“I need help attracting investors for a new product that I have developed.”
Sound familiar?
It’s a comment that the owners of SMEs often make to their accountants at this time of year.
They will proudly say “I have developed a prototype and I think it is ready to take to market.”
This is how the innovation journey of many SMEs ends.
But let’s go back to the beginning and follow the story through…
If you, as an accountant, are planning to offer a broader range of commercial services or Business Advisory Services to your clients, then you’ll likely have more of these conversations in the future.
Don’t be caught flat-footed and not able to confidently steer your client in the right direction.
It is crucial that you have at least a working knowledge of how the R&D process works. Your clients are coming to you as an expert, therefore you need to know every aspect of the “Innovation Journey” to be able to advise them properly.
Let us look at it as if you were having a conversation with a client, who says:
“How do I commercialise my invention? I think it’s ready to market.”
Inventors tend to be full of optimism, and often, unrealistic.
Most aren’t aware of many of the issues that need to be worked through to successfully commercialise their inventions.
As accountants, we need to start at the beginning of the Innovation journey…
Research and Development Phase
This is what your client would have been working on and, hopefully, not for very long before they’ve decided to contact you. There are significant R&D benefits available to SMEs, but only if the proper arrangements are put in place at the right time.
There are some questions you will need answered.
Have they developed a prototype? Does the prototype work? Has it been evaluated by an expert? Have they considered what it will look like as a final product?
Who paid for the R&D expenditure? Have they heard about the R&D Tax Offset that is administered by the ATO?
If they want you to claim the R&D Tax Offset for them, there are some important matters that you will need to consider:
- The entity undertaking the R&D expenditure must be a company.
- Do they have a company for this purpose at this time?
- How much additional expenditure do they think is necessary to get the prototype to a “commercial-ready status”?
- Regardless of whether they’ve already undertaken the R&D expenditure, they will need at least $20,000 worth of expenses to make an R&D claim. That’s the minimum.
Research and Development System
If you are incorporating a company to claim the R&D expenditure, you will need to set up an appropriate R&D administrative system. Fortunately, at ESS BIZTOOLS, we can ease your pain, as we have developed all the necessary paperwork and forms you and your clients will need to support claims for the R&D Tax Offset.
Our R&D Tax Offset package also details the searches that you or your clients need to make regarding “prior art”. Prior Art is the process of determining that your client’s invention is unique and hasn’t already been invented by anyone else in the world. Extensive record-keeping is required for those searches. If you contact us, we’ll be happy to talk you through the process.
Prototype
Depending on what the invention is, it is always best to prepare a prototype of what the new product will look like and how it will function. Of course, there may be many changes before the final commercial product design is available, but the initial prototype is very important, if you need to raise loan funds or capital to finance the project. Most people do.
Market Research
If your client is going to try to raise funding to assist with their R&D project, they will need to do some market research. It is best to appoint a market research consultant to do this review if there is money available, because the results are likely to be more accurate.
This is very important!
The primary focus of market research is to identify the key components of the prototype, and then compare what your client envisages their prototype will look like as a final product, against what is currently available in the marketplace.
This research should be documented on a spreadsheet, identifying the key components of the prototype. It should include a comparison of what is included in other products currently available and why your client’s invention is better.
A focus group could form part of the market review process, when your client has the protection of a provisional patent. If the group members also have some knowledge of competing products, the feedback from them could prove beneficial in determining the final design of the product.
Project Budget
Your SME client needs to take the time to carefully consider what expenditure is going to be required to get to a “commercial ready product”.
Items to be considered include:
- expenditure to finalise the prototype
- expenditure based on recommendations from the focus group
- salaries and wages from now until the expected income is earned from the product being developed
- patent attorney expenses
- patent registration fees for countries for where patent protection will be applied
- legal fees
- accounting fees
- rent of premises
- business agent costs for negotiations with potential customers and distributors
- travelling and accommodation related to the product
- all other expenses relative to the operation of a business
Funding Required
You and your client will now have a better idea of the level of funding that is going to be required to take the project from the current prototype to the final commercial product, when customers will start paying the calculated price to your client.
Is this funding currently available?
For most entrepreneurs, the answer will be NO, so you will need to consider whether your client can raise capital from the market.
Capital Raising Opportunities for SMEs
The Australian Government has passed legislation that lets a private company raise capital direct from the public, without having to produce a prospectus using:
- Section 708 of the Corporations Act
- An Early Stage Innovation Company
- A Crowd Sourced Funding Equity Raising Company
Section 708 of the Corporations Act
Under this provision, a private company can raise up to $2M of capital over 12 months without issuing a prospectus or advertising.
This form of capital raising is limited to a maximum of 20 investors.
Early Stage Innovation Company
A young company may qualify as an Early Stage Innovation Company.
This status lets investors in the company receive an income tax benefit on their original investment, so long as that investment is made after a specified date. To avoid Capital Gains Tax on that investment, the shares must be held for longer than twelve (12) months and less than ten (10) years.
Investing in an Early Stage Innovation Company has become popular for sophisticated investors. They understand the significant benefits available to them from investing in a qualifying company.
Crowd Sourced Funding Equity Raising Company
The most recent form of capital raising for SMEs is Crowd Sourced Funding Equity Raising.
Private companies and unlisted public companies may be eligible if they have an aggregated international turnover of less than $25M and gross worldwide assets of less than $25M.
These companies cannot be listed on a stock exchange anywhere in the world.
Eligible companies are able to raise a maximum of $5M from the public in a twelve (12) month period making this form of capital-raising very appealing.
Predictive Accounting Reports
To go out and raise capital from the public, it is vital that appropriate Predictive Accounting Reports are prepared by an expert to identify the projected financial performance of the company for at least the next five (5) years. Of course, that expert should be you, their accountant.
The documentation you will need to prepare includes:
- Business Plan – this is the leadership team’s vision for the business operations.
- Budgets – month-by-month budget projections covering the business operations.
- Cash Flow Forecasts – detailed summaries which reflect creditors payments, debtors income, capital expenditure, inventory investments and other expenditure items envisaged for the next five (5) years.
- Projected Balance Sheets – these are the forecast Balance Sheets for each year so that you are able to illustrate to potential investors the company’s projected position at various future dates. This is a summary of the expected financial performance of the company.
Action
When you are faced with the prospect of advising an SME client on how to get their invention from the drawing board to market, where do you start?
If you are thinking about tackling this process for the first time, we’d like to have a discussion with you before you “jump out of the frying pan into the fire!”
We can help ensure that you will be on top of the most appropriate R&D strategies to benefit your clients.
ESS BIZTOOLS has developed detailed product packages to assist accountants, like yourself, to give the right advice to your clients on every stage of the innovation journey, as we have discussed in this article.
Do yourself a favour. Visit www.essbiztools.com.au to review our materials, including the Research and Development Package. To get an idea of what is included in this package, click here to receive a complimentary document – Planning a Research and Development Project Flowchart.
WANT MORE INFORMATION?
Webinar Recording: Accountants/Bookkeepers Role in Assisting SMEs in R & D Claims.
Podcast: Discussion with a Client in relation to assistance to undertake the Commercialisation of Innovation.
SPECIAL OFFER
ESS BIZTOOLS ADVANCED PACKAGE – $2,999 PLUS GST (NORMALLY $5,909 PLUS GST)
What is included:
- 12 months subscription
- Research and Development Package
- Four (4) holiday accommodation vouchers (while vouchers last)
Or
RESEARCH AND DEVELOPMENT PACKAGE – $1,200 PLUS GST (NORMALLY $3,000)
What is included:
- 12 months subscription on Research and Development Product Package
- One (1) holiday accommodation voucher (while vouchers last)
This special offer is available until Thursday, 23 March 2023.
SPECIAL INTRODUCTION TRAINING PROGRAM
New subscribers are invited to an introduction training program on Research and Development, comprising of four (4) sessions to be held on Thursdays at 11.00am AEST (12.00pm AEDT).
Session dates:
- 23 March 2023
- 30 March 2023
- 6 April 2023
- 13 April 2023
Peter Towers – Managing Director, ESS BIZTOOLS Pty Ltd
Telephone: 1800 232 088 | Email: peter@essbiztools.com.au | Website: www.essbiztools.com.au | www.essbizgrants.com.au
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