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Eight killer questions you must ask before investing in an SME

Daniel Hansen is the founder and CEO of investment firm, OMNIA Global. A life-long entrepreneur and investment specialist he is passionate about connecting SMEs and new businesses with the type of support and funding they need to help them grow. Working with high net worth clients across the world, he and his team are expert in leveraging new sources of finance. Here he shares some key questions for anyone looking to invest in the potentially lucrative SME market.

How well do you know the founder?
I always look for happy and contented founders – people who are going to be compatible with the way you like to invest and work.

What’s their history?
Have the founders been through any crises or issues – and if so, how have they resolved them?  I always see this as a positive. If someone has weathered stormy conditions once, then there is every chance that they can do it again. If they haven’t faced any challenging times yet then their reactions are unknown, they’re untested which could make them more of a gamble.

Are they cash savvy?
It might be worth checking – has he or she had to call on external investors already?  If not, then the signs are that their financial management skills are strong – an obvious positive.

Beware inflated valuations
Valuations should always be considered with caution – after all, it’s cash flow and not valuations which pay the bills.

What’s the founder’s long-term plan?
How committed are they to the business going forward? If they talk about exiting a lot then they’re clearly not that passionate about the company – something that would make me wary.

Do they have partnership potential?
What kind of partnerships is the business open to? How do these play into their future plans? For us, this kind of knowledge is much more interesting. We aim to develop relationships that move beyond someone just wanting to sell shares, to a longer-term relationship. Are there any obvious partnerships you can help bring about? How can you leverage your own contacts?  Could your investment help bring an SME into previously untapped markets for example?

Watch out for culture clashes?
Is there anything in the culture of the business that could clash with your own values and working practices? We worked with one business who had previously accessed funding from an investor that adhered to Sharia working practices. It placed genuine restrictions on how they could work and wasn’t really practical.

What else can you bring to the relationship?
As well as finance, can you provide additional practical help, in terms of wider support services like branding and marketing, than can help the business grow? Often SMEs have spent years focusing only on their business. It means that even relatively successful companies have neglected certain aspects of their operation, marketing or branding for example. We recently worked with an investment partner who was making £600,000 profit a year but still didn’t have a functioning website. They simply hadn’t had time to develop it. As well as providing funding we could help with this and other aspects of their growth strategy.