A commitment to research and development (R&D) is an important but sometimes overlooked factor for high growth businesses keen on attracting external investment.
When determining what type of start-up or emerging businesses they will back, private equity investors typically look at a number of key areas, including strength of proposition, quality of an executive team, strategic growth plans, financial performance and cost control management.
Investors need reassurance that an investment target is heading in the right direction. A track record of investment in R&D demonstrates the level of innovation within the company, which in turn gives investors a degree of comfort with regard to the competitiveness and the longevity of the business.
Private equity investors also need reassurance that all risks are covered. A company with a track record of investing in innovation and claiming R&D tax relief through a reputable adviser can give the investor confidence in the company’s future competitiveness and a greater level of assurance that there is no hidden liability as a result of inaccurate claims on the part of the investment target.
This approach can also deliver advantages at the pre-investment stages for start-up companies. An on-going investment in R&D focused activities is often an indicator of hidden IP which will not only improve their ability to attract investors but could also increase the valuation of a business and improve its pre-investment terms.
Investors also need to minimise the risk on their investments as much as possible. In terms of R&D tax relief, the easiest way to provide investors with reassurance is to use a trustworthy R&D tax relief provider in preparing and submitting claims. This approach can help ensure that, post investment, the company’s focus won’t be distracted by an HMRC enquiry or indeed that the value of their investment will be diminished due to a demand for repayment of erroneous relief claims by HMRC.
Through R&D tax relief, investment in innovation can be highly cost-effective for start-ups with significant rebates available for those in profit, and even larger cash payments for those in a loss making position!
Under the existing R&D tax relief scheme, companies investing in improvements to a product or service using qualified staff could be eligible for a significant tax break. SMEs can recover up to 24.7% (if in profit) and 33.35% (if loss-making) of eligible expenditure, which includes money spent on salaries, externally provided workers, subcontractors, software, utilities and materials ‘consumed or transformed’ as part of an R&D project.
For start-ups and high growth potential SMEs, the rebates that can be derived from a successful R&D tax relief claim have a clear financial benefit as this can often reduce a company’s dependency on bank debt. The rebates can also extend a company’s cash runway to give them more time to develop their commercial proposition. This also enables a business to demonstrate strong financial management, which will ultimately make them more investable.
In our experience of working with a range of private equity-backed businesses across the UK, we find that those that are investing in innovation tend to develop more fruitful relationships with their investors as the earning power of the business is enhanced by a solid and robust IP strategy.
A focus on R&D activity can also be fundamental in helping a high growth business secure investment from other sources, including European funds such as Horizon 2020.
Businesses with high growth potential are often dependent on private equity support in helping them achieve their full potential. While attracting this investment requires focus in a number of areas, a commitment to R&D could be a decisive factor in whether or not a company is able to attract the investment it needs to flourish.
Sandy Findlay, Partnership Director at R&D tax relief specialist Jumpstart