may be entitled to a fixed dividend or share of the profits. Preferred ordinary shares have votes.
Preferrence shares
These are non-equity shares. They rank ahead of all classes of ordinary shares for both income and capital. Their income rights are defined and they are usually entitled to a fixed dividend. The shares may be redeemable on fixed dates or they may be irredeemable. Sometimes they may be redeemable at a fixed premimum. They may be convertible into a class of ordinary shares.
Loan Capital
Venture capital loans typically are entitled to interest and are usually, though not necessarily repayable. Loans may be secured on the company's assets or may be unsecured. A secured loan will rank ahead of unsecured loans and certain other creditors of the company. A loan may be convertible into equity shares. Alternatively, it may have a warrant attached which gives the loan holder the option to subscribe for new equity shares on terms fixed in the warrant. They typically carry a higher rate of interest than bank term loans and rank behind the bank for payment of inerest and repayment of capital.
Venute capital investments are often accompanied by additioonal financing at the point of investment. This is nearly always the case where the business in which the investment is being made is relatively mature or well-established. In this case, it is appropriate for a business to have a financing structure that includes both equity and debt.
Other forms of finance provided in addition to venture capitalist equity include:
- Clearing banks- principally provide overdrafts and short to medium term loans at fixed or, more usually, variable rates of interest.
- Merchant banks- organise the provision of medium to longer-term loans, usually for larger amounts than clearing banks. Later they can play an important role in the process of "going public" by advising on the terms and price of public issues and by arranging underwriting when necessary.
- Finance houses- provide various forms of installment credit, ranging from hire purchase to leasing, often asset based and usually for a fixed term and a fixed interest rates.
- Factoring companies- provide finace by buying trade detbs ar a discount, either on a recourse basis or on a non-recourse basis(the factoring company takes over the credit risk).
- Governement and European Commission sources- Provide financial aid to Indian companies ranging from project grants(related to jobs created and safeguarded) to enterprise loans in selective areas.
- Mezzanie firms- provide loan finance that is halfway between equity and secured debt. Thse facilities require either a second charge on the company's assets or are undsecured. Because the risk is consequently higher than senior debt, the interest charged by the mezzanine debt provider will be higher than that from the principla lenders and sometimes a modest equity "up-side" will be required through options or warrants. It is generally most approrpriate for larger transactions.

Making the Investment- Due Diligence
To support an initial positive assessment of your business proposition, the venture capitalist will want to assess the technical and financial feasibility in detail.
External consulatant are often used to assess market prospects and the technical feasibility of the proposition, unless the venture capital firm has the appropriately qualified people in-house, Chartered accountants are often called on to do nuch of the due diligence, such as to report on the financial projections and other financial aspects of the plan. These reports often follow a detailed study, or a one or two day overview may be all that is required by the venture capital firm. They will assess and review the following points concerning the company and its management:
-Manangement information syestems
- Forecasting techniques and accuracy of past forecasting
- Assumptions on which financial assumptions are based
- The latest available management accounts, including the company's cash/debtor positions
- Bank facilities and leasing agreements
- Pensions funding
- Employee contracts, etc.
The due dilignec review aims to support or contradict the venture capital firm;s own initial impressions of the business plan formed during the inital stage. References may also be taken up on the company(e.g. with suppliers, customers, and bankers).