Raising funds for your beauty business can be a transformative step, enabling you to expand, innovate, and capture a larger market share. In the early years of a company's life, it will often need to raise external funding or capital, to accelerate its journey, and preparation is key to ensuring a successful fundraising round. Here’s a step-by-step guide to help you get ready.
Sourcing funds / identifying potential investors
Before approaching investors, it is helpful to clearly define how much capital you need and how it will be used. Whether it's to develop a new skincare line, expand your team with expert formulators, set up a cosmetics pop-up or to open a new salon location, having a detailed business plan will help you justify the amount you are seeking.
Once you have decided that external funding is your next move, researching potential investors is key; you could consider an angel investor with beauty expertise and who can specifically support your business' growth or a venture capital fund that has a track record of investing in beauty businesses and you can identify iconic brands that they have helped grow. Look for those who align with your brand values and can offer more than just capital, such as beauty industry expertise or valuable connections across the market. Networking is key to building these connections and finding the right partner to grow your business with.
If you’re targeting UK-based individual investors, it’s worth exploring whether your business qualifies for SEIS (Seed Enterprise Investment Scheme) or EIS (Enterprise Investment Scheme) relief (both tax-advantaged schemes that can make your company significantly more attractive to potential backers). These schemes can allow qualifying investors to claim generous income tax and capital gains reliefs, but the shares issued must meet strict conditions, so early understanding and planning are essential.
Know your valuation
Understanding your business valuation is essential. It determines how much equity you’ll offer in exchange for investment. It is helpful to research comparable companies in the beauty sector, whether they specialise in makeup, skincare, or wellness services, to gauge your valuation and also engage a professional to carry out an independent valuation.
Be mindful that if founders, directors, officers, or employees hold or are being issued shares or options, these may be 'employment-related securities'. This means there could be employment tax consequences if the shares are acquired at an undervalue or on preferential terms. Establishing, documenting, and dealing on the basis of a defensible market value early on is key to managing any potential exposure.
Types of investment
Common sources of funding available to a company are equity and debt. These are important to consider when preparing for a fundraise, and how quickly you need cash in the business.
For short term funding needs, without the need for a valuation, one way to raise money is through a loan. The loan instrument will set out how long the company can borrow the funds for, how much interest will accrue, whether the loan is to be secured against the company’s property, and under which circumstances it is repayable. It is also possible to have loan instruments that convert into shares in the future.
From a tax perspective, the interest on such loans is generally deductible for corporation tax purposes, assuming it is on arm’s length terms and not caught by anti-avoidance rules. Interest received by the lender is taxable income for them, but you may need to withhold tax when repaying the loan if the lender isn't a UK company or bank. If the loan later converts into equity, there can be implications around the treatment of accrued interest and any discount on conversion, which should be considered in advance of any issuances.
Another method to raise funds quickly, is via an advance subscription agreement (ASA), where an investor can agree to make an advance payment of monies. The shares are then also issued at some point in the future, on a trigger event. An ASA is not a debt, it does not generate interest, and it can never become repayable in cash. Again, no valuation is needed. These methods are typically used as alternatives to equity fundraising by growth companies as a bridge to get them to their next equity round or valuation inflexion point.
Importantly, HMRC has clarified that ASAs can qualify for SEIS or EIS relief provided certain conditions are met - including a clear intention to issue shares within six months of the agreement. Careful attention must be given to the drafting to ensure eligibility is not compromised.
The most popular option for raising capital is through investment for equity, where the company’s valuation is determined and shares are issued at a set price. An investor will give money to a company in exchange for new shares. By accepting the investment amount, the existing shareholders of the company have their ownership percentages diluted. Many institutional investors prefer priced rounds as they provide a clear valuation and immediate equity ownership, and it allows them to carefully monitor the employment-related securities rules where applicable.
Where you have enterprise management incentive (EMI) options or other share incentive schemes are already in place, it is essential to factor in the dilution impact and ensure that any option terms continue to reflect the company’s share capital structure post-investment. Valuation shifts may also affect the price at which future options can be granted.
Due diligence
Once you attract interest, investors will conduct due diligence before the drafting of the legal documents begins. It is important to be ready to provide detailed information about your business operations, people, commercial contracts, legal structure, intellectual property, and any potential risks. Online 'data rooms' where you can store all of this key information are really helpful.
When undergoing due diligence, investors may look at your brand's reputation and online presence, so it is helpful to know your social media strategy, for example if you work with influencers. Intellectual property is often key to a beauty business and where a lot of the value sits, and so it is vital to make sure branding or product formulas are protected. If your brand markets itself as 'clean' or 'natural', evidence of ingredient sourcing will likely matter to investors and your advertising will need to comply with advertising regulation. It is also important to consider if any products or services that the company produces comply with relevant safety regulations, such as the EU Cosmetics Regulation.
Due diligence will also include your tax affairs - investors will expect to see up-to-date tax filings and compliance records on both the company side and the employee side. Any unresolved queries with HMRC can delay or even derail a deal, so it is best to resolve these early.
Next steps
Preparing for a fundraise involves various different workstreams, but with thorough preparation, you can position your beauty business as an attractive investment opportunity. By understanding your tax and financial needs, and demonstrating strong potential for growth, you can successfully navigate the fundraising landscape, future-proof for tax purposes, and secure the capital needed to take your business to the next level.
We regularly work with founders in the beauty industry on their first funding round to help get everything in order from the get-go or help them gear up for a later stage investment or exit, so we are well placed to assist you on your growth journey. From seed to exit, we are here to support you and help you succeed.