Is this the end for Entrepreneurs' Relief?

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

5 Reasons why Brexit might not be so bad for M&A

Despite recent evidence of Brexit hitting M&A it may not be so bad after all.    Here's five reasons why.

1 Liquidity

Companies might be put off attempting larger deals due to the difficulty in raising sterling debt.  Also there’s evidence of some Brexit planning being rolled out with stockpiling of goods and relocation of corporate head offices outside the UK.

But these things are seen mostly at the really large end of the market, and smaller deals should hold up.

Why so?  Because confidence and cash are key drivers of M&A.  Whilst confidence may be in relatively short supply, at least in some markets, there’s still lots of cash around.  Companies and PE houses are holding record bumper levels of dry powder so the Global M&A market isn’t about to grind to a halt, even some fear the UK could.

Given all that corporate liquidity smaller deals especially technology or strategically driven deals should not be hit as hard if at all.  

Brexit2 Specific sectors will hold up

The uptick in inbound European M&A activity in 3Q18 should continue in sectors which remain relatively unaffected by the current tumult.  It’s hard to predict which sectors those might be!  But it’s safe to say that UK technology companies, and other businesses with a real edge, market access or strong business proposition are likely to remain attractive to potential purchasers.  

So I’d imagine that the Cambridge tech cluster and other areas of excellence should continue to see activity.

3 Change as a driver for M&A

Change often drives opportunity, capital flows and M&A activity.  And companies seek to capitalise on disruptive factors by buying and selling companies.

4 The UK as an attractive economy/jurisdiction in which to do business

English law will remains attractive to international companies. 

5 Continued Sterling weakness

A hard Brexit will probably punish the value of Sterling, but as we saw after the referendum the currency effect of a “cheaper” British pound has been a real driver for M&A deals.  Overseas buyers particularly from US, Europe and China have been very active.  

M&A Prediction for the rest of 2018

Intralinks, which is a provider of virtual data rooms produces a "Deal Flow Predictor" by tracking early stage M&A activity by looking at sell-side deals that have begun their diligence stage, or are being prepared.  They reckon those deals are typically about six months away from any kind of public announcement.  This is the data for H2 of 2018 just published.    The chart below plots the year on year percentage growth in the number of announced M&A deals for the next two quarters. 

It shows Europe  (EMEA) to be pretty flat contrasting with real growth in the APAC region.  Given that  activity, certainly as far as we're experiencing it, is strong then stable represents a continuation of a pretty active deal market.   That certainly is reflected in the number of companies in and around Cambridge and East Anglia that are preparing for transactions.  And also the number of unsolicited approaches that we hear about.  We're currently mandated to advise on a number of mini-auctions where companies have been approached by a few buyers at the same time.  Those wouldn't necessarily be picked up by this survey which is driven by those preparing sale side deals - by its very nature a mini-auction which arises when a business has been approached by one, two or three buyers wouldn't get picked up.

Intralinks deal predictor H2 2018



Prices paid for mid market companies reach record level

One of published indices of unquoted company achieved exit multiples has recently been published and shows a record level.   

Argos 270718

Argos Soditic is an independent European private equity Company supporting management buyouts of medium sized companies and has offices in Paris, Geneva, Milan and Brussels.  The Argos Index measures the trends of euro zone private mid-market company valuations.  Carried out by Epsilon Research for Argos Soditic and published every three months, it reflects median EV/EBITDA multiples, on a six-month rolling basis, of mid-market M&A transactions in the euro zone. 

It has shown steady growth since 2013 and the latest end June results are a record 9.9x.

Before you get geared up to sell your company for this multiple you need to dig into how these indices are constructed.  Bear in mind that this is a basket of different types of companies, and is categorised more by the size of deals and the availability of data (always an issue in private company valuation reporting).  The index targets deals in the 15M to 500M range for EuroZone countries and only deals where a majority stake has been acquired.  It also excludes some industries such as financial services, real estate and interestingly "high tech" (which it doesn't define).  The latest results are based on deals with an average Equity Value of 142M Euros.

However as with all indices it's the trend that's useful - and it's certainly a reason to be cheerful. 

PEM Corporate Finance's regular publication "Valuation Snapshot" tracks Argos and other indices to take the temperature of private company sales prices on an approximately quarterly basis.   Here's a link to the latest one.  If you have a look you'll see that what's also interesting is how the various indices diverge from time to time and why.




Numbers with no narrative :-(

I always stress the need for numbers in any of our reports at PEM Corporate Finance to have some narrative, some thought, some insight to go with them.  Otherwise one might conclude anything or nothing from them.

Experian H1 2018 coverSo I was interested to read a rather doom laden article in today's Insider email newsletter.   "East of England Deal Market Declines - Experian".    This is reporting on Experian's H1 2018 figures for deal doing activity nationally and around the country by region.  For the East of England it went on to report that "the value of deals struck in the East of England in the first has 2018 suffered a steep drop, according to new data released by Experian"  "Values fell significantly by 75% to £3.5Bn from the £14.1Bn announced 12 months ago."

Now on the face of it that's true, and pretty much lifted from the Experian report.  What it doesn't do is ask why.  This drop is compared to the same period last year.  So a quick look at the Experian report for H1 2017 shows that the 2017 period included two huge deals, the sale of a stake in Arm Holdings plc to Vision Fund Japan for £6.41Bn and Tesco's acquisition of Booker Group plc for £3.7Bn.  So the two largest deals in 2017 were together worth £10.11Bn.   In H1 of 2018 the two largest deals were the sale of petrol station/convenience store group MRH GB for £1.2Bn and the sale of Northgate Public Services to a Japanese buyer for £0.475Bn, taken together there were worth £1.675Bn.

The trumpeted 75% decline in deal value between H1 2017 and H1 2018 came to £10.6Bn.   In other words  80% of that decline was due to the two largest deals in 2017 being particularly big.

Can you conclude from this that the market is in decline?  Don't think so.

However over the same period there was a 23% drop in the number of deals from 324 to 249.  Given the drop by value is so skewed by those two big deals, this probably means a real slowing in volume of smaller deals.   Harder to be sure why.    This might be of more concern, although anecdotally we just don't see any slowing in activity with many companies seeking to transact, and sustained appetite from overseas buyers and financial players alike.

So you can put narrative on the value decline, but as regards the volume decline it's much more difficult to conclude as to why from this data.


Valuation and pricing lessons from the battle for Sky

Valuation is art not science

A recent finance editorial in The Guardian on the 21st Century Fox v Comcast battle for Sky was critical of the Sky independent directors.  It felt they should be embarrassed at recent events and should realise that valuation is art not science.

Sky-logo-b90e8c9Too good to miss?

Paraphrasing the argument - in 2016 the independent directors felt a £10.75 per share cash offer was too good to miss.  Surely offers 40% above the previous weeks share price don’t come a long too often.    In fairness at that time the share price had fallen from £11 in April 2016 to 769p as the market fretted about Netflix and BT.  And you can be sure that Brexit fears didn’t help either.  But at the same time based on the fundamentals including the benefits to be derived from getting Sky Italia and Sky Deutschland motoring properly UBS analysts reckoned a fair price for Sky was £13.70.   So they’d not have been sellers at that price.

Today in 2018, with the political and regulatory issues behind them the real bidding has begun and the action is around the £14.00 to £14.75 range - so far.

Price v Valuation

This is all about price v valuation.  So what are the lessons?  Well the discussions at the board are of course mostly about price.  First time around in a jittery market, amidst fears about market trends (the threat from streaming), and with a one horse race the independent directors view on price wasn’t too bullish.  They obviously weren’t feeling too confident.  Either that the value was light, nor were they sufficiently robust to turn it down and take and flak from further share price decline afterwards.  So that was all about what price to accept. 

But back in 2016 UBS valuation opinion based on fundamentals was clearly suggesting something much higher – I’d be surprised if that wasn’t also the view in the Murdoch’s camp.

Now it looks so different.  Better performance, better market sentiment, and true competitive bidding is driving a value c£7Bn higher than before!  No wonder Sky shareholders were angry in 2016.

The above is all about how it felt for the sellers, for some insight into how it might have felt on for the purchasers have a look at this blog post on the PEM Corporate Finance website on how to pitch an acquisition offer.

The need for competition to get the best price

Taking the lesson a step further this really underscores the need to sell your business at a time of your choosing and to get a competitive process going.  It also demonstrates graphically how much higher a price you might get as a result of real competitive tension between strategic buyers.

Beware cheap valuations (or how to intentionally overvalue a company in three steps)

You get what you pay for, and cheap ill thought through business valuations could lead to costly strategic mistakes.

499-price-tag-shadow1Last year a London based business I was working with shared with me a formal valuation they’d had done for them by a UK national business which specialises in company comparison and (ostensibly) valuation.   It had cost them less than £500.   To be precise £499 + VAT which is a not-at-all cheesy way to price it!

Of course price doesn’t necessarily give any indication of quality, or value.    Usually such cheap valuations are machine driven, very mechanistic and only as good as the assumptions fed in.  Garbage in garbage out etc. 

But what really shocked me about this report was that the basis of calculation was just plain wrong.  It looked as if it was wilfully designed to generate as high a number as possible however meaningless. 

So what was wrong with it?  Here’s my 3 biggest objections to it, which could also be read as a three step method to produce a meaningless and overstated valuation:

STEP 1: Take profit and add back ALL directors’ costs.

Valuations need to be based on a considered view of the businesses sustainable underlying level of profitability.   It’s usual to make an adjustment to private company profit figures before using them for valuation to allow for one off costs or profits.   Most commonly one needs to adjust to make sure the profit is arrived at after deducting a fair cost for the directors actual economic input to the business.   Put simply you’d add back their actual emoluments and deduct the “going rate” for the actual role they were going.  

The offending valuation just adds back ALL directors’ costs and makes no deduction, on the spurious logic that the new owners will do things differently.   But surely the business still needs managed?

STEP 2: Apply after tax multiples to before tax profits

This is mixing apples and pears and is guaranteed to give the wrong answer.   The business being valued was successful and profitable and making a good return on its assets.  So taking an earnings multiple approach was fine.  

The valuation firm used PE (price Earnings) multiples, and cited its use as a metric in the stock market.  That’s fine but it needs to be applied to after tax, after interest profit as that’s how it’s derived and used in the quoted market.  To apply it to pre-tax, pre-interest, pre-directors profit is meaningless and overstates the valuation. 

The valuer also stated that “most valuations are done this way” – actually no.   Most unquoted businesses are valued on an Enterprise Value to EBITDA basis.  And a compelling reason for that is that otherwise you need to make complicated adjustments to reflect the funding structure and taxation regime differences between benchmark companies and those being valued.

STEP 3: Add total assets to your valuation

It’s correct to add surplus assets to an Enterprise Value but not any other assets.  The logic is that the assets are involved in generating the profit stream that you’ve valued so to add them to the valuation would be to double count.  If it’s a poorly performing business you might just use the true value of the net assets as a measure of valuation but that’s a different story.

To compound it all this valuation then took the result of step 2 above and added total net assets – which in this instance added a totally spurious 50% uplift to the valuation.

At the end of the day the business owners who purchased this valuation report hadn’t wasted much money on it – but the true cost of it could easily have been poor or downright wrong decision making based on its conclusions.    After all it probably overstated valuation by nearly 60% taking all three mistakes together!  As it happens we had a discussion with them about a realistic valuation range which they used as input to their strategic discussions on exit and succession planning.  

If you're interested in the topic there's more on valuations at PEM Business Valuations

A good time for business exit or succesion - high company multiples and before any scary tax changes?!

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.

ArgosThe 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
  • Strategic planning
  • How to build value in your business
  • Business valuation
  • 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

There are a few places still available - and the venue (Novotel just off the A1M) is easy to get to from Hertfordshire, Bedfordshire, Northamptonshire, Cambridgeshire, Essex and North London.  So have a look at our website for the full program and booking.





Upcoming event in Stevenage for those planning business exit or succession -

We're once again running our Business Exit Strategies seminar this time in Stevenage, Hertfordshire on 23 November 2017.

This is aimed at business owners who are beginning a planning cycle towards exit or succession or indeed those who plan an exit or sucession event in the short term.  It's an interactive and engaging morning that will send attendees back to base with useful insights. 

We've all been to seminars that are just overt sales pitches, or frankly boring.  So we set out to make sure our events are neither.   Our primary objective is to inform, and leave our guests feeling it's been a morning well spent.  Just ask any previous attendees.

We cover a range of topics including

  • Developing a workable ownership strategy
  • Succession buyouts and MBOs
  • Valuing a business for sale
  • Tax efficient exit planning
  • How to sell your business
  • Negotiating the deal

And the key benefits of coming along are

  • A practical overview of how to plan and implement your strategy for exit or succession
  • A clear understanding of the selling process
  • Understand how succession buyouts are an alternative to selling
  • Tax planning ideas for exit and succession
  • 60-page book exclusive to guests

If you would like to come visit our website Business Exit Strategies Stevenage Nov2017

Venue is the Novotel - so very easy to get to just off the motorway.


Novotgel sg












Unreliable forecasts - and how to spot them


Like Hercule Poirot you should be on the lookout for ulterior motivation.  Was the forecast prepared with one eye to selling the business (usually inflated) or getting a valuation for a matrimonial dispute (this often produces a low valuation if the business owner is the defendant).  Or perhaps it was prepared for bank funding – in which case be sure the bank will scrutinise and sensitise the forecast.

Forecasts graphPoor track record of forecasting

If the business has historically been poor at predicting its results which should it be different now?

The pattern of growth or margins look odd

It’s always possible to benchmark the figures against public companies or other data.  If the business producing the forecasts has wildly different growth rates, or margins one needs a good explanation as to why that should be.

Forecasts prepared in isolation by the finance director

The CFO or FD in the business needs to canvas inputs from the key mangers in the business before he or she can produce anything meaningful.

The forecast is based on a huge assumption

If there’s one or two huge assumptions that drive the forecast, such as being able to raise millions of pounds of equity finance, or winning a significant new contract then you should consider what happens if those assumptions don’t prove realistic.

Forecasts conjured out of thin air

Of course if there are no, or few, supporting assumptions to check out then the forecast will lack credibility.  I recently valued an early stage technology company where it quickly became clear that the forecasts beyond the first twelve months were just round figure guesses – so I had to discount them altogether in my appraisal.

No balance sheet

I do sometimes see forecasts based on a profit and loss account and some cash flow assumptions.     Without a balance sheet a vital logic check is missing.