Chancellor George Osborne set the scene for what was to follow in his first Budget stating that “it pays for the past and it plans for the future".  He set out his objectives to deal with the country’s deficit in a “fair” manner and balance the Treasury’s books by 2015.

The Government is relying upon the private sector to help the country recover.  In order to assist UK businesses the Chancellor has proposed cuts in corporation tax over the next five years. 

The key tax changes are:-

• VAT will rise to 20% from 4 January 2011 which should make the pre-Christmas trading period an even busier time for retailers.
• From 23 June 2010 Capital Gains Tax rises to 28% for higher rate tax payers but remains at 18% for basic rate tax payers.  As a compensatory measure the lifetime limit for Entrepreneurs Relief substantially increases to £5 million.    This is potentially worth £240k of tax saving per entrepreneur. 
• Income Tax Personal Allowances are set to rise by £1,000 from 6 April 2011 in order to help lower paid employees but the basic rate tax limit is being reduced so that this relief will not be enjoyed by higher rate tax payers.

As ever the devil will be in the detail for much of it.   One other positive point is that UK Research & Development Tax Credits in their current form are safe for now. Consideration will be given to the proposals contained in Sir James Dyson's report.   Expect a more focused regime to be announced in the autumn, targetted at SMEs .

Click for details of our free budget seminar tomorrow at 8am - breakfast included!

Can one plus one ever equal three?  Yes it can.  If you are selling your business - find a strategic buyer which will enjoy synergies from combining the businesses and which knows it is in competition to buy and you can maximise value and share in the marriage value. 

What are the chances of pulling this off in the current climate?  Most recent surveys of corporate opinion show that firms are far more likely to engage in M&A activity over the coming year.  E&Y found 57% were more likely to make an acquisition while within BDO’s rather more “gung-ho” sample 80% felt the same.  Regardless of numbers it’s quite clear that there is a much greater appetite for deals this year.

Deals will be concluded by strong businesses with clear strategic intent, although some of those surveyed did admit to opportunism as a motivator and to being on the look out for bargains.  The biggest hurdle is likely to be discrepancies between buyer and seller valuation expectations – however as the market improves, and the volume of transactions increases, this is likely to even out.

There is evidence that strategic acquirers who have been deferring M&A activity while profitability recovers are now sitting on their largest cash reserves in recent years.  Add to this Private Equity investors who also have cash to burn before the time expiry of funds with a finite end date and you have a much better prognosis for those seeking to sell their business than for many months.  The return of strategic buyers and increased competition should drive an increase in activity and valuations.

The ability of purchasers to fund deals from their own cash resources is still a key factor – for example Corpfin found that the majority of UK deals in April 2010 were funded by buyers existing cash resources.  However they also found that the second largest source of funding for such deals was bank debt.  So liquidity is once again available for the right deals.

Owner managers who have been planning an exit but have had to put their plans on hold during the financial crisis can now start planning for exit.  Now is the time to consider grooming the business for sale in the short or medium term.  Now is the time to give consideration to the preparation of an exit strategy – which should cover the following issues:

· What are the personal or corporate objectives of the owners?

· What’s the business worth now?

· At what valuation would the owners be prepared to sell?

· What are the prospects for the business?

· What drives value in the business?

· What will a likely potential buyer for the business look like?

· How must the business look to maximise sale value in the future?

· What could get in the way of an exit or reduce future value?

At PEM Corporate Finance we have seen a marked increase in the number of enquiries from businesses planning for exit.  And there is also plenty of appetite from local businesses to make acquisitions – we have recently advised the purchaser in transactions such as the purchase of ISIS Fertility by Bourn Hall Clinic, the acquisition of Elmy Landscapes by Flora-tec and the MBO from Stratech Scientific of Molecular Dimensions.   

If you are exit planning it’s worth getting an outside opinion on the valuation of the business, and on opportunities to groom it in order to increase exit value.  Grooming is aimed at closing the gap between the current value of the business and the target exit valuation.  It should avoid the risk of a sale at undervalue.

Another deal to announce. We have recently helped Tony Savill, CEO of Suffolk based Molecular Dimensions, to acquired the business through an amicable management buyout from existing shareholders.

Molecular Dimensions is a world leading supplier of modern screens, reagents, other consumables and instrumentation for protein structure determination by X-ray crystallography.  Headquartered in Newmarket it has offices in the USA and distribution in Asia.  Founded in 1998 to provide specialist products for crystallographers across the world, it has grown through alliances with leading scientists aimed at developing and commercializing innovative ideas.  Current alliances include the MRC Laboratory of Molecular Biology Cambridge, Imperial College London, and the York Structural Biology Laboratory, University of York.

Molecular Dimensions offers the most innovative range of products from the latest developments in structural biology research.  The company currently has over 20 projects at various stages of development from new screens and reagents for crystal growth, new laboratory plastic-ware, to a range of instrumentation through an exclusive collaboration with a spin-off company from a German university.  The company has launched two unique products already this year; one for screening temperature as a crystal growth parameter, and a new device for growing crystals and analyzing them ‘in-situ’ in capillaries.

Tony has been MD of the business since its formation as an associated company ofStratech Scientific Limited.   Stratech, which was founded over 26 years ago, is a distributor of innovative and specialist life science research tools and  supplies one of the largest ranges of primary and secondary antibodies.  The management buyout of Molecular Dimensions follows a strategic review and should allow both businesses to grow through greater focus on their respective different markets.

As is often the case following a buyout an independent Molecular Dimensions will benefit from increased market focus.  It is also good to see bank funding once more becoming available for such transactions”. 

Legal advice to the buyout team was provided by Claire Clarke and Stephen Hamilton at Mills & Reeve in Cambridge.    Finance for the transaction was arranged by Steve Cooper of HSBC Cambridge’s technology team.

It's still tough out there and despite some inflationary pressures, cash may not be available to fund salary increases.  Instead it might be worth thinking of tax efficient benefits to provide instead as a one off or an ongoing:
•Salary/bonus sacrifices in exchange for employee pension contributions can significantly reduce National Insurance costs;·
•Pension advice costing up to £150 in any tax year;·
•Annual social events – the “Christmas party” tax exemption of up to £150 per attendee applies to annual social events to which all employees are invited. Events such as a summer barbeque or theatre visit may qualify. Care needs to be taken on which costs are included when considering expenditure against the £150 limit;·
•Health screening and eye tests/glasses for VDU users;· Employer supported childcare and childcare vouchers;·
•Trivial benefits such as office refreshments;·
•Provision of free or subsidised meals, for example in a canteen or a shared canteen on an industrial estate/business park;·
•Training.
••Long service awards;·
•Cycle to work schemes including meals provided on cycle to work days;·
•Lunchtime bus/mini bus services;·
•Provision of free or subsidised meals, for example in a canteen or a shared canteen on an industrial estate/business park;·
•Training.

 

Lots of speculation about what might be in the budget. Here's some last minute things to consider.

• Realise gains now to access current rates of tax, bearing in mind that it is important not to lose sight of any long term investment strategy.
• Consider ownership of assets – for example transfer to a spouse who is taxed at lower rates of income.
• Interest on loan finance is currently tax deductible and will act to shelter tax at up to 50%, effectively halving the cost of borrowing – investors should consider leveraging the benefit of any existing equity to re-invest in new property which of course will not be sitting on a gain.
• Review any planned refurbishments to property that might increase gains – it may be better to divert the capital spend into acquiring a new property and realise a reduced gain on existing assets.
• Assess income from buy-to-let that was already taxed as income – investors should ensure that they are getting maximum relief for all expenditure.
• Absolutely nothing – property and share investments are typically medium to long term and any gains in the future are likely to be realised when the tax regime has changed several times and by which time capital gains tax rates may well have softened.
• Remember that hasty decisions now to save tax in the short term may be detrimental to overall investment returns in the future.
• Business status reviews – it is possible that your assets may qualify for some form of relief so investors should seek advice as to how to potentially restructure their business or portfolios now to access such reliefs in the future.

Of course the ground rules may change completely in two weeks time.