Crowd sourced equity funding

In 2017 we are seeing the introduction of major changes to crowd-sourced funding and the ability for companies to raise capital from “the crowd”. The following is an overview of recent changes to legislation for Crowd Sourced Equity Funding (CSEF) and a look at what this could mean for private companies.

Crowdfunding has been around for nearly a decade with IndieGoGo launching in 2008. In 2015 it was estimated that approximately US$34billion was raised globally through crowdfunding. The World Bank predicts that crowdfunding investments will be a US$96billion a year market in developing countries alone by 2025, while Goldman Sachs describe it as “potentially the most disruptive of all the new models of finance”.

So what is it and how will it benefit SMEs?

To date, Australia has somewhat lagged behind the rest of the world, partly due to the inability for start-ups to provide equity in their venture with only rewards based crowdfunding available. Recent developments for how companies can use crowd sourcing will mean a dramatic change to how businesses finance growth, new product development and other strategic initiatives.

What is Crowd Sourced Equity Funding (CSEF)?

It’s essentially a financial service where SME’s and start-ups can raise money from a large number of people for a specific project or venture and in return provide equity in the company.

Local developments

A national Crowd Sourced Funding bill was passed into law recently and has provided start-ups and small businesses with an opportunity to be able to raise capital directly with investors.

It allows for unlisted public companies, with annual turnover or gross assets of up to $25million, to utilise CSEF to raise capital up to $5million a year from retail investors.

Retail investors include ‘unsophisticated investors’ who will be able to invest up to $10,000 each and every 12 months in whatever ventures they choose.

There is no restriction on the amount of investment from a ‘sophisticated investor’. This type of investor is one which is deemed to have sufficient investing experience and knowledge to weigh the risks and merits of an investment opportunity.

As part of the 2017/18 Federal Budget, draft legislation was released allowing SME private companies – a structure used by the vast majority of Australian businesses – the opportunity to participate in CSEF.

This means proprietary companies will no longer need to become a public company (reducing cost and compliance burdens) to access CSEF. The legislation seeks to protect investors through additional obligations of CSEF proprietary companies including a mandatory 5-day cooling off period.

CSEF offerings must be made through eligible CSF intermediaries, who hold an Australian Financial Services Licence and are responsible for publishing a CSF offer document that complies with regulations.

When will CSEF be available?

The Federal Government has already passed legislation that will establish a CSEF regime for public companies and this will start on 29 September 2017.

The draft legislation, extending the regime to proprietary companies, is now being reviewed in light of comments provided to government. No date has been set for when the bill will be before Parliament. The current draft legislation sets the commencement date as six months after the legislation receives royal assent.

What does it mean for SMEs?

Capital raising for SMEs has been challenging, often tying up personal assets as security with banks, and for some it has involved going down the road of a costly and time consuming IPO.

CSEF allows SMEs and start-ups to by-pass the traditional methods of raising capital and to source funding from the public in exchange for an equity share in the business.

Before companies move down this path there are a number of aspects that will need to be considered and prepared, including:

  • Market Research to ensure your offer is attractive
  • Marketing Plan to validate your offer to potential investors
  • Corporate Structuring to ensure you have the most tax effective structure in place
  • Intellectual Property assessment to ensure your ideas and business is well protected
  • R&D strategies covering how you will invest the funds raised to the benefit of investors
  • Business plan which is robust and long term
  • Budgeting and Cashflow forecasts to demonstrate that the business or product is sustainable
  • Information Memorandum to set out the key elements of the offer
  • Corporate Governance requirements are in place and the business is well prepared to satisfy its obligations.

While there may be substantial upside to sourcing capital in this way, there are also a number of compliance obligations which will need to be considered:

  • An annual financial audit if more than $1million in CSEF is raised
  • A minimum of two directors of the proprietary entity
  • Financial reporting in accordance with accounting standards
  • Restrictions on related party transactions
  • Minimum shareholder rights to participate in exit events (such as an IPO or similar).

What else can SMEs do to raise capital?

Although it sounds attractive, CSEF may not be the best option for your product or company – it really depends on individual circumstances and timing.  Other forms of raising capital can provide attractive benefits too, such as:

  • Early Stage Innovation Company (ESIC) set up which provides for a 20% tax offset to certain investors that can be used with or without the CSEF concessions regarding regulation of raising capital.
  • Section 708 of the Corporations Act Capital Raising’ which provides for long-standing exemption from capital raising reporting requirements when capital is raised from ‘sophisticated investors’.

Depending on whether your product is at the exploration, validation, demonstration or launching stage, there are numerous government grants available through The Department of Industry, Innovation and Science, Austrade, Australian Taxation Office, CSIRO and other Government organisations.

Help is at hand

Navigating the opportunities for funding that are right for your business or product can be a time consuming task. To discover more about CSEF or other capital raising methods available, including government grants, contact Prosperity Advisers on 1800 855 844 or mail@prosperityadvisers.com.au

What is your practice worth?

There are many variables to look at when valuing a practice and if you are looking to sell you need to start planning earlier than you think. This article discusses the important factors that are considered in a valuation as well as what you can do to improve it before you are ready to sell.

Do GP practices actually have a value in the market independent of a payment for the plant and equipment and the structural aspects of a practice?

There is room for a practice to have a value, however there is a threshold. Often we find a smaller practice may only be a worth a small amount of money if anything at all, while a larger, well-run practice can be worth a significant amount of money.

A very simple way to calculate the value of your practice is if you remove your owner Doctor billings from the Profit and Loss Statement, then consider your billing the same as you would a contractor (say 35% for the practice), would there be anything left? Effectively, are you subsidizing the practice, because if you took 65% as a contracting doctor, there would be nothing left? If that is the case, then it is a good indication that at the moment your practice isn’t really worth anything.

What should we keep in mind when valuing a practice?

The value of a practice is subjective; it’s important to keep in mind that the value is what someone in a free market is willing to pay for it, and what you’re willing to take for it. As the vendor, your value may be higher than the value of buyer. Essentially the value of your practice is somewhere in the middle.

Another thing to consider is if corporates become involved, that metric can change. A trap to be aware of is, if a corporate or large entity comes in, they will often offer big numbers, higher than most GPs would be expecting. However, the devil is in the detail of the contract, so it is important to understand it and talk to a specialist about it. For example, there may be big numbers offered up front, but restraints put on you as part of the contract. This could include requiring you to work in the practice for 5 years, at a contracting rate of 50% instead of 65%, meaning essentially they haven’t bought the business per se and have tied you up generating profit for them at the same time. While there may be some big money out there, it may not always be the best option and it is always best to talk to someone who can break it down for you, so you understand the long term effect.

What is a common approach to valuations?

There are a number of different valuation methods, but to keep it simple from a GP perspective, the business cap rate (also known as an EBIT multiple) is the most common. This method is where you work out the future maintainable earnings by looking at the adjusted profit for the last number of years, then apply this multiple by that number to work out what it’s worth. That is, how many years’ genuine profits or regular profits would you be willing to pay to take over the practice? Is that 1 years’ worth of Profit or 5 years’ worth of Profit?

Profitability: what are the principals involved in working out the adjusted profit of a practice?

I would recommend looking at your profit and loss over a number of years, say 3 as a benchmark. From that profit, add back any non-genuine wages you or your family have drawn and any expenses for you personally (eg motor vehicles, superannuation, etc). Likewise, take out any fringe benefits tax reimbursements you have contributed. Once you have this core business figure, apply the contracting rate for any owner Doctors (say 65%) to the owner Doctor billings, and this profit is the adjusted profit for the year.

In addition, you might also want to add back any abnormal expenditure over the 3 year period (eg large pieces of equipment or any other expenses you don’t consider “regular”). This will “annualise” a true profit of the business over the 3 years. You then also need to “weight” each of the years. This means that you will not look at the profit made each individual year, or the average of the profit over the 3 years, rather you would consider which years were more “regular” income years and give them a higher weighting than any years which were less “regular”. This gives you the weighted average EBIT.

How does a valuer work out what multiple to use in arriving at a valuation?

This is the harder bit; it’s not something you can just come up with or guess at. As a rough guide, a multiple of 1 to 5 years profit, however it depends on a number of factors. You should speak with someone who knows the medical industry and will also get to know your practice well. Once you have a rate, you will effectively multiply it by the weighted average profit figure.

There are a number of industry factors to consider in working out the multiple, for example:

  • Changes in Government policy will not only affect the industry, but your practice specifically;
  • Changes in healthcare, for example changes to the way public hospitals are run. If it were to become an option for patients to visit their public hospital as opposed to a GP clinic, that would affect your profit;
  • External environmental factors, for example practice location. Practices on busy roads are easily accessible, ample car parking and proximity to a train station will see a positive impact on the multiple. Practices which are difficult to access, don’t have street frontage or difficult car parking will see a negative effect on the multiple;
  • Demographics, for example areas with young families who are inclined to visit the doctor regularly versus areas with more elderly patients who may be bulk billed this will affect your practice performance;
  • Socioeconomic status, for example affluent areas where patients are happy to pay more to see their doctor, versus low socioeconomic areas which may be traditionally bulk billing areas.

It’s important the process is undertaken thoroughly to get an indication of what your business is worth.

Is that the final number?

This Cap rate approach will help determine the goodwill (or value) of the business, however don’t forget that the value of any plant and equipment should also then be added to this number if a sale does occur.   This could be minimal value or it could be considerable if there was a recent fit out. The value of this equipment should always be considered at market value, not the price it was purchased for.

Is market competition important?

Most definitely. If you’re a small practice and a multi-clinic opens up a couple of streets away, that will affect your value. This may not be fully reflected in the numbers, which is why it’s important for the person making the assessment to understand the business.

What are some of the factors inside the practice that are relevant?

Growth is an important factor to consider; is there any room for growth within the practice? If you’re running a small practice with, for example, four rooms, and they’re at capacity, not much can really be done with the practice as there really isn’t a lot of room to grow.

If someone is coming in to buy that practice, they’re not going to want to pay a higher multiple for the profit of the practice if they can’t really grow it or do much more with it. Whereas if a practice is not at full capacity, has space for more rooms or opening hours, there’s room to expand.

Fit out is also something to consider; is the practice fit out current and modern, or does it need to be updated, which could cost money in the future?

Is the staff and contracting team relevant?

The team is very relevant. A practice who has doctors on contracts who are happy working in the practice, who have regular patients who visit the practice to see them specifically, will be more appealing to someone coming in to buy the practice compared with a practice where the doctors aren’t on contracts and are not tied to the practice. For someone coming in to buy a practice where the doctors aren’t on contracts, they have to consider whether the patients will follow if the doctors leave.

Likewise, with nursing and admin staff; perhaps the practice has a great receptionist who knows all of the patients by name and the reason the patients visit that practice is because they feel at home there. These types of things will affect the value of the practice, and that isn’t something which can be seen in the financials.

Is there anything Prosperity Health can do to help our clients work out where they sit in that spectrum?

A good starting point for practices is to see how they compare to other practices. Prosperity Health run an annual GP Benchmark Report which is a useful tool for practices to gauge where they sit on the spectrum in terms of how they operate, whether their expenses are high and their income low.

The next step is to work out why you want to know what the practice is worth; whether it is for your own peace of mind, or because you want to sell the practice or for some other purpose. There are rules and guidelines that are followed when determining the value of the practice and how much detail goes into it will depend on the reason you want to know your practice’s worth. Valuing a practice is not something that should be done for the sake of it.

How long before wanting to sell your practice, should you start that conversation?

Practices should start the conversation several years out because once they get to the point where they want to sell and are trying to work out what their practice is worth, the first step is looking at the last 3 years. If the last 3 years aren’t great, the practice isn’t going to be worth much. If you start planning 5-7 years away from selling the practice, you have time to implement some changes and improve the practice, and ultimately its value. Again, our GP Benchmark Report is a good place to start to see what changes and improvements can be made.

The positive side of the multiple factor is that if the practice is making more money each year, the multiple will increase, meaning the practice will be worth exponentially more. If the worst case is practices are making more money each year by starting early, then that’s not a bad downside!

 

Australia expected to follow French New Era of Corporate Governance

In light of the Australian government’s impending new anti-corruption and anti-bribery legislation to be enacted, ethics experts are asking whether we should be looking at what’s happening elsewhere for guidance on what might be in store for Australian businesses. New anti-corruption law recently passed in France is particularly interesting and relevant to Australia. France calls it a “Law on Transparency – the Fight against Corruption and Modernization of Economic life”, commonly referred to as SAPIN II – named after France’s Finance Minister who fought for its passage.

Why has new French legislation got our attention?

This piece of anti-corruption law – is said to be setting a new bar for anti-corruption while still being in-line with the strictest European and international standards.

As a result, French companies have had until June 2017 to implement whistle-blower compliance programs to comply with this new legislation, which is not a long time to implement the requirements of the legislation.  SAPIN II adds to the host of other legislation from first world economies in recent years, a clear recognition that anti-bribery and anti-corruption compliance are at the forefront of legislative and regulatory agendas globally.

SAPIN II also applies to bribery and corruption activities committed outside of France by French companies and French nationals, or to others who conduct business in France or within French territories.

Where is Australia up to?

In December 2016 the Minister for Revenue and Financial Services, the Hon Kelly O’Dwyer MP issued a consultation paper seeking public comment on whether corporate sector whistle-blower protections should be harmonised with that of the public sector whistle-blower protection laws (in recognition that Australia’s public sector protection laws are very stringent by international standards, but that corporate sector laws lag behind most developed nations). Around the same time, the Australian Senate referred an inquiry to the Joint Parliamentary Committee on Corporations and Financial Services into whistle-blower protections in the corporate, public and not for profit sectors with a report due back by 30 June 2017. This deadline has been  recently extended to 17 August 2017.

Consequently, experts expect new legislation to unfold from early to mid- 2018 as Australia races to look good and meet its G20 commitment for improving its corporate sector whistle-blower laws. This is expected to form part of the  Australia report to the G20 Summit in Buenos Aires in 2018.

What can Australia learn from SAPPIN II?

France’s new legal requirements of this compliance program include:

  • Developing and implementing a Code of Conduct which defines and illustrates the different types of prohibited behaviours, notably those relating to bribery and/ or influence peddling;
  • Implementing Disciplinary sanctions and consequences for non- compliance with the company’s code of conduct;
  • Implementing a Whistle-blower System that enables employees and others to highlight and report violations of this Code of Conduct;
  • The need to have in place regular and continuous Risk Mapping to identify, analyse and rank the organisation’s exposure to bribery and corruption related risk;
  • Requirement to assess and conduct Due Diligence of clients, providers and intermediaries associated with the organisation for bribery and corruption risk;
  • Implementing Accounting Controls designed to ensure the company’s financial accounts are not used to conceal acts of bribery or influence peddling;
  • Conducting regular and continuous anti- bribery and associated influence peddling training for managers and employees exposed to this risk;
  • Establishing an internal control system to regularly assess the design and effectiveness of the compliance controls of the program (i.e. including audits of the anti-bribery and anti-corruption compliance program within Internal Audit Plans).

In passing SAPIN II, the French government has established a new regulatory anti-corruption agency, the Agence Francaise Anti-corruption (AFA) to oversee and administer this law. For any company which fails to comply with SAPIN II, the AFA will in the first instance issue a warning letter to the Board and Executives and may refer the non-compliance for enforcement.

The implications of enforcement action range from fines against the Executive Officers of the company of up to €200,000 individually and up to €1million for the company, with possible compensation payments to the victims of corruption as well. Further consequences include more stringent monitoring by the AFA of the company prosecuted for up to 5 years (at the company’s expense). These are significant actions for any company caught foul of the Act.

In Australia there have been calls for a similar Australian federal agency to be established to oversee the new legislation under development. It is widely expected that this will occur.

How can your organisation prepare?

If Australia goes down the path of France and other developed nations such as the USA and Canada – experts expect this will be the case – then now is the time to start preparing your organisation for this new world.

Many experts argue that whether there is a compliance obligation or not, it makes good business sense to think about an organisation-wide Ethics Program and to implement a sound Whistle-blower approach in order to be recognised as a leading organisation.  Prosperity’s Corporate Assurance and dedicated Ethics experts can help organisations to understand their risks and to implement a sound and effective Ethics & Whistle-blower Program, including independent support for whistle-blowers and investigations.

To find out more, contact Michael Mahabeer on 1800 855 844.