I have mentioned before that the key to a smooth transaction and therefore maximising the value you will receive is preparation.
When selling your business you may receive several visits from advisors dealing with financial, legal, commercial, environmental, property and pensions due diligence. It may seem that you are asked for the same paperwork thousands of times.
To keep you sane, I have a few tips :
It is typical for businesses to sell for a multiple of profits. At the early stages of a deal a buyer will rely on the seller to provide a profit figure. It is up to the seller to decide on a multiple and I will talk about how to approach this decision in another posting.
A large amount of judgement will go into the identification of the profit figure by the seller. The most important factor is
Continue Reading...Due Diligence is an involving task, where the old idiom ‘…can’t see the wood for the trees’ is true.
It is very easy to get immersed in the detail of a transaction – checking that balance sheets balance, existence of assets, invoices are not shredded etc etc. However most value from the DD process is derived from standing back and pondering – is my client getting a good deal?
Before you embark on detailed financial due diligence, I wholeheartedly recommend you spend half a day with your accountant and your offer letter (or heads of agreement). Not only will your accountant be able to independently appraise the all important headline figures associated with the transaction, but this will also allow you to identify risk areas together – ensuring a more focused DD process.
Oh and by the way, it is useful to review the ‘wood’ element before a not insignificant fee has been agreed with your accountants and lawyers.
I have and I am pleased to say the new Companies Act will take away this requirement for private companies.
However I do have concerns over complex deals where the protection of the creditors will be lost. How are they going to feel if the transaction leaves them with a shortfall in the amount they get back ? No doubt the lawyers will end up getting involved.
At least an amended form of Section 151 of Companies Act 1985 still applies to public companies.
Is it just me or are transactions becoming more and more leveraged? Lenders appear to be have a better appetite for lending compared to when I started in the profession. I think this is a positive change, as very few transactions I have been involved in have gone awry (it must be the excellent Due Diligence advice…..).
However could it be that lenders are misinterpreting the profit calculations? The shift in profit measures from EBT (Earnings Before Tax), EBIT (Earnings Before Interest & Tax) and EBITDA (Earnings Before Interest, Tax, Depreciation & Amortisation) have meant that the basis for earnings has increased. Could it be that the increase in the profit measure has meant that lenders continue to use the same multiple, while simultaneously providing more finance??
PS to all the bankers I deal with – only joking.
Finance raising – part of the tax planning for growing businesses series
When raising funds, essentially you have two main choices:
· Loans
· Equity
Loans
The position on loan finance is relatively clear – there is no tax relief on capital repayments but tax relief is available on interest costs.
One point to bear in mind is that tax relief is also available on the costs of raising loan finance (e.g. the bank arrangement fee) even if these are capitalised in your accounts.
Equity
The commercial implications of issuing new equity can be significant but, looking just at the tax impact, can you structure your business to make it more attractive to new investors?
There are essentially three classes of investor and potential reliefs to benefit them:
The reliefs apply provided certain conditions are met:
· EIS provides income tax relief at 20% on the amount subscribed up to £400,000, the ability to defer capital gains on the total amount subscribed and provides for exemption from capital gains tax on sale.
· CVS provides corporation tax relief on the amount subscribed and the ability to defer the gain on any disposal of the CVS shares into the next CVS investment.
The qualifying conditions for all three investors are broadly similar and mainly relate to the trade carried on; the quantum of non-trading activity (capped at 20%) and gross assets being less than £8 million after the issue of new shares.
Your focus is to grow your business profitably, so are you sometimes tempted to ignore the tax issues and leave them to your accountant to sort out at the end of the year? In the scheme of things is tax really that important?
Well, yes it is. Tax will impact on virtually every decision you make. For example:
It is not possible to cover everything you may ever need to know, so I propose to look at five key areas:
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