Investment in SMEs also have a great opportunities, not to mention that they are sometimes eligible for defiscalisation devices. To choose in which SME to invest, many parameters are to be taken into account. Communal Business presents these different factors and gives you advice on how to successfully invest in SMEs.
Here we note some points for successful investment in SMEs
- Make sure you have access to information
- Watch the media coverage
- Opt for an officer respectful of his shareholders
- Demand a real growth project
- Make sure the tax eligibility of the SME
- Choose a participation at the right price
- Spot the abusive fees
- Anticipate your exit by focusing on the market
- Diversify your portfolio
- Regularly follow the SMEs in which you invest
OUR METHOD FOR CHOOSING SMES IN WHICH TO INVEST
Make sure you have access to information
To investment in SMEs, access to information is essential. The opacity of some SMEs is a big drag on this type of investment. To know the true health of an SME, you must have a certain number of financial elements.Several types of information exist. Firstly, the financial elements of the last financial years of the SME: balance sheet, profit and loss accounts, and appendices. Added to this are the manager’s reports explaining the half-yearly or annual results of the SME. The investor must also have a note explaining the terms of the capital increase of the SME with the key dates and the nature of the securities for example. You may continue reading The Essence Of Enterprise Investments
Watch the media coverage
It is important for an SME to have access to quality media coverage to explain its added value and get people talking about it. The good development of an SME requires good media coverage.
You need to check that the leader is regularly doing interviews and communication of all kinds in the media.
Opt for an officer respectful of his shareholders
Respect for the shareholder requires regular communication with him. To do this, the SME manager must keep the shareholders informed of his experiences in the media, the signing of major contracts, the evolution of his business and his strategic choices.
An opaque manager with his shareholders often seeks to mask the reality of the economic and financial health of his SME.
Demand a real growth project
A company that carries out a capital increase must use this financial resource to finance an operational long-term average investment such as the acquisition of production tools or research and development that will increase the operating result of the company.
A company that uses its so-called ” balance sheet” resources to meet its cash requirements or to repays its financial debts is not in line with the growth outlook sought by investors. It is important that the manager clearly expresses his need for financing and presents the allocation of this contribution of funds in a real growth project.
Some SMEs have a significant growth profile in the short term, often subject to a product effect of fashion or innovation, while others will have a slow but more linear growth in the long term. For the investor, the most important thing is to identify SMEs that can pay their shareholders well over time.
Make sure the tax eligibility of the SME
Investment in SMEs allows the individual an ISF reduction of 50% and an 18% reduction of your income tax.For this, the SME manager must provide the investor with an eligibility certificate indicating that his company is in line with the laws in force granting these tax cuts. Indeed, the legislation evolves regularly, it is necessary that the SME manager makes sure to be in phase with the latter.
This certificate will protect the investor in case of non-compliance with the legal framework by the SME who seeks to raise funds.
Choose a participation at the right price
Valuation is an indispensable element when an SME raises funds. Make sure this has been done by independent experts. The independent expertise protects you from an exaggeration on the rise of a valuation, called overvaluation.
There are different valuation methods but the following two are usually the most used:
- The discounted free cash flow valuation method determines the value of the business based on the discounted cash flows. Based on a business plan, this method is based on forecasts subject to volatility (turnover, operating costs or financing costs)
- Comparative valuation methods allow you to compare the investment target with companies in the same industry and give you an idea of the overvaluation or undervaluation of your investment target.
The valued company can be compared with two types of data:
- Financial ratios for listed companies from the same sector of activity with a similar capital intensity
- Recent transactions in companies from the same industry with a similar capital intensity
A comparison is valuable only if it is between comparable companies. The difficulty of this method lies in finding a representative sample of companies from the same sector and having a similar capital intensity.
The independent expertise is based on knowledge, methodologies, databases accessible to professionals and know-how that the expert guarantees you by signing his valuation report.
Spot the abusive fees
The more intermediaries between the SME and you, the more the profitability of your investment will be reduced by fees. The following list is not exhaustive but includes the most known fees and commissions: intermediation fees, registration fees, administrative fees, subscription fees, application fees, custody fees, brokerage fees, financial management fees, performance fee and outperformance.
In general, the direct investment limits these costs.
Anticipate your exit by focusing on the market
It is relatively easy to investment in SMEs, but it is much more difficult to get out of it. The difficulty of disinvestment is not a legend and there are many financial arrangements to help shareholders out the private equity of a company, but this has a cost: financial penalties in case of illiquidity of securities or sale of the entire company, for example.
The best way out easily remains the listing in a market that creates liquidity by connecting buyers and sellers.
Diversify your portfolio
Investment in SMEs may represent a risk of capital loss. You need to spread this risk by allocating a portion of your assets and investing in several SMEs. It is important to position yourself on SMEs with different activities. It is the same for geographical areas.
Regularly follow the SMEs in which you invest
Your investment in SMEs is in the medium-long term. The SME must, therefore, be transparent over the same period. Also favor SMEs that organize conferences, events, site visits and meetings with their shareholders, and go for it. It’s a great way to understand how the business works, what it does, what its strategy is, and what’s happening in the industry in general and the business in particular.
CommunalBusiness recommended to read also 5 Mistakes that SMEs make in their human resources management