Foreword. Benefits of using advisers include:

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1 Raising finance

2 Foreword Raising funding be it bank, venture capital or business angel finance is a complicated process and can be both daunting and stressful. Using experienced advisers is essential to manage the process and in some cases prospective funders will not deal direct with the company and may insist that directors appoint Corporate Finance advisers to support and guide them through the process. Benefits of using advisers include: matching the right funder for the right opportunity is critical and advisers with extensive experience and a network of funding contacts will have the credentials and ability to pick up the phone to the people that matter. advisers know what is expected and pre-empt the information requests from the various parties and issues that may arise. advisers know how to structure funding and therefore can offer an unbiased view as to funding offers received and negotiate these on your behalf. As a full service accountancy practice we offer joined-up access to other areas in which you might require advice and can draw upon the expertise of our in-house tax and financial planning experts, if required, in structuring and planning transactions. We offer a full range of services to help you achieve your business ambitions and measure our success by your success. Critchleys experienced Corporate Finance professionals have the expertise, contacts and commercial acumen to effectively negotiate and conclude deals - and an impressive track record to prove it. We are committed to providing sound commercial advice to the mid-market, and have particular expertise in owner-managed businesses and SMEs. Justin Ray Corporate Finance Partner

3 Key issues Pricing Different funding sources will require different rates of return depending on where they sit on the risk profile. It is important to match the right funding to the right investment both in terms of cost, purpose and timescale of investment. Warranties It is likely that you will be asked to give warranties over the business as part of the investment conditions. Time Great demands will be placed on your time and it is important that you don t neglect the business itself in this process. The Management team The quality of you the management team is fundamental. Ideally you would need to be able to show any prospective funder that you have the pedigree and track record of running that business.

4 The Process The diagram below summarises the typical process involved in raising funding: Stage 1 Stage 2 Stage 3 Stage 4 Feasibility review Prepare Business Plan and Forecasts Identify funders Marketing to potential funders Negotiate and agree best funding package Contract negotiations Due diligence Legal documentation Completion The business plan For a detailed outline of what should be included within a Business Plan please refer to our separate brochure. The key points to reflect on are: venture Capitalists receive a large number of plans every year and therefore the Executive summary should grab their attention otherwise they will not read the rest of the document it should provide enough information to allow a prospective funder to make an informed decision about the business it should identify the strengths and experience of the management team clearly explains the opportunity What does a prospective funder want to hear? track record sustainable cashflow market opportunity endorsed by commercial due diligence credible and properly costed strategy management information and systems

5 Forecasts forecasts should be believable and robust as they will be scrutinised under due diligence the financial model should be fully integrated and flexible to allow sensitivities to be run the acquisition structure and funding should be superimposed over the model to fully reflect the financial position of the business going forward financial covenants should be modeled as appropriate to highlight the headroom that the bank has over its facilities Funding A) Debt The banks are not risk takers! The amount of money that they are prepared to lend is effectively limited and a function of both available security (property, assets, debtors and possibly personal guarantees) and a multiple of stable cashflow. Their money can come in many forms: term loan invoice discounting facility asset based lending overdraft It is also likely that the bank will set certain financial covenants for the business to report on post transaction. The purpose of these is to give an early warning to the bank in the event that things are not going to plan. B) Venture Capital/Private Equity Venture Capitalists derive their returns from a variety of sources interest on their investment: not all of a venture capitalist money would be invested in pure equity - a proportion may be lent to the business as quasi debt attracting an agreed rate of interest owning a direct share in the business: for this reason most Venture Capitalists will only invest if it is understood that all parties are working towards an exit goal within a certain timeframe, usually three to five years, be it by sale, flotation or a secondary buy-out or re-financing. dividends: depending on the situation the equity holders may be entitled to dividends paid out of retained profit, these will usually be subject to the agreement of the bank C) Business Angel Finance In essence a Business Angel can be treated under the same heading as Venture Capital. They are typically one or a group of High Net Worth Individuals who are willing to invest their personal money into opportunities in return for some equity. Business Angels can be both active (ie involved in the business) or passive (ie limited to a monitoring role). Risk Vs Return

6 Different funders will have different requirements in terms of expected return depending on where they sit on the risk profile. The table below highlights the typical structures that each class of funder would base their investment on: Return Conditions/comments Debt 2% to 3% over base rate or LIBOR covenants asset security cashflow lending at 2.5 to 3.5 times EBITDA if the situation warrants it Set repayment profile Cost Venture Capital dividends 8% + yield on loan stock possible redemption premium on the loan equity holding risk money loss of some control typically look for 30%+ IRR or at least 3 times money. look for quality management teams and growth potential look for an exit at some point in the future Board representation Business Angels dividends 8% + yield on loan stock possible redemption premium on the loan equity holding risk money (smaller amounts) loss of some shareholder control look for 30%+ IRR or at least three times money look for quality management teams and growth potential look for an exit at some point in the future active or passive role Due diligence The purpose of due diligence is for investors to validate the information provided to them and to gain a better understanding of the risks of the transaction.

7 Areas that are usually covered include: management referencing commercial: verification over the reputation of the business and its relationship with its customers accounting: verification over the information provided and comfort over any accounting issues legal: looks at any key issues within contracts; property; terms of trade; intellectual property; employments; litigation etc environmental pension For more detail of what is typically contained under an accounting due diligence report please refer to our separate brochure Due Diligence. The Legal process Management teams are always amazed at the sheer volume of paperwork required to complete the transaction. A good corporate lawyer is essential to ensure that your interests are maintained and that the transaction runs smoothly. The typical key documents are: investment agreement articles of association loan note instrument banking documents security documents inter-creditor deed service agreements board resolutions financial assistance documentation Role of the adviser The role of your advisers is to lead and manage the complex process and advise you on the issues at each turn.

8 They are there because they are experts in what they do. A great deal of the onus can be moved from you onto them. This releases your time to allow you to do what you do best - in other words run the business. The key advantages of advisers can be summarised as follows: actively sourcing the right funding partner offering commercial advice on every element of the transaction identifying potential issues and resolving them acting as lead negotiator co-ordination of all parties involved assisting with paperwork, documentation and forecasts providing a buffer between Buyer and Seller essential when negotiations get heated! Tax Tax issues are likely to play a major part in getting the structure right. Tax advice may be necessary for some or all of the following: ensuring investors get any tax relief that is available confirming the tax treatment in the company s hands of any funding making sure that any interest payable is tax-deductible structuring share schemes for employees tax-efficiently ensuring that the set-up now does not do anything that will cause long-term problems at exit