SME Funding

All posts tagged SME Funding

The Three Profits of SME's WCP 2013

YOUR CHECK LIST FOR RAISING CAPITAL

As check lists go this one has been kept pretty minimal, see it more as a thought starter for a list of your own! 

Check your must do list!

 

  • Have all your legal documents prepared and in order including all of your corporate information (ABNs, taxation summaries, core financials, assumptions, insurance, contracts etc) centralised and easily accessible so that it can be supplied to potential investors upon request.

  • Ensure the information you provide to potential investors is easily understandable, clear and accurate. The business may seem simple and straight forward to you but remember it may well be complex to them. Keep your presentation simple but ALWAYS have every detail close to hand for the investor who asks that curly question. With cloud storage solutions and tablet mobility there can be no excuses for poor preparation.

  • If successful you will end up in a relationship with these investors, so make sure your new partners and you both have the same goals (equity splits, exit strategy, founders’ roles etc) and that the culture is right.

  • Be prepared to negotiate and give some ground to get a deal done.

 

Understand your don’t do list!

 

  • Don’t think you have the investor’s cash in the bank until it’s in the bank

  • Don’t be cocky. You need to show investors that you not only have a good idea, but are willing to listen and learn off them. Most of the time, they are investing 80 per cent in you and 20 per cent in the product.

  • Don’t hold to an unrealistic goal on valuation – its always better to have 10 per cent of something than 100 per cent of nothing.

Yes it’s a very small list, perhaps the missing advice is that wherever possible seek experienced professional advice, yes it will cost you but long term it will prove to be a very sound investment.

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By, Neil Steggall

The Barking Mad Blog

Business Advice with Bite

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Crowdfunding - WCP 2014

 

Raising Capital is a lot like Internet Dating!

Raising capital is stressful and incredibly time consuming. It’s a full time job. So if you embark on a money raising mission, make sure your business is at a stage where it can survive (and hopefully flourish) with minimal input from you. The capital raise will demand most of your time and attention for the next little while.

It’s actually a lot like internet dating. You write a profile (information memorandum) you go on a first date (swipe right), you decide if you’d like to see each other again, (thank-you text), one party plays hard to get (valuation), meet the parents (due diligence), buy a ring (appoint lawyers), ask the question, (term sheet) and get married (settlement).

Once you’ve got a little seed money to work with, it really then becomes an issue of timing. If you go to the market looking for money before you have a concept or product, you don’t have as much leverage with investors and could potentially be beaten down on your valuation. So founders are generally better off building the product and getting as much traction as possible before courting significant further investment to reduce the risk profile of their venture.

The longer you can hold off, the more leverage you have with investors. But the longer you wait, the more risk there is that your competitors will land funds and get the jump on you. And it can be hard to play catch up.

Preparing the business for a capital raise correctly is critical. My advice is to find yourself someone who knows what they are doing, has experience in the area and importantly is respected by the VC community.

A skilled and trusted advisor is worth their weight in gold, they provide invaluable advice on how to groom the business for a capital raise, such as having an attractive shareholders agreement, employment agreements, and commitment from the founders in place.

Once you have a data room prepared with an information memorandum and financial model  hit the pavement and talk to investors.

Let your advisor’s line up 10 or so meetings, target verbal commitments from these early potential investors. The best way to describe this part is that no one is ‘in’ until they sign a term sheet. Have one of these prepared and printed in your back pocket. Don’t be afraid to put it in front of them to sign. You’ll quickly work out their position.

If you are aiming to raise $1.5 million the hardest part will be getting that first chunk signed away. No investor wants to be the first $50,000, they want to be the last $500,000. So it’s important to lock down some foundation investors, and use them and their name to secure other investors. It’s all part of the gamesmanship and you need to have your strategy down pat before you got out to market.

Once you’ve locked down the funds, management now becomes a priority. Most investors don’t just hand over cash and then walk away. They will set benchmarks, timelines and other KPI’s. You need to keep them in the loop, so regular corporate updates are critical. Ask them what they want to know and how often if you are unsure. Don’t be afraid to ask advice from them, leverage them and their networks as much as possible. You’ll sometimes be amazed at how much of their time they are willing to give.

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By, Neil Steggall

The Barking Mad Blog

http://www.neilsteggall.org/?p=1235

Business Advice with Bite

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businessmanagement1

How to structure your startup for investment

Most Australian startup’s will never raise a first round of funding. The recent Startup Muster survey puts the number at just 14%. For those startups that do raise a seed round, the chances of securing VC funding at Series A is even lower. Nevertheless, it’s important to understand what potential Angel and VC investors will want to see from a legal standpoint before investing. This article will set out some of those requirements.

 Incorporate!

You’re not going to raise money unless you’re running your business through a limited liability company structure. Better yet, set up a holding company/operating company structure. Investors will invest in the holding company, which will own 100% of the operating company. This structure can protect the assets of the business from risk of seizure, should the operating company be sued.

A small number of more experienced Australian founders are now setting up their company structure in the US, even if they’re running the business from Sydney or Melbourne. If you’re looking to secure investment over in the US, this approach can make a lot of sense. That being said, it’s definitely only worth doing if that’s your goal.

Founder vesting – sensible for founders and investors

The reality is that a startup isn’t worth much, particularly in the early days, if the founders leave. It makes no sense at all to issue yourselves with equity that doesn’t vest over at least a couple of years, and investors know this. The standard startup-founder vesting structure is a four-year vesting schedule with a one-year cliff, meaning you get nothing if you leave before you’ve been working in the startup for at least a year, and you earn the rest of your equity over the four years.

Many VC investors will require founders to “revest” upon investment. This means that even if you’ve been working on your startup for a couple of years before securing funding, you’ll have to work for another four years to get all of your shares.

Founder vesting obviously make sense for investors; they don’t want you ditching the startup two months in, but it also makes sense for founders. If your co-founder leaves the business with his 25% stake fully vested, the business is pretty much guaranteed to fail. You’re either going to end up working away building up the value of his shares while he chills out on the beach, or you’ll end up quitting too. Vesting means he’ll leave with a smaller amount of shares, which is much more manageable.

Preference shares

VC investors will often only invest through preference shares. The basic idea behind a preference share structure is that it gives investors a liquidation preference in the event of a sale. Preference shares are a way of ensuring that investors get repaid their initial investment before founders and employees get anything.

Obviously if you can avoid issuing preference shares, and simply issue ordinary shares, that’s great for you and your co-founders.

Employment contracts

No one ever bothers putting together an employment contract when they first launch their business. Why would you? You’re probably not even paying yourself!

If you’re looking to raise a round, you need to sort out your employment contracts for a couple of reasons. First of all, investors will want to know you’re not just pocketing their hard earned cash; they’ll want you to set out a small salary etc. Most importantly, though, they’ll want to ensure that you’re entering into a non-compete with the company. If you don’t get on with your investors, they don’t want you quitting and setting up a competitor business the next day.

To conclude

Investors are a diverse bunch, so they’re not all going to be looking for the exact same structure before investing. If you’ve got a great team on board and you have significant traction, you might be in a position where you can dictate terms. Unfortunately that’s not very common! It makes sense to structure things professionally and to be pragmatic about what you’re going to offer investors. It might just help you end up as one of the 14% of Australian startup’s who raise a round!

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By, Neil Steggall

The Barking Mad Blog

Business Advice with Bite

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SME's Going Under WCP2014

HELP! – I am out of cash & going down!

At which stage do you accept that without a cash injection your business is probably doomed? Looking at the ABS statistics they show that in any three year period around 42% of registered SME’s fail. So the answer is that we should look for and accept cash and or help a lot sooner!

It is very hard when investing the enormous time, energy and focus needed to start and build an SME, to then find the time (and to provide the mental distance needed), to properly analyse and re-assess your management and direction. Being naturally entrepreneurial, SME owners have a tendency to fight on, often to a very bitter end.

When I left the corporate world to start my first SME I got to the end of year one and realised I was emotionally drained, failing and down to my last eight weeks or so of cash. Everything I had was on the line and I had no answers.

Recognising that I was no longer thinking straight I bundled my worried wife and two noisy young children into the car and we headed off for a long (and very cheap) weekend by the beach. It was mid-winter and raining; you can imagine my despair.

Late in the afternoon of our second day I took a long walk along the beach, in the rain and asked myself three questions:-

  1. Is the business concept viable

  2. If its viable have you managed it well

  3. If you had sufficient resources available what would you do differently

My answers were 1) yes 2) fair 3) build a team to leverage revenues.

I returned to the shack motivated and excited for the first time in weeks and when back at work I went about raising the cash and partners needed. It was surprisingly easy and within a year we had a happy and booming business.

Lucky bastard! I hear you whisper. Not really. In a now long career in and around SME’s I have realised a few truths about human nature:-

  1. By and large people want to help you

  2. There are more investors looking to invest than there are good ideas

  3. If your business is a good idea and you are honest, fair and hardworking you will find funding

  4. Investors are usually older, experienced, have suffered and recovered from failure – they understand your position

  5. By understanding your position and taking positive action you earn respect from your stakeholders.

So when do you put up the red flag and shout for help?

Assuming your business concept is viable and you are offering a product or service your customers want then consider the following danger signs:-

  1. Your business is growing, you are profitable and yet you are always short of cash. This happens in growing companies as to service higher sales you need more stock, labour, materials etc and your debtors ledger expands as sales grow. This all eats cash.

  2. You have more potential customers than you can handle and you are falling behind on paperwork and starting to knock back new business. At this stage you need to employ and or outsource more resources but how do you do this when cash is so tight?

  3. You know you could win larger more lucrative contracts and strengthen your business if you had more people, plant and equipment.

  4. Your debtors are slow payers and it is impacting on your ability to meet your payments as and when they fall due.

  5. The bank offers you an overdraft but only if you provide the family home as security.

If you are experiencing any one of the above your business is at risk, if you are experiencing any two you are in trouble and should seek help quickly.

In our company we see so many businesses fail which are fundamentally sound and indeed held so much growth potential.

When we analyse them we invariable find a point beyond which they had insufficient cash to maintain the business. Corners start getting cut, staff numbers are reduced, marketing budgets cut, bills go unpaid, staff morale falls, the staff start leaving and eventually an administrator or other court appointed official is installed

Possibly as many as 90% of the failed businesses (assuming no underlying fraud etc.) we look at could have been saved had appropriate action been taken early enough.

So what should you do if you are at risk?

First of all have an open and frank discussion with your advisors including your accountant and lawyer. Walk them through your business plan and figures and explain your concerns and the amount of investment you think you need to achieve a turnaround. Not only will they offer advice but they may well know of potential investors.

Look on line for SME Turnaround Specialists – a good specialist company should have all of the in-house skills you need and access to numerous investors. You may be able to negotiate an hourly rate or a fee based upon their success or a combination of both. A preparedness to complete some or all of the work on a success fee tells you a lot about their level of confidence!

What will I have to give away to attract an investor? Less than you think. A savvy investor will want to see you remain motivated and happy so as to help build a return on investment. If you are both fair, reasonable and above all offer each other respect you should enjoy a profitable relationship which sees the business turnaround.

Once you have an investor on board start to build a team of business mentors. Many SME’s have an advisory board of a couple of specialists who meet as a regular board would and help you analyse and guide the business forward.

Neil Steggall

The Barking Mad Blog

SME Advice with Bite!

Article Shortlink:  http://wp.me/p401Wv-cb

www.wardourcapital.com

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Startups Wardour

5 Tips for a SUCCESSFUL Start-up

Starting a new business is an exciting and challenging task, one in which success brings a variety of rewards and yet failure can be a painful and damaging experience. Despite this there are 2.0 million SME’s in Australia and new start-ups opening every day.

This is the entrepreneurial drive at work, the human need to try new things and to stretch and grow. The SME is the economic life force and breeding ground of business. Of the many small start-ups some will go on to become multinational corporations, this isn’t everyone’s choice, or objective and statistically most start-ups will fail within the first three years of operation

Understandably starting a new business is full of challenges and I am often asked how I went about starting my first business and what tips I can offer. Starting a business for most entrepreneurs means a huge amount of sacrifice, hard work, risk and belief in your concept.

My first business came about via a combination of accident, hope and “nearness” to opportunity but if I was to start again I would take these points into consideration:-

1.       Think carefully about the business you choose:

Last week at a conference I was asked the question “what business would you choose if you were starting again?” A very good question and yet one I felt confident in answering. I would choose:-

  1. A high volume established industry with proven customer demand
  2. An industry with a relatively low cost of entry
  3. A location very close to an established business in the same industry
  4. I would price my product at the market price or slightly higher
  5. And this is the WINNER I would out-service and outperform the competition in terms of customer satisfaction.

2.       Market your business well – Marketing is your cash engine

If you have taken my advice and set up your business virtually next door to an existing similar business you already have potential customers passing your door so how do you convert them. You need a plan of attack:-

I.             Check out your competition and look at weak points in their product offering, customer service, display, staff training, customer handling etc. Then do the reverse and observe their strengths.

II.            Build your strategy around out servicing your competition; choose customer service and customer satisfaction as your point of difference. A company we have worked with “Chilligin” is a successful on-line and pop-up retailer of fashion accessories, scarves, handbags etc. Chilligin’s founder and director Nikki Gilhome decided from day one to offer Chilligin customers great products, at affordable prices and to package every item whether ordered on line or in store beautifully. “I wanted the customer to have a lovely surprise when they open their home delivery, or for in store customers something to look forward to when they return home” says Nikki. Small details such as carefully designing wrapping paper, stickers and ribbons, tags etc turn the ordinary into an occasion.  Effectively the customer gets a double hit of pleasure first the purchase decision and later a beautiful package to unwrap.

III.           Train your sales staff to meet and greet customers with genuine warmth, use quiet times to rehearse the perfect approach.

IV.          Wherever possible over deliver on customer expectations, the more a customer enjoys doing business with you the more they will return

3.       Employ the best staff: 

When starting a business we need to be careful of costs but a really good staff member is a key asset and a valuable part of your strategy. Don’t cut costs here.

Chose staff who share your vision, who want to grow, who will absorb your training and guidance. Respect and reward them. Encouragement and respect are amazing rewards, how do your competitors reward staff? There are many ways to reward beyond the pure financial and most people I know would rather work for a little less in a great environment than for more in an uncomfortable environment.

4.       Review Progress and Question – Can we do better?

If your business strategy is to outperform your competition by offering better service and customer satisfaction you must work hard at it to keep at the top of your game. Constantly check your competition, both locally and via the internet, overseas. Read everything you can find for new ideas, engage with your customers, listen and learn. Constantly review every single aspect of your business questioning how you can improve the customer proposal, to satisfy and engage more closely.

Your stock and services must always be current and adjusted as closely as possible to your customer needs. Use stock analysis tools so that you know which items are moving and which are slow. Respond very quickly to avoid wastage, move quickly to special out and move any slow stock. Slow stock is dead money and loosing you sales. Buy more of the fast moving items and consider expanding that part of your range with more options.

Change your web presence or store displays daily to build and maintain customer interest. Collect email addresses via direct questions as you input receipt data, small competitions, draws etc. Communicate directly with your customers, be innovative, informative and “the place to go”.

5.       Think carefully about finance & assistance:

Most businesses will involve you assuming responsibility for some level of debt, make sure you understand the obligations here and your responsibilities. Debt isn’t just a loan, it includes your supplier credit, your rental or lease obligations etc.

It’s important to know which type of financing is right for your business and always try to hold three to six months cash in reserve. Are you willing to give away equity in exchange for cash? Are you looking just for an investor or also for a mentor? Is your business plan solid enough to secure a bank loan?

All important questions to consider and remember with an investor you often gain an experienced mentor as well. If I was starting out again today I would look for an experienced investor who could guide and mentor me over any other form of external funding.

 

 

We are fortunate to live in an age when so much information, knowledge and experience is available for those who want to search for it. Eric Schmidt, executive chairman of Google, said: “There’s a new way to do marketing, and it’s to do it with numbers. People do marketing to bring in revenue, to have an impact, and with these new systems you can measure this. The technology the internet brings means you should be able to measure almost everything.”

If you are thinking of a start-up read and absorb, plan and then follow through and your chances of success are high.

Neil Steggall

The Barking Mad Blog

SME Advice with Bite!

http://wp.me/p401Wv-au

 

Banks

Are Banks Funding SME’s?

 

A good deal has been written recently regarding the attitude to SME lending by the major banks. On the one hand we have SME owners frustrated by their inability to attract bank funding and on the other we have the banks advertising and talking up their preparedness to fund SME’s.

Why do we have this disconnect of views?

It is clear that since late 2008 and the commencement of the GFC, banks have been more wary of lending. The financial crisis – caused largely by risky lending and banking mismanagement – combined with subsequent higher liquidity and capital requirements have made for a far more risk adverse approach.

However, banks are lending and they are increasingly keen to do so. They are lending less than they used to and looking for tighter security, but the idea that they won’t lend to anyone is simply not true, but you must submit a well-reasoned, structured, quality application.

This myth is not only hurting the banks, but it is hurting SME’s. A problem is that we hear so many negative stories of loan applications dragging out for weeks before amounting to nothing and of bank BDM’s being excited by your application only to have it knocked back by credit that many established businesses with sound bankable propositions are not even applying  for funding

Other SME’s will get a rejection from one bank and assume they fall into the ‘do not lend’ category, and give up – whereas in a more positive  climate, they might keep trying. This is slowing business growth and therefore the growth of Australia’s economy.

Why is everyone saying that ‘banks aren’t lending to SME’s’?

To answer the question we need to understand the lending process and rationale applied by the banks. Decisions are no longer made by your local manager who in days gone by would have known you, your business and the state of the local economy in which you operate. Lending decisions are now centralised and subject to stringent internal rules, guidelines and matrix ratings.

It is possible in this centralised and semi-automated system of credit approval to fail simple because you can’t “tick” a given box. So let’s look at some of the actions you can take to improve your chances of success:

Credit History:

In tough times banks require a near perfect credit history with no defaults, judgements or slow payments showing on your credit history. The reporting agencies make mistakes and many suppliers make mistakes so it pays to request a copy of your credit file from the main agencies such as Veda or Dunn & Bradstreet and check that it is accurate.

Recently our Credit Manager brought a large monthly trading account application to me for approval, the applicant trades nationally and is at the upper end of the SME definition. On the credit file were two very small sums of money showing as outstanding for over two years to a major utility company. Had I been a computer I would have rejected the application but as a reasoning person I could accept that such small sums were inconsequential against the annual revenues of the applicant. A quick conversation with the applicants CFO satisfied me and the application was approved.

For a relatively modest annual fee the reporting agencies will provide you with email notification of any changes to your credit file and provide a fully detailed up to file each year.

Portfolio Risk:

Most banks from time to time place a limit on the amount of funds they will advance into a certain business sector or avoid some sectors all together. In late 2010 we had a client with a strong business case and sound backing who wanted to acquire assets in the wine industry. At that time none of the major banks would lend to any “non existing” wine industry clients. Don’t be afraid to question the banks BDM as to their attitude to your sector and if the BDM doesn’t know ask them to find out.

Business Plans, Budgets & History:

Being able to table a well-constructed funding application supported by a current business plan, detailed budgets including P&L, Balance Sheet and Cash Flow will help enormously and if you have maintained accurate records of plans and performance over the past three years even better.

The plans and records don’t just show how your business has performed and how it may perform in the future they speak volumes about you as a thinker and manager.

It’s relatively easy for you to know how you stand from a profit and cash position on a monthly basis and you may question the time and investment required in maintaining such detail but believe me it will pay you dividends time and again to do so.

Management Team:

Provide information about your management team. This will be a key consideration for any lender. You need to show you have a team that can develop the product, market and sell it, and just as importantly, manage the finances. If you have gaps in your team, try and fill them get one in place before you apply.

Interest Rate Cover & Security:

The banks will calculate how many times cover your current net profit will give to the total amount of interest payable and they will want that cover to be 2.5 – 3.5 times as a minimum. For additional security the banks will look at your stock and debtors and advance funds against that security, again they will be conservative and depending on the age and condition of stock may lend 60% of cost and up to 80% of debtors. The bank will also look to take a charge over the various assets of your business.

As a general policy you should, wherever possible, avoid giving personal guarantees or security over your family home and always seek professional advice before executing any loan documentation.

Amortisation & Exit:

An often over looked point which the banks will be very interested in is how quickly can you repay or amortise the loan and how you plan to do it.

The banks don’t want open ended facilities and they want to know you have more than one option to repay, irrespective of anecdotal reputation banks do not enjoy having to collect on defaults.

Hopefully you will be able to demonstrate an ability to amortise the loan over a reasonable period whilst still leaving sufficient cash flow to cover your interest ratios.

In summary the lending market is constantly changing and hard to keep up with. For this reason it’s often  worth engaging one of the companies that specialise in SMS funding as they will have strong relationships with a variety of lenders, understand each banks current requirements and how best to structure and present your application to provide the best prospect of success.

Neil Steggall

The Barking Mad Blog

SME Advice with bite!

http://wp.me/p401Wv-9q

SME's Out of Cash - WCP 2013

SME’s: Starving for Cash

Just how much cash does a start-up need?

In my experience the simple answer is “a lot more than you think”. The lack of cash to fund SME growth is the single biggest cause of SME failures and yet it need not be so.

With a proper understanding of business dynamics and risk, cautious budgeting and the regular monitoring of your performance against your budgets you are already a long way along the path to securing your future.

So How Much Cash Does an SME Start-up Need?

THE FIRST STEP

Be totally honest with yourself when assessing your business plans, don’t plan on what you hope will happen, don’t even plan on what you think will happen. Plan on what you know you can achieve and then allow for the unexpected.

Over the span of a long career I would estimate that 80% of the start-up budgets I have seen, over estimate sales and cash flow, whilst under estimating costs and cash burn.

This will possibly frighten you but you should have sufficient cash on hand at the start of your business to cover at least six months of total costs and operating expenses and you should maintain this cover throughout the growth of your business.

If your business concept is realistic and your business plan and budgets well thought through you will almost certainly succeed but be very realistic when budgeting.

THE SECOND STEP

When writing your business plan and establishing budgets calculate the cash needed in year 1 to meet your three key areas of expense; Cost of Entry – or Capital Expenditure (CAPEX); – Cost of Goods Sold – (COGS) and finally Operating Expenses – (OPEX).

If after careful consideration and budgeting the sum is higher than you thought, see what if anything can be scaled back, without losing sight of your concept and what cash is really going to be needed to deliver the objectives.

Do not despair if the cash needed is more than you thought or indeed more than you have available. The cash needed is the cash needed so plan for it.

In respect of Revenues employ caution in the quantum of sales you project. A mistake here will cost you dearly and don’t expect your customers to pay you on time. Most “good” debtors pay in 30 days but it is usually 30 days from the end of the month in which you invoice and if they are savvy buyers they will order in the first week of the month thus getting almost 60 days to pay.

THE THIRD STEP

The business plan and budgets are written and after due and diligent consideration you feel you are short of cash “Stay Calm and Engage Stakeholders”.

The stakeholders in your business include you, your family, your investors, your staff, suppliers and customers.

If your business plan is sound and well-articulated and explained, each of these stakeholders will support you. Your family will probably support you best by understanding long hours worked and tiredness at home.

Your investor in making the decision to back you and your idea has the most to gain by supporting and helping you meet goals. The investor is probably experienced and can be a great mentor and sounding board for you so use the relationship and value it.

Your customers and suppliers both stand to gain through your business success so engage them, show them your plans and discuss the terms on which you need to trade. Treat them with respect and they will return the favour in heaps.

SUMMARY

We are yet to answer the big question: Just how much cash does a SME start-up need? It’s a bit like the question; how long is a piece of string and the answer is the same……it’s as long as it is, or it needs as much cash as it needs.

Don’t be worried by this, in almost 30 years of SME experience I have always had access to more investor cash than I have had to good ideas and people to back.

If you have confidence in yourself and your plan and need an investor, speak with local accountants, financial planners and lawyers, they will almost certainly know someone looking to invest funds in a sound idea.

Most importantly if you think you need $8.00 ask for $10.00 it’s much easier to return funds with a little interest than to ask for more. Again if you think your first years profit is going to be $10.00 write it up as $8.00 and come in ahead of budget. Everyone loves a winner and success spreads!

Follow these simple steps and you should be set for a successful future with loyal stakeholders willing to follow you into your next bigger venture.

Neil Steggall

The Barking Mad Blog

SME Advice with bite!

http://wp.me/p401Wv-9k