UK Scale-up Fund: Is Your Business Investment Ready?

Five of the UK’s major pension providers are exploring a new fund of more than £1 billion to invest in high-growth British science and technology businesses.

The proposed UK Scale-up Fund brings together Railpen, Nest, LPPI, LGPS Central and Border to Coast. The British Business Bank is working alongside the group and intends to invest in partnership with it.

The fund is still being developed. It is not a £1 billion pot that businesses can apply to today, and it is not a general funding scheme for UK SMEs.

For growing businesses more widely, however, the announcement raises an important question: would your business be ready if an investor, lender or buyer started asking questions tomorrow?

Outside investment depends on more than a strong growth story. Investors want to understand where growth will come from, how much capital is needed, how it will be used and whether the financial information supports the plan.

Those are useful questions for any ambitious business to answer, whether investment is on the immediate agenda or several years away.

What has actually been announced?

The proposed UK Scale-up Fund is intended to invest in high-growth UK science and technology companies that have moved beyond the earliest stages of development and require further capital to scale.

The British Business Bank is supporting the development of the fund and intends to invest alongside the pension providers.

There is still work to do before businesses could receive investment. A fund manager has not yet been appointed and the Government announcement does not set out an application process.

For most businesses, the immediate significance is therefore not access to the fund itself. It is what the announcement tells us about the information serious investors expect to see.

Could you explain your growth plan in numbers?

A good growth story needs numbers behind it.

The British Business Bank’s investment-readiness guidance says businesses seeking finance should be able to explain their growth ambitions, how they plan to achieve them, how much funding they need and the financial position of the business.

That broadly means providing historic financial information alongside forecasts covering areas such as profit and loss, cash flow, the balance sheet, sales and expenditure.

Producing a forecast is only part of the exercise. You also need to be able to explain what sits behind it.

If a business generating £5 million of revenue expects that figure to increase to £8 million next year, where does the additional £3 million come from?

Is it already contracted? Is there a strong sales pipeline? Will prices increase? Is the business entering a new market or opening another location? Will more people need to be recruited to deliver the work?

And importantly, what happens to profit and cash while that growth is taking place?

This is where reliable management information becomes valuable. Turnover alone tells you very little about the quality of growth. Management also needs visibility over margins, cash generation, customer concentration and performance against budget.

We have written more about the figures growing businesses should be reviewing in What ambitious businesses should be measuring monthly.

Forecasts need to survive scrutiny

A forecast should help management understand what needs to happen for the business plan to work.

An investor is unlikely to accept a growth percentage without asking what supports it.

Take recruitment. If ten new employees will add £600,000 to annual salaries before employer costs and other overheads, the numbers should show when those employees will join, what additional revenue they are expected to support and whether there is enough cash to fund the period before that revenue arrives.

The same applies to new premises, equipment, technology, marketing or acquisitions.

If a business is seeking £2 million of investment, management should be able to explain where it will go and what it is meant to achieve.

How much is for recruitment? How much is for product development, equipment or marketing? How much needs to remain available for working capital?

Clear answers give management and investors a much better understanding of the plan.

Forecasts should also be tested against what actually happens. If sales, margins or cash regularly come in well above or below forecast, understanding why can be just as important as producing the next set of projections.

Get the structure right before due diligence starts

Investment readiness is not only about forecasts.

An investor or buyer will also want to understand who owns the business, where intellectual property sits, and whether liabilities, tax, and filings are in order. They will also want to know about any historic issues that need addressing.

These questions can become more complicated when businesses have grown quickly.

Shareholdings may have changed. Directors may have made loans to the company. New businesses may have been added to the group. Intellectual property may have been developed in one entity but used by another.

None of these issues necessarily prevents investment. The difficulty comes when they are discovered partway through a transaction.

Reviewing the structure early gives owners more time to understand what needs attention and deal with it properly.

Investment readiness is useful even if you are not raising money

Most growing businesses will not be looking to the proposed UK Scale-up Fund for investment.

But many will face similar financial questions at some point.

It may happen when applying for bank finance, bringing in an investor, acquiring another company, introducing new shareholders or preparing the business for sale.

The same preparation helps in each case.

Reliable monthly information tells you how the business is performing today. Forecasting helps you understand what the next stage of growth could require. A clear balance sheet shows what the business owns and owes. Good financial records mean you can answer questions without reconstructing years of information once a deal is already underway.

This work can also highlight issues worth addressing regardless of whether a transaction happens.

You may discover that too much revenue depends on one customer. Sales may be increasing whilst cash collection is deteriorating. Profitability may rely heavily on the owner. Margins may vary significantly between different customers, services or projects.

Knowing that now gives you more options than discovering it during due diligence.

We have looked at some of these issues in more detail in Building value in your business.

What should business owners do now?

For most businesses, there is nothing to apply for today.

But the announcement is a useful reminder that investment readiness starts well before an investor arrives.

If raising capital, bringing in an investor or selling part of the business could be on the agenda over the next few years, start by looking at the information you already have.

Review your latest management accounts, cash-flow forecast and balance sheet. Compare previous forecasts with actual performance. Make sure you understand what is driving revenue, margin and cash. Look at your ownership structure, tax position and financial records.

Then ask a simple question:

If somebody unfamiliar with the business challenged these numbers, could we explain them confidently?

At DSK Partners, we work with growing businesses to put clearer financial information in place, understand the numbers behind important decisions, and prepare for the questions that come with growth, investment, and eventual exit.

Good preparation gives you more than a better chance of securing investment. It gives you a clearer view of the business you are building.

Speak to DSK Partners if you would like to discuss how investment-ready your business is.