Cambridge Caledonian

EMI Schemes and Entrepreneurs Relief

Some interesting enhancements to the regime. HMRC have now published further information concerning the availability of Entrepreneurs’ Relief on shares acquired on the exercise of qualifying EMI Options. The proposed changes are subject to state aid approval with draft legislation planned for Autumn 2012.

The new legislation - which applies to EMI options exercised on or after 6 April 2012 - essentially removes the normal Entrepreneurs’ Relief requirement to hold 5% of a company’s shares for those shareholders who have acquired shares on the exercise of a qualifying EMI Option. All other conditions for Entrepreneurs’ Relief on the sale of shares remain, that is, for a period of twelve months prior to disposal the shareholder needs to hold the shares and be an officer or employee of the company.

Comparison with the old Taper Relief Rules Unlike Business Asset Taper Relief, where the taper relief clock commenced from the date of grant, the period of ownership for Entrepreneurs’ Relief commences only from the date of exercise. The first occasion that Entrepreneurs’ Relief could be claimed on the sale of shares acquired on the exercise of an EMI Option will be 6 April 2013. EMI Options tend to be exercised only when the shares acquired can be immediately sold (for example, on the occasion of a trade sale or to an Employee Benefit Trust).

Its now worth thinking about an early exercise where an exit event is likely. Whilst the new legislation is not as generous as first thought - there's a surprise! - it does provide opportunities for employees or directors who are intending to acquire less than 5% of a company’s shares (or if there is a risk that future funding rounds will dilute shareholders so that they will hold less than 5%). If shareholdings below 5% are acquired as part of a normal subscription, i.e. outside of an EMI Scheme, Entrepreneurs’ Relief would not be available on a future sale. However, if both the company and director / employee satisfy the requirements of the EMI legislation, such shareholdings could be acquired via the grant of an EMI Option that is capable of being exercised immediately. The 5% shareholding rule would then not apply and Entrepreneurs’ Relief would be available after 12 months provided that the other conditions are satisfied.

Business Exit Strategies

We run an annual programme of free half day Business Exit Strategies Seminars for business owners throughout the East of England. These are lively and informative events giving practical guidance on selling your business or doing a succession buy-out, preparing the company for sale, the sale process and how to save tax.

We're running the event again shortly in Norwich and Peterborough on 8th and 15th March, then again in June in Cambridge and London. For full details click here for the brochure, or click here to book

Topics covered include how to:-

• Maximise your business value for exit
• Value your business
• Sell your business
• Plan succession
• Minimise tax
• Sell to your management team in an MBO

The seminars will be presented by 3 experienced advisors from PEMCF. No hard sell, just an informative and lively morning packed with useful, practical advice and with a detailed delegate pack to take home.

Some quotes from previous attendees:
"Excellent non technical explanation of the process."
"Clear, concise, easy to understand."
"Made tax almost interesting."
"Exercises good – discussion and thinking."

Practical tips for selling to an overseas buyer

Many of the deals we do have an international element. If you have a decent company, with a good position in the UK market, and its large enough for a cross border deal, overseas buyers may pay a premium in order to get access to the market. There are some practical points to consider if you're thinking about cross border M&A.

The timescales involved in the sale process will typically be longer. Some overseas buyers may have slow decision making processes, or for that matter will need time to book flights to come and visit the vendors.

A buyer which has already got some kind of foothold in the market will probably move faster than one for whom you might be the first acquisition.

Overseas buyers may have different expectations on the legalities of the deal. Hopefully they will appoint a decent UK lawyer to guide them. However sometimes their choice of lawyers can be unhelpful - we've seen huge City of London firms appointed where a decent regional practice would have been more appropriate, equally we've seen inappropriately small firms appointed just because they are a an internatinal network with the buyers lawyers. Then there are questions on what they expect re warranties and other key provisions. Many overseas buyers will expect to put some of the purchase consideration in escrow - this would be unusual for a UK buyer.

Overseas buyers need some flexibility in the auction process - bear in mind they have do deal with a different culture, legal jurisdication, and find the time to visit.

Tax laws may be different in the UK. We've had foreign buyers keen to make asset purchases - of course this is bad news for an entrepreneur who would not benefit from Entrepreneurs' Relief in a deal structured that way. Surprisingly we have even seen one north American buyer which was prepared to gross up the price to compensate the sellers for the tax disadvantage.

In short its well worth considering overseas buyers - but they need careful managing to deliver the best outcome.

No exit or succession plan?

According to Imperial College London 95% of business owners have no exit or succession plan. Sounds a bit high to me, but I guess if the question was asked about written planning then it may well ring true.

We're interested to better understand how business owners in our region think about these issues - and so we're conducting a survey. It is difficult for even the most successful business owners to grapple with exit planning. The survey is to test the extent that directors and shareholders are ready to achieve the kind of exit that they'd chose, and at a time of their choosing - or if they will simply be forced to respond to events? Of course having a plan should allow them to maximise the value of their investment in the company, and exit in a manner of their choosing - whether this be a management buyout or a company sale.

As an economy we need successful entrepreneurs - and they need an orderly way to realise the wealth that lies tied up withing their businesses. If you'd like to do the survey click here - as an incentive there's a draw for a bottle of champagne or a free valuation report.

Graphic - Cash for M&A growth in company cash balances

Cash balances in larger corporates have built up steadily since the financial crisis are folk husband their resources carefully.  I've often commented on how such large accumulated cash balances in have become a driver for M&A "post" financial crisis.  

They say a picture is worth a thousand words - well I've found a chart that illustrates the cash balances growth very clearly.  

The graphic which is from Capital IQ via Deloitte shows cash balances fairly static up to the autumn of 2008 since when they've grown strongly.

How can I sell my business for maximum value?

For most busines owners once they've begun to think about exit strategy "how do I get the best price" is often top of the list of questions.   We're addressing that at a series of three seminars this autumn entitled Business Exit Strategies.    They're being held on 3rd, 10th, and 24th November in Hemel Hempstead,  Northampton and Brentwood.   These are half day free seminars designed to demystify the topic and to offer genuinely practical insight and ideas for business owners.  For full details and the ability to book easily and confidentially visit our website.

For those owners who want a decent price but also the ability to acheive a sale to their management team to reward the people,  and to secure continuity we have a special session in the seminar on this topic.  Its an area we specialise in and we'll be sharing some pracitcal advice and some real case studies.

Preparing your company for sale in tough times

The M&A market is much better than it was.  Companies are selling.  But the recovery is fragile and its important to prepare well in order to maximise the value on sale of a company.

Three key things to do are put your house in order, accept "funny money"  and sell the growth plan.

Housekeeping

This is always important - but especially so now.   Get your accounts squeaky clean.  And your balance sheet in order - i.e. not stressed.     Think about the impact of any investments on the level or surplus cash on sale - will you get better value by deferring them or funding them differently.    Also have a good clean track record, and if there are any ups and downs have them cleanly recorded so the buyer can easily understand what's gone on.

Funny Money

By this I simply mean that to get the best price you may have to accept defered consideration, earn out deals, or paper.   There's less liquidity about, and buyers with cash tend to want to hang on to as much of it as possible.  Deals are often done with between 33% and 50% seller financing.     This is not neccesarily a bad thing.  It depends how its structured.  And don't assume that earn outs are a bad thing - not everyone makes money from them, but I have advised on a number of company sales where the team have made most if not all of their earnout.

Growth Plan

In an uncertain environment you need to make the case why your company will prosper and even grow once it has changed hands.  You don't have to have implemented your plans - but it would be good to illustrate that you have tangible plans to increase profits.  For example if you plan to enter a new market, it would be good to have taken the first steps - you don't need to have set the world alight - but a buyer will rate you higher is you have proven your new idea has potential.

 

Seven Exit Planning mistakes to avoid

Here's 7  exit planning mistakes to avoid.

1. Don't be reactive

A great strategic buyer might just beat a path to your door.  But its unlikely.  Even less likely is the thought of two or more buyers chasing after at the same time.  

So be proactive - if you want to sell your company you can get real competition amongst buyers - but only if you have an auction process to drive them towards you in the first place.

2. Avoid loss of focus

Its very easy to become consumed with the sale process - and this is usually rapidly and significantly to the detriment of the business.   Hire some professionals to market your businses and to manage the sale process - leaving you to make the single largest contribution to the process that of continuing to trade profitably and develope the company.

3. Bad timing

Judging the best time to marketint the comapny in order to maximise the sale value is critical.  Think carefully about how the company is performing, and what's happening in the market place - for example is there consolidation currently happening in your sector?

4. Not having a realistic idea of what your business is worth

Do you have a good idea what its worth today?  You need to form realistic expectations before going into a sale process to ensure that the outcome will meet your needs in retirement, or as capital for your next project.

5. DIY

This is not a DIY project, to get the best outcome and to maximise the value from a sale of your business you need to work with an experienced team with the insight, resources and marketing skills to get your company in front of the right buyers, and to engineer real competition.

6. Leave time for the process

Selling a buiness is complex, and to get best price can take 3, 6, 9, or even 12 months.  Prepare early, get your house in order, and approach the sale in a controlled and planned fashion for best results.

7. Consider alternative strategies

Selling now to a trade buyer may not be the best answer.  Have you considered a management buyout as a means to acheiving succession?  This might allow you to sell in part and ease out gently whilst relesaing capitla tax effectively.     

Planning to sell your company this year, or just grooming for a later sale? Thinking about a retirement and considering sellling to your management team. In any event I guess you'd rather pay as little of the proceeds in tax as possible. We are once again running our Business Exit Strategy Seminars which cover these topics and more in a lively informative way. "A morning well spent...." is a typical quote from a previous attendee. The event is running in Peterborough and Norwich over the next few weeks, then in Cambridge and London in June. Full program and booking details on http://www.pemcf.com/index.php?public/events events page.

Sale of Suffolk based Payday Lender

We finished 2010 with a completion on 29th December with the sale of Fortress Group (UK) Ltd to Texas based Think  Finance Inc . 

Fortress, which is based in Bury St Edmunds, was founded in 2007 and has grown rapidly  to become a leading UK payday lending business.   It's an entirely online businses trading as "1 Month Loan" and "Mayday Payday".  

Think Finance is one of the US's fastest growing private companies with three year revenue growth of over 70%.  It is privately held and backed by some of Silicon valley's most respected venture capital firms, including Seqoia Capital and Technology Crossover Partners. 

Think will provide capital to accelearate Fortress's expansion - Kieran Moulden, CEO of Fortress said that as a result of the new funding the company aimed to increase its business ten-fold.

We were pleased to work with Kieran and his co-director Stuart Carter over the last year to prepare the company for sale and to market the company internationally.    They have achieved a huge amount in building Fortress to such a strong position in a short period of time.

This is a market which is developing rapidly in the UK.   In contrast it is a mature market in the United States with allegedly more payday lending outlets than branches of McDonalds.   This is not the only US acquiror active in the UK - NASDAQ quoted Dollar Financial Corp is to acquire Purpose UK Holdings the largest UK payday lender for £124M