Alternative finance case study: Pension-led funding
Start-up business Alago needed credit to grow its business, but most providers were reluctant to help the firm realise the full potential of its heated glove technology.
That was until pension-led funder Clifton Asset Management stepped in with a novel funding solution based on unlocking the business owner’s existing pension pot.
For Alago, the story started with a light bulb moment when Bristol-based Tony Curtis was standing on the touchline of a freezing pitch watching his 12-year old son play rugby.
The game had been tough one, particularly because the weather had played havoc with the teams’ ball handling skills. The solution, thought Curtis, was heated gloves.
The kitchen table soon became his test-bench and the family his guinea pigs until he managed to come up with a working prototype.
Curtis patented his invention and set about finding designers to take the gloves to the next stage. Through online research, he found 35 manufacturers who could assist with the component parts of his gloves.
“We needed someone who really understood the product, as we had to go through a lot of sampling and testing,” said Curtis.
In the end, he chose a company in Pakistan that part-funded the product development and a Chinese manufacturer to supply the heat packs.
“From my initial idea to having the glove ready for market took five years,” explained Curtis. “In that time I spoke with a huge number of sports players, athletes, sailors, gardeners and triathletes.”
However, the step from development to mass production was costly and Curtis had reached the point where he needed additional funding to get his gloves to market.
Search for funding
Curtis hadn’t spoken to his bank as he knew it would only lend the money secured against his home.
“The one thing that we had was the house,” said Curtis “and this was the family safety net. We wouldn’t use this unless we exhausted every other avenue.”
One of those many avenues Curtis explored was the BBC TV’s Dragons’ Den programme. After setting up his new company Alago in 2010, he appeared in front of the Dragons with the aim of raising £100,000.
Dragons’ Den pitch
The response was a definite “no”, but Curtis knew that the Dragons had missed opportunities in the past and was determined to prove them wrong.
Around the same time he attended a series of business courses and was introduced to Anthony Malcolm of Clifton Asset Management.
Malcolm explained the idea of pension-led business funding, in particular, funding based on intellectual property (IP).
After a meeting with Clifton in December 2011, Curtis decided to take the pension-led funding route, using his existing pension pot as the source of finance for his company.
“I felt that I needed to make my pension work harder for me,” he said. “By choosing pension-led business funding, I could finally invest in something that I have control over, take my own risks rather than those of the stock market and make the money work for both my company and my pension.”
His £60,000 pension was in a local authority scheme and was transferred to a Clifton SSAS, established under Alago’s sponsorship.
This allowed him to release £27,000 of his total pension by way of a self-invested loan.
The loan was secured through a general debenture but, crucially, from a collateral perspective, a portion of the company’s IP (the pending UK patent) was independently valued to supplement the business’s balance sheet to facilitate the loan.
Curtis said: “We decided to take the loan-back option as our projected figures showed that we would make a rapid profit and this would allow us to pay the loan back to the pension more quickly.
“The whole process was really good. I met with Clifton’s Anthony Malcolm regularly and he couldn’t do enough for us. Once we signed the paperwork, the money arrived in our account in just a couple of weeks.”
With the help of his accountant, Curtis was able to put together a detailed business plan, which served as a foundation for the formal/independent valuation of the company’s IP.
Alago’s IP valuation was prepared by Adam Kelly of David E Seabright & Co in Nailsea.
Typically, valuations are predicated on:
- a detailed analysis of a business’ trading position - historical, current and forecasted
- a robust assessment of implied goodwill
- an allowance for industry-specific financial data - price/earnings multiples, discount factors
By the summer of 2012, Alago received its first batch of heated gloves (1,300 pairs), with manufacturing and delivery financed by funds from the director’s own pension.
With pre-orders growing, Curtis expects Alago’s turnover to hit £200,000 in its first year of trading.
Products will be stocked online and a new riding glove has been developed with equestrian products distributor EFI Westgate. Alago has also been contacted by a Premiership Rugby Club which wants to test the heated gloves in its lead up to the 2012/13 season.
A client’s accountant can play a pivotal role in securing much needed credit to grow a business.
Clifton aims to act “in concert” with the accountant, thereby extending the overall suite of advisory services available to the client. The idea is to “dovetail our operations, to the mutual benefit of all concerned,” chairman Adam Tavener added.
Have you had experience of pension-led funding or any other alternative source of finance? If so, what was outcome?