10 Tips for Successful Investment in SMEs

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It is not only the CAC 40, SMEs also present attractive investment opportunities, besides being sometimes eligible for tax-free schemes. To choose well in which SME to invest, many parameters have to be taken into account. Café de la Bourse presents these different factors and gives you advice on how to invest successfully in SMEs.

Our method of choosing which SMEs to invest in

Make sure you have access to information

To invest serenely in SMEs, access to information is paramount. The opacity of some SMEs is a major obstacle to 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 data of the last financial years of the SME: balance sheet, profit and loss accounts and notes. In addition, the reports of the executive explaining the semi-annual or annual results of the SME. The investor should also have a note explaining the terms and conditions of the capital increase of the SME with the key dates and the nature of the securities for example.

Watch the media coverage

It is important for an SME to have access to quality media coverage to explain its added value and make it talk. The good development of an SME requires good media coverage.

You must verify that the manager regularly conducts interviews and communication of all kinds in the media.

Opt for a respectful shareholder leader

Respect for the shareholder requires regular communication to the shareholder. To do this, the SME executive must keep the shareholders informed of his passages in the media, the signing of major contracts, the evolution of his business and his strategic choices.

An opaque leader 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 average long-term operational investment such as acquisition of production tools or research and development that will increase the operating result of the company.

A company that uses its so-called ” top-of-the-range” resources to meet its cash requirements or repay its financial debts is not in line with growth targeted by investors. It is important that the executive clearly expresses his / her need for financing and presents you with the allocation of this contribution of funds in a real growth project.

Some SMEs have a high growth profile in the short term, often subject to a fashionable or innovative product, while others will have a slow but more linear growth over the long term. For the investor, the most important is to identify SMEs likely to pay well to its shareholders over time.

Ensure the tax eligibility of the SME

Investment in SMEs allows the individual a 50% EWB reduction and an 18% reduction in your income tax.

In order to do so, the SME’s manager must provide the investor with a certificate of eligibility indicating that his company is in line with the laws in force granting these tax cuts. Indeed, the legislation evolves regularly, so it is necessary that the SME executive ensures to be in phase with the latter.

This certificate will protect the investor in the event of non-compliance with the legal framework by the SME seeking to raise funds.

Choose a participation at the right price

Valuation is an essential element when an SME raises funds. Make sure that it has been done by independent experts. Independent expertise protects you from an exaggerated upward valuation, called overvaluation.

There are different valuation methods but the two following are generally the most used:

  • The valuation method using the discounted free cash flows method determines the value of the company based on 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 thus 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 on listed companies in the same sector with similar capital intensity
  • Recent transactions on companies in the same sector with similar capital intensity

A comparison has value only if it is carried out between comparable enterprises. The difficulty of this method lies in finding a representative sample of companies from the same sector with similar capital intensity.

The independent expertise is based on knowledge, methodologies, databases accessible to professionals and a know-how that the expert guarantees by signing its valuation report.

Identify Abusive Expenses

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 well-known fees or commissions: intermediation fees, registration fees, administration fees, subscription fees, application fees, custody fees, brokerage fees, Financial management fees, performance fees and out performance.

In general, direct investment limits these costs.

Anticipate your exit by privileging the market

It is relatively easy to invest in an SME, but it is much more complicated to get out. The difficulty of divesting is not a legend, and there are many financial arrangements to help shareholders get out of the capital of a company on a voluntary basis, but this has a cost: financial penalties for illiquidity Securities or sale of the entire company, for example.

The easiest way out is to quote 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. The same applies to geographical areas.

Follow regularly the SMEs in which you invest

Your investment in SMEs is in the medium to long term. The SME must therefore be transparent over the same period. You should not be content with annual general meetings. Reporting can take the form of press articles, press releases, key accounts, etc. Also give priority to SMEs that organize conferences, events, site visits and meetings with their shareholders, and go ahead. It is a great way to understand how the company operates, what it does, what its strategy is, and what the news is from the industry in general and the company in particular.