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

Bring in the new financial year with a clear plan for success

As another financial year comes hurtling to an end it’s a great time to pause and reflect on what you can do to ensure FY 2018 is all you want it to be. Here are my top 5 tips in preparation for a new year. Tackle one a week and you will be on track to start the year with confidence and a recipe for success.

  1. Set a budget for the year

Assessing financial performance is subjective. To know whether you have succeeded you need to be able to measure your results against an agreed plan (or budget). Having a budget also allows you to make financial decisions around setting revenue budgets and sales strategies, making decisions to invest in capital expenditure and team development. Importantly, it enables you to allocate personal remuneration and drawings without fear of unexpected bills or a cashflow crisis you didn’t see coming.

Most SME owners start with a good idea, an identified market niche and a tremendous amount of enthusiasm to drive their vision to succeed. But to what end? Having a clear financial goal in mind assists in shaping your broader business strategy for the year and also provides a sense of purpose to your company.

  1. Set your top 5 priorities 

Setting clear and concise goals gives you focus and direction. By identifying the 5 most important things to get done for you to be able to meet or exceed your financial budget you will ensure that your hard work pays rewards as your activity and efforts are directly linked to factors which contribute to your goals.

Of your 5 priorities it is also great practice to identify the number 1 priority – the one goal which is the most important thing for the business to achieve. You may also find that your top 5 priorities contain longer term projects, if so, identifying shorter term milestones or actions related to each one can keep it achievable and ensure you are making progress with steps in the right direction.

What you focus on gets done. 

  1. Use an advisory board

Being in business can be lonely, and being busy can mean time passes by without stopping to check on your progress. Implementing an Advisory Board provides owners a sounding board, guidance, and an outside perspective to hold you personally accountable. It is a great way to break the dynamic from working IN the business, to working ON the business.

I recommend at least a quarterly cycle of meetings, including a meeting agenda and financial reports (compared to your budget).

The Advisory Board team may be limited to one or two individuals (depending on the size and complexity of the business and the internal skills in the business) and meetings should be kept to 2 or 3 hours maximum. In my experience, businesses with an Advisory Board more often meet their financial targets and stay on track with their strategic priorities than those without one.

  1. Streamline a process 

Like decluttering your house during a spring clean, finding an inefficient process in your business and streamlining it can reap great rewards. For business efficiency as well as staff satisfaction.

We live in an age where technology can provide solutions for all sorts of problems and you might be surprised to find an “off the shelf” solution to your process inefficiency.

Are you spending too much time entering receipts and filing them? Try Receipt Bank to snap a photo of your receipts and bills and watch it load itself into your accounting system – and no more need to file the paper. Perhaps you are sick of entering and remembering too many passwords for the multiple applications you use each day? Try LastPass and save yourself time (and frustration) every day. 

Creating a culture of continuous improvement has immense benefits. Start now with one change and see where it leads. 

  1. What to stop doing!

Time is a limited commodity. To do new things and create new habits, you need to find some stop doing activities and bench old habits. To identify some things you can stop doing, consider the following questions:

  • Do you say ‘yes’ too often?
    • Next time, pause and consider “does it need to be done?”, “can someone else do it”, “if I need to do it, how urgent is it?”.
  • Do you do things that others could do?
    • Focus on delegation. Leverage the time of others to get tasks progressed and only get involved when they are advanced to a stage where they need your input.
  • Stop being a perfectionist.
    • Ensure the time spent is commensurate with the value of the task.
  • Cease & desist from doing repetitive tasks.
    • Take advantage of technology and start automating repetitive processes.

Help is close by. Your accountant should be a sounding board for your ideas or feel free to contact Prosperity Advisers if you want a fresh approach.

SME Owners to plan for Financial Freedom

Close-up of a women hand typing laptop keypad from representing the concept of business graph in front of blackboard.

Financial independence, key person risk and being too busy to grow their business are some of the most common stresses facing SME businesses in Australia today.

Formal business planning is squarely in the ‘too hard basket’ for many business leaders (72%) and this is holding them back when it comes to financial independence, growth and financing, and planning for retirement – with many SMEs without a retirement date and no succession plan (90%), or worse, they don’t know what income and assets they need at retirement (88%).

So says a comprehensive face to face study conducted over 12 months with more than 500 SME business leaders.

To access the research report findings and commentary please contact us on 02 4907 7222.

Why aren’t businesses doing strategic planning for growth?  We found 66% of participants in this study are too busy working in their business with no time to work on their business.

Here are some key business planning tips for SMEs, across the key areas of Strategy, People, Processes & Cash, to take the mystery out of planning and to help business leaders to take charge.

1) Everything is relative – Even if you do planning – how do you know it’s going to work?  Benchmarks are fundamental indicators of success and without knowing how your business and activity currently performs against other SMEs, you could be flying blind. Ask your adviser about helping you with benchmarking your business against others.

2) What are you solving for?  You need to determine what your end game is – where are you going and why? What do you need to get there? What’s holding you back? What does your vision look like in terms of what you sell, to whom, when, where and how.

3) Do you have the processes and systems in place to implement a plan? Identify your key processes, highlight what needs to change to grow where and how you want, then develop the processes and enlist your team to troubleshoot and own them.

4) How much money do you need? Revenue for cashflow, profit target, capital for growth. How much is enough and what’s the best sources of finance for your business? What do you need to secure it?  How healthy is your credit history?  All of these factors are important if you are looking to secure outside investors or fund your growth through debt. Your accountant can help you to put sums around your plans.

5) Do you have the right skills and experience in-house to implement a plan? If not, where can you find them?  Do they need to be in-house or can you use a virtual CFO, marketing team or cloud accounting solution? If you need experienced resources for sales or development then what will it take to get them and how much will it cost?

6) Have you thought about what it will take to align your staff so you can get the 1+1=3 effect? Make sure you have champions for each aspect of your plan or it will fail. Hold people accountable through alignment and integrating the plan into every day activity. Do you need a reward system to get the best out of your staff? Something simple may not cost you a lot of money but could create a step change in your business culture.

7) What are your indicators for success?  Every plan needs to have indicators of success and clear timelines. These help form KPIs for your team and will demonstrate outcomes to investors and owners when the time comes.

8) Reassess and refocus. Use real time financial and management reporting to steer incremental change. Cloud Accounting solutions are your go to. Set yourself a timeline for assessing success periodically and refocus where you need to in real time. Cash flow is king regardless of the size of your business. Don’t let your focus on expansion blind you to the need for strong cash flow and money in the bank.

There is always plenty to think about when you run your own business. Sharing the load with a trusted adviser will help you to put perspective on your vision as well as reality around your plans. A Board of Advice is a term used widely when it comes to business advisory and it can be a useful step for you to consider if financial freedom is your goal. Enlisting a structured Board of Advice with those who you trust to give you honest and informed insight could mean the difference between feeling stressed by the treadmill, and seeing your vision blossom.

Help is available to those struggling after the devastating week in NSW

It has been a rough week of weather for parts of New South Wales (NSW) and we all know someone who has been affected.   So as the week comes to a close we wanted to reach out with some information that may be of help to you, or may help you assist a neighbour, friend or relative who has been affected.Here are some of the things you should consider if you have been affected by a natural disaster.

Are you eligible for natural disaster assistance schemes? The government has emergency assistance grants and loan schemes available for

1) People facing personal hardship and distress The Ministry for Police and Emergency Services can provide disaster relief grants to eligible individuals and families whose homes and essential household items have been destroyed or damaged by a natural disaster. Find out more

2) Small businesses that meet eligibility criteria Loans of up to $130,000 are available at a concessional rate to small businesses affected by disasters and which meet certain eligibility criteria. This finance is available to those unable to obtain assistance through normal channels.   Find out more 

3) Primary producers that meet criteria for loans and transport subsidies Loans of up to $130,000 are available (subject to certain eligibility criteria), at a concessional interest rate for those in urgent need.  Transport freight subsidies of up to 50 percent are available to help with the carriage of livestock and fodder to help primary producers  Find out more

These schemes are all subject to eligibility.

Have you notified your insurance company of an intention to claim? If you intend to claim on an insurance policy, it is important to start enacting this process as soon as possible.  Insurance brokers and companies provide extra support for the high volume periods and often prioritise on a first come basis. Further, there may be records and information you need to collect and retain to ensure your claim is valid and maximised. For example if you have suffered a business loss and your business insurance covers “loss of profits” or “business interruption” it may be necessary to capture information about the hours of staff or loss of income during and following  the disaster. Such information may be more difficult to collect afterwards or not having it may impact the amount paid under the policy. For property damage it is important to understand the process required to be followed by your insurer to ensure costs are covered. For example you may need to get a certain number of quotes for repair work or use certain providers to have the work done in order for your insurer to reimburse you.

Seek out programmes that might be available to help. Many financial institutions and organisations are releasing programmes to help their customers.  We have already been contacted by a number of banks, as well as Chambers of Commerce and Government bodies.  Our team is across many of the programmes that are being offered and will continue to monitor this space as it unfolds to help people in their local areas. Please contact us for assistance in understanding what help is being provided.

Do you need help getting your business, home, family or charity through this period?  People who are struggling might not have the tools, skills or equipment they need to lodge claims, manage issues or obtain help that will get them back on track faster.  Our team is just one call away for someone you can trust to be a second set of eyes or hands at this time.  Whether it be a sounding board, processing payroll while systems are down, helping you apply for assistance or insurance or longer term planning to help you or your business recover from this event, we are here to support you.

Most of all, we want you our clients and friends to know that if there is any way we can help you at this time, to please reach out to us.  Natural disasters and the aftermath can be soul destroying, and there are plenty of hands and minds here to put to work on solving any issue, personal or business that you might be struggling with

Derisking your Business Partnership – Some simple but important steps

Running a business with others whether through a company, trust or partnership is not something that many people step into lightly.  Most get to know their business partners for months or years before they go into business, building trust, rapport and structure around them as they go. 

So it makes sense that many partnerships are now insuring against the unexpected exit of a partner from the business  with Buy/Sell insurance that allows remaining stakeholders to buy a partner out in the event of specific events like death and disability.  

It is an important element of succession planning in partnerships, where individuals rely on each other to run their business and deliver their services or products to the market.

Take for instance the business run by Mark, Jeff and Drew, partners in a firm that sold high profile residential property.  The real estate agency had a premium referral based clientele and a superb reputation that enabled them to live a good life.  Despite their success, the partners had never taken the time out to build a succession plan, put business agreements or insurances in place.

Sadly, Jeff’s lifestyle got the better of him, and he died suddenly and unexpectedly from a heart attack.  His wife, Kathy, who had never really been interested in the business since she left to have children 10 years ago decided return to work again, demanding to be treated like and equal partner by the other two as she was a beneficiary of Jeff’s 33% shareholding.

It soon became obvious to Mark and Drew that Kathy was out of her depth.  Clients who had previously worked with the agency were complaining, two of their best staff resigned and the agency was denied an important regional contract they had held for 12 years.

The hostility and resentment between Kathy  and Mark and Drew grew to the point where Lawyers became their best way of communicating.

The situation was stressful for everyone in the office, and it had virtually destroyed the value of their once buoyant and successful business to the point where it was virtually worthless.  When one of the senior staff left and set up an agency down the road in competition with them, they knew their run was over.

Had Mark, Jeff and Drew sought advice on succession planning their partnership and implemented buy/sell agreements and insurance this situation could have been avoided altogether.  When Jeff died, funding would have immediately triggered to buy Jeff’s ownership share from his estate.  The inclusion of staff incentives schemes in their succession plans may also have kept staff in the business, minimizing the risk of them setting up in competition with the firm.

Are you in a business with others?  What should you do?

  • Seek professional advice to draft a buy/sell agreement
  • Put in place buy/sell insurance
  • Draw up an effective succession plan that take into consideration sudden and planned exits
  • Ensure your buy/sell agreement is regularly revised and amended as circumstances change.
Image source: Flickr: o5com