Its often said that the reason lots of deals are still happening in uncertain times is down to the liquidity in the system, and those companies being in good sectors. Conversely if asked many investors and advisors will tell you the retail and construction are "difficult". So it's heartening to report that there's always cream at the top of the milk bottle and that deals are still to be done in "difficult" sectors provided you're working with really good businesses.
We acted as lead advisers to the shareholders of English Architectural Glazing. Based in Mildenhall in Suffolk and Attleborough in Norfolk, this is one of the UK's leading contracting businesses providing envelope cladding packages for project such as Great Ormond Street Hospital, Wimbledon Centre Court, DLR Station City Airport and the BBC TV Centre conversion. Their clients include the great and the good of UK construction such as Kier, BAM and Skanska. The business was sold to Irish Private Equity Fund Elaghmore LLP. This deal closed in August.
A couple of months later we were pleased to announce the sale of ATP Architects + Surveyors to RSK. ATP, which is based in Ilford in Greater London, is a multi-disciplinary professional consulting firm, and its purchase was RSK's 7th deal so far this year. ATK, which was established in 1966 provides the complementary services of landscape design, interior design, space planning, employers’ agent, and health and safety. It works with a broad range of clients such as Barratt London, Sanctuary Housing Association and Hollybrook Homes.
We've not done anything in retail recently - but are always keen to speak with good businesses and to help shape their exit plans.
More on our website about the EAG and ATP transactions.
There is a growing chorus of voices urging the government to scrap Entrepreneurs' Relief. The Institute for Fiscal Studies which suggested that business owners respond more to changes in taxes by adjusting how and when they take money out of their companies rather than by changing their investment plans. It also claimed that many owner managers hold significant sums of cash in their companies in order to access lower CGT rates and to save tax - no sh*t Sherlock! IFS issue with the system is that while higher income tax rates encouraged lower income take from companies, especially if it kept owner managers just below the next tax threshold, but that the cash retained wasn't invested just squirreled away.
Now the former head of HMRC has called for ER to be scrapped, as it costs the country c£2bn a year in lost tax but with "no real incentive for entrepreneurship"
An earlier HMRC research paper by IFF, found that in most cases ER was not the primary motivating factor for entrepreneurs when making decisions about investing in assets, or disposing of them. But it did find that those most likely to be influenced by ER at the point of making their initial investment were those most likely to planning to set up a new company. Perhaps it's motivating serial investors - and so perhaps this is a driver for enterprise?
It's difficult to predict anything in British politics, and that's also true about the future of ER. Phillip Hammond tinkered with it in his 2018 budget but resisted calls at that time for it's abolition. So perhaps more tinkering is the likely outcome post election?
Whether or not a transaction will qualify for ER is always an agenda item in exit planning discussions. And it's relevant in any M&A activity, whether you're selling your business, doing a management buyout, or even if you're buying business (because it will influence the seller). But we're now finding, in discussions with entrepreneurs around Cambridge and East Anglia, that the availability of ER is becoming a factor for some in accelerating their exit plans before possible tax regime changes. It's certainly true to say that it's unlikely to get any more benign.
Ultimately exit decisions are driven by personal factors such as age, and a desire to do something else in life. Or by business factors such as the value of the company, and it's strategic plans. So the tax tail actually doesn't often wag the dog, but it would be helpful to have some certainty on how capital gains on the sale of businesses are going to be taxed.
In the short term the best way for business owners to wrest back some control from the politicians is to have some exit planning discussions, work out a range of dates and values for you exit, and what needs to happen to deliver that. We're always happy to have this kind of discussion, because it makes it easier for business owner and adviser to act swiftly when opportunity arises. If you'd like to read more about exit planning and selling your business have a look at the PEM Corporate Finance website https://www.pemcf.com/services/selling-a-business/
The latest Argos Mid-Market Index which shows movements in private company prices has just been published. It shows data up to Q3 2017 and indicates a record high of 9.5x. As you can see from the graph it has been steadily climbing since 2009. So if you're a business owner it's a good time to think about exit. Or at any rate to make sure you have a credible exit or succession plan in place. Many owners of private companies have much of their wealth locked up in their shareholding and so even an equity release transaction - perhaps by selling shares to a third party like a private equity house can help balance their personal portfolio.
The other factor I now start to hear in conversation with business owners is concern about the tax regime that a new government might bring. The capital taxes regime re the sale of company shares is particularly benign with Entrepreneurs' Relief effectively reducing the rate to 10% on the first £10M of lifetime gains. Whilst Entrepreneurs' Relief was brought in by a Labour government there is an up swell of concern that a Corbyn led government might change things.
None of this may happen of course but it does underscore the need for every business owner to have a plan for exit and succession - even if it is explicitly not intended to happen for some time.
We're running our Business Exit Strategies Seminar in Stevenage on 23 November the day after the Chancellor Philip Hammond's budget speech. So we should have clarity at least on his short term tax plans.
Our event, which is free, gives useful insights into a range of topics:-
The current M&A market
How to build value in your business
How to achieve succession through a management buyout
Tax - how to mitigate and also how to use your tax affairs to build value in your company
Company sales - how to sell your business, pitfalls, why some companies don't sell
I was asked this question by a business owner very recently. We had been discussing his exit options for some months, and not unreasonably he is trying now to work out the effects of a post Brexit world on his decision making, in particular how it should affect timing.
Timing is the key given that successful company sales are often significantly about getting the timing right; timing re your business, your sector, and of course one cannot ignore the overall economic outlook.
My considered opinion is that I think it is too early to tell.
But there are, as yet anecdotally, some positive signs. We have 3 sales on the go at the moment at Heads of Terms or legal stages, all with foreign buyers, all are unaffected. Also we have another just begun where the directions asked themselves the same question – and decided to proceed, on the basis that if buyers are all running scared we’ll find out quite early on and they can pause the process.
At a more general level if the purchase is strategic I think folk will push on, however there must be some buyers out there who will wait to see what happens.
What about foreign buyers wanting an EU base – how will they behave? For some businesses that will clearly have an effect. Again it will depend on the precise business being sold and the buyers specific motivation.
Of course there is potentially a plus from exchange rates depending on how that pans out. We have clients which will do well from that, and those that are already hurting.
In short nobody knows – only way to be sure is to try it.
Finally, just as with the political campaign, we're seeing some daft statements associated with the post Brexit world. I received a marketing flyer re a company sale today from another adviser which cheerfully concluded that the business was "Wholly UK focused, so not affected by Brexit". Presumably any downturn in the UK economy due to Brexit would not affect this business despite being wholly UK focussed?! Dubious logic that even Boris would have been proud of.
It’s a cliché that business valuation is both and art and a science. Or as it’s been more aptly put it is a craft. Either way it needs to be done thoughtfully. You don’t need to look hard online to find sites that invite you to put your data in and I’ll value your company for a low fixed fee. Trouble is that “under the bonnet” this is just some maths – this is a problem because you have no idea if the site is asking the right questions, and more importantly its only as good as the data input. As they say garbage in garbage out.
But if you do treat valuation as a craft, to be conducted thoughtfully, making insightful and supportable judgements about the business at each step you need to guard against bias – and this can arise accidentally.
Anchoring is a well documented phenomenon. There have been psychology experiments that have demonstrated this. Business students are asked if they’d pay the last two digits of their national insurance number for each of several items. Then they’re asked the maximum they’d be prepared to pay item by item. Despite it being random students with higher NI numbers consistently indicated higher maximum bids. The anchoring phenomenon can work to ones advantage – it’s a reason why it’s often helpful to go first in a negotiation – to try to anchor the debate at your end of the value range. But it has no place in valuation as the valuer should form an independent judgement.
So as a corporate finance adviser I’m keen to understand what my clients objectives are as input to negotiations. Conversely as a business valuer I need to be deaf to the client’s desired valuation. This might be a business valuation for divorce purposes, or to do with shareholder exit, or tax. But I need to avoid anchoring bias to make sure I arrive independently at my best judgement of valuation which is supported by the evidence and by my understanding of the business.
For more information on our Business Valuations service have a look at our website - based in Cambridge we provide valuation services to business owners around East Anglia, in London, nationally and internationally.
Planning for exit and succession can be difficult in any business, but in family businesses there are additional factors to consider. One of the problems with family succession planning is that the two key objectives – liquidity and preservation of the business legacy appear to be in conflict – how can you get cash without selling up? A sale to a trade buyer may be unattractive if the plan is to keep things in the family, and this is where the idea of a sale to family comes in.
This is a form of management buyout – the family members buying the business are very often the team running the company. Often it goes beyond that to key managers – hence the occasionally used abbreviation the FAMBO. This is meant to mean Family and Management Buyout, or Family Buyout, although just to confuse things I’ve recently seen it used in East Anglia to refer to a Franchisee and Management Buyout. It can also be called a VIMBO or Vendor Initiated Management Buyout – because the its usually (though not always) the older generation which initiates the sale to the younger family members. At PEM we prefer to refer to such deals as Succession Buyouts – because that neatly encapsulates the overarching strategic intent of the deal.
Because family relationships are involved things can go wrong so as to delay the transaction or even kill it completely. So here are some key thoughts on how to preserve family harmony whilst successfully completing a buyout.
Plan ahead and don’t rush each other. It is really important that harmony and trust is maintained. Nothing breeds suspicion more than the idea that one family member wants to take advantage of another, either by being pushy or appearing to scheme behind the scenes. This is true whether a family member is a buying or selling. An aggressive buyer almost ensures that the seller will react negatively; an aggressive seller communicates desperation and may undermine his or her own negotiating position. Actually this is also true of Succession Buyouts amongst long standing colleagues who are not related.
Take account of peoples personalities Families ought to know one another pretty well. They know about personality traits or past circumstances giving rise to unusual levels of loyalty, or even resentment, or jealousy. This might all come out in the run up to a transaction, sometimes they are deep-seated psychological feelings, and can be almost childlike—“Dad always preferred you.” Being alert to such attitudes and steering the transaction in a sensitive way that respects feelings will help ensure success. Often the most important thing is to make sure everyone is listened to.
Get the business professionally valued If your shareholder agreement doesn’t prescribe a valuation methodology, it will be helpful to everyone involved in negotiating a transaction that there should be an independent assessment of valuation. Fairness is the key to completing the transaction and maintaining positive family relationships, and possibly sanity. Neither buyer nor seller wants to looking back on the transaction with regret or suspicion.
Find some trusted advisors. Truly independent advisors who have the best interests of the family in mind can be hugely helpful in communications and facilitating agreement amongst the family. Each family member can get some independent advice, but its much better to select an adviser with a track record of brokering/facilitating such deals amongst close knit family or business groups to work for the company/family as a whole with the objective of reaching an agreement that works for all. A skilled adviser will listen to all the agenda’s and try to manage any emotional pressures that arise during negotiations.
Tax and estate planning My tax colleagues would point out that it’s really important to consider the tax and financial affairs of the whole family, up and down the generations. And a deal like this is an opportunity to consider these things holistically. Has the family provided for everyone as they intend and have they done inheritance tax planning? Again these are things that need to be done early. One of the consequences of some buyout structures is that IHT planning becomes more important – don’t leave it to the last.
Family businesses are important to us all – according to INSEAD they account for 57% of US GDP. There’s a general perception that many don’t make it beyond one or two generations. I’m not sure that’s true, INSEAD reckon there are 5,500 bicentenary family businesses around the world, and we’ve certainly worked with some family businesses which are now at fourth or fifth generation stage. Visit our website to read about some of the family buyouts we've worked on.