Pros and Cons of Crowdfunding Your Business | LegalVision UK (2024)

Crowdfunding has become a popular alternative financing method for various projects, including business ventures and acquisitions. However, crowdfunding offers advantages and disadvantages in the context of purchasing a UK company. This article unpacks the key benefits and drawbacks of using crowdfunding to acquire a company in the UK.

Advantages of Crowdfunding

1. Access to Capital and Diverse Investor Base

Crowdfunding allows access to a broad pool of potential investors through crowdfunding websites or social media. This process enables entrepreneurs to raise the required capital for acquiring a UK company.

By leveraging various crowdfunding platforms, entrepreneurs can tap into a vast network of individuals, including angel investors, venture capitalists, and retail investors. This broad investor base can increase the chances of securing the necessary funds, especially when traditional financing options may be limited.

2. Market Validation and Customer Engagement

Crowdfunding campaigns offer more than just capital. For example, they validate the market demand for the target company’s products or services. Accordingly, through crowdfunding, entrepreneurs can gauge the level of interest and support from potential customers, validating the business model’s viability.

Furthermore, crowdfunding provides an avenue for early engagement with the customer base. This allows you to create a sense of community and cultivate brand advocates.

3. Flexible Financing Options

Unlike traditional financing methods, crowdfunding offers flexible financing options tailored to the entrepreneur’s specific needs. Depending on the platform and campaign structure, you can opt for different funding models, such as:

• equity crowdfunding;
• debt crowdfunding; or
• rewards-based crowdfunding.

This flexibility allows entrepreneurs to customise their approach based on the capital requirements and the desired involvement of the investors in the company’s operations.

4. Brand Exposure and Marketing Benefits

Crowdfunding campaigns attract attention from various stakeholders, including media outlets and industry experts, providing an opportunity for significant brand exposure. In addition, a well-executed crowdfunding campaign can generate publicity for the acquiring company and increase its visibility in the market.

Furthermore, crowdfunding can act as a marketing tool by creating buzz and attracting potential customers and partners even before the acquisition is finalised.

Disadvantages of Crowdfunding

1. Reputational Risks

Crowdfunding campaigns are conducted in the public domain, making them susceptible to public scrutiny and potential reputational risks. Adverse publicity or unfavourable public perception can arise from:

• unsuccessful campaigns;
• disputes with investors; or
• criticism regarding the ethical or social implications of the acquisition.

Managing the company’s reputation during or after the crowdfunding campaign requires careful communication and transparency to maintain trust and credibility.

2. Potential Investor Risks and Expectations

Investors participating in crowdfunding campaigns may have varying levels of experience and understanding of the investment risks associated with acquiring a company.

Some investors may not fully comprehend the financial risks involved, leading to unrealistic expectations or misunderstandings regarding the potential returns on their investment. Accordingly, this can create challenges in managing investor relations and meeting their financial performance and profitability expectations.

3. Regulatory Challenges and Compliance

Crowdfunding activities are subject to regulations imposed by financial authorities, such as the Financial Conduct Authority (FCA) in the UK. However, complying with these regulations can be complex, time-consuming and costly. This is especially so for entrepreneurs without prior experience navigating such legal frameworks.

Failing to comply with regulatory requirements can result in penalties or even suspending the crowdfunding campaign.

4. Limited Due Diligence and Information Asymmetry

In a crowdfunding campaign, you may have limited time and resources to conduct in-depth due diligence on the target company. In addition, crowdfunding campaigns often have strict timelines and predefined funding goals, which can create pressure to close the deal quickly. This can lead to information asymmetry, where investors may have incomplete or inadequate information about the company’s financials, operations or potential risks.

The lack of comprehensive due diligence can increase investor uncertainty and the overall investment risk associated with the acquisition. For example, the valuation process becomes more complex, and it can be challenging to balance the equity fairly between investors.

Key Takeaways

While crowdfunding offers several advantages for acquiring a UK company, entrepreneurs must consider the disadvantages carefully. Crowdfunding’s compelling benefits include access to capital, market validation, flexible financing options, and brand exposure.

However, challenges related to regulatory compliance, investor risks, limited due diligence, and reputational risks warrant careful evaluation. Entrepreneurs should conduct thorough research, seek professional advice, and weigh the pros and cons before embarking on a crowdfunding campaign.

By understanding the advantages and disadvantages, you can make informed decisions and navigate the crowdfunding landscape effectively in pursuing a UK company.

If you need legal assistance purchasing a UK company using crowdfunding, our experienced business sale lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.

Frequently Asked Questions