Equity, not debt, holds the key to financing the future of the EU’s small business sector. The economic recovery could prove to be business angel’s shining moment.

Professor Robin Jarvis, Head of SME Affairs at ACCA (the Association of Chartered Certified Accountants) and member of ACCA’s Small and Medium Sized Enterprises (SME) Committee, in the latest of this Committee’s policy briefings entitled “Improving SME access to equity finance“, calls for more support for equity finance in general and particularly business angels. The paper suggests four priority areas where governments and accountants can make a difference:

  • Tax incentives, such as France’s solidarity tax exemption as an example of providing tax incentives without falling foul of EU State Aid rules.
  • Support for networks, which can help business angels identify investment-ready businesses and leverage the experience and capital of their peers. Subsidising the gate-keeping function of angels is one easy way for governments to make a real difference without spending much.
  • Developing investment-readiness – Angel investors are constrained by a lack of opportunities rather than by a lack of funds –accountants need to build demand for equity finance by helping SMEs understand the benefits of equity and signal their value to potential investors.
  • Developing exit routes. – Equity investors don’t make any money from their investment unless a business is sold or goes public. Exits could become more attractive and more numerous if businesses were able to achieve fairer valuations (for instance, by better valuing intangible assets) and investors could be lured with lower levels of capital gains tax.

However, interventions into the angel investment market are no simple matter and there are great concerns that the EU institutions and governments do not have enough information on Business Angels to inform policy in this area. ACCA’s SME Committee is hence actively working to correct that.

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  1. Nice ideas however, I think the third item is key. To take the points in turn:
    1. Tax incentives tend to play at the margins – the key is weather the business is worthwhile investing in at all. Tax benefits should be seen as a nice surprise rather than the reason for the investment. Having lots of different tax rebates, benefits, etc. complicates the investment decision and can make the whole process too hard when small amounts of money are concerned.
    2. Both formal and informal networks seem to work well without state aid already. I can’t see the purpose of state aid unless it is really a back door opportunity to do “investment readiness” i.e. train entrepreneurs in what to expect.
    3. Investors are constrained by lack of good opportunities. Accountants are often the first to know about funding difficulties and their awareness of local and national networks can give companies another option. I feel this is to be commended and would benefit the entrepreneurs and angels alike.
    4. The last point mixes tax and theoretical valuation ideas. At the end of the day, valuation is what someone will pay for the company… while accountants may help in setting expectations; it is up to the seller and buyer to determine what the exit price should be.
    On a separate point, how many accountants are aware of the benefits of angel investment?

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