patent box

Patent Box… videos and links

I did a full post on Patent Box a while back… but I thought I’d throw in a couple of videos we did on it a few years ago…

This first video has poor sound quality, clunky jump-cuts and is a no frills interview with a cracking Patent Attorney… Tom Hutchinson of HutchinsonIP

This second video is a bit slicker with a few different people talking about Patent Box

And here is a site that is great for keeping up to date with any changes to these sort of tax reliefs

So… over to you

 

 

wealth management

A Wild Way to look at Wealth Management

Owners of businesses are special in a ton of ways… and they need advisors who recognise that reality… but when it comes to Wealth Management it just doesn’t happen…

Too many wealth/financial planning guys see you as walking pension pots…  maybe they’ll sort you Key Person Cover, and maybe encourage you to get a shareholder agreement in place (with attached Insurance policies)…

But they leave waaaaaay too many gaps for me to be happy with the service you guys are getting…

So here’s the Wild way to look at Wealth Management…

Protection first… and that means a form of Living Will for your company…

A Shareholder Agreement (with any necessary Insurance policies)… Key Person Cover (must contain some Critical Illness)… and an LPA (Lasting Power of Attorney) 

Mind the Gap

Admit it… you don’t have all of these… ? … and that means you are leaving the wealth you’re creating and your business unprotected

You’re not alone… I’ve recently visited 45 companies in 3 months as part of a passion project (see here for why) and only two were properly covered

Why? Because the quality of Wealth Management & Financial advice owners of businesses receive at this level is frankly piss poor…

Too often it fails to take into account the extra duties & responsibilities of owning a company… and too often it leaves major gaps… like an LPA

You are 7 times more likely to become incapacitated than die… so why hasn’t your finance advisor rammed an LPA down your throat? Why isn’t incapacity provided for in your Shareholder Agreement? and why are your cover polices more about death than incapacity?

And there’s more

So… having Protected your wealth what’s the Wild way of looking at Wealth tied up in the business?

Making the most within the business

Why hasn’t your wealth / finance advisor told you about some of the incredible tools available to optimise interest on any cash balances in your business?

I know of one bonkersly brilliant tool  that can turn a 0% deposit account into one paying 2%… by giving you a portal to easily move money between different deposit accounts from different banks…

(And if safety first /protection is a priority this tool has 30 banks on it… meaning you can spread your money and get 30 lots of £85k deposit protection should the banks get in trouble again)

And for those of you running a consistent cash surplus… there are safe Corporate Bond products that keep the cash in the business but pay out 5% plus (and don’t screw with your Entrepreneurs Relief if you sell the business)

Getting wealth out of the business

I’m not talking a sale here… I’m talking Converting Company Assets in Personal Assets…

… and doing it in a non-aggressive “won’t come back & bite me” way

Here’s a simple way to look at the 4 Pillars of Tax Efficient Investing

ISA : no tax relief going in… tax free coming out

Pensions : tax relief going in… taxable coming out

EIS : tax relief going in… tax free coming out

VCT : tax relief going in… tax free coming out

 

BOTTOM LINE

… if your advisor hasn’t covered anything mentioned in this post… you are GS10K… you need and deserve better

 

 

Estimating Turnover

Your Competitor’s Turnover… how to calculate it

Filing abbreviated accounts at Companies House means people don’t know what your Turnover is… or do they?

Old accounting lags like me and credit agencies have their own ways to estimate a company’s Turnover from just a Balance Sheet… here are a few… and they can be surprisingly accurate

Estimating Turnover from Debtor Days

Debtor Days is an accounting ratio that can be used to figure out a competitor’s Turnover…

Work out your own Debtor Days… and apply it to your competitor’s Debtors… et voila you have a good estimate of their Turnover if their business is similar to yours

Apply your industry standard* Debtor Days to their Debtors and you’ll get yet another estimate of their Turnover

Take care though… dig around in the notes to the accounts and try to use only Trade Debtors in the calculations

And for any of you GS10k guys I have a spreadsheet that does it for you I’ll send you if you drop me an email…

Times by Six

One of the world’s largest credit agencies simply takes a company’s Debtors and multiplies that figure by 6 to estimate Turnover…

The logic is that globally Debtors take roughly 60 days or 2 months to pay… and there are 6 lots of 2 months in a year

mmmm… sophisticated or what?

And the Rest

Lots of Credit Agencies have a go at estimating a company’s Turnover using their own weird ways… and some even let you know what that estimate is (eg FAME database let you turn on a tab to show a company’s estimated Turnover)

The Takeaway

Just because you don’t file your Turnover doesn’t mean people can’t and aren’t guessing what it is… and they’ll typically underestimate… because they’re cautious finance guys…

 

*industry standard Debtor Days can often be found in a Credit Agency report

Lasting Power of Attorney

LPA Lasting Power of Attorney… what it is & why you NEED one

Protecting you guys from yourselves has become a mission of mine since a client’s world fell apart when her husband had a disabling heart attack…

Terrible for him, his family and the family business… incapacity means legally decisions cannot be made… even by his wife, joint shareholder and driver of the business… without ridiculous, repeated, time-consuming, & stupidly expensive trips to court to get permission…

Obviously it’s not going to happen to you…

But just in case…

Please sort an LPA… a Lasting Power of Attorney… appoint someone to make decisions should you be incapacitated… if only for the sake of the smooth running of your business…

There’s more below… but for GS10K people if you need help with this stuff please get in touch … I really do mean it… happy to pop out and chat this sort of thing through… completely 100% foc

I failed my client by not suggesting this sort of thing originally… ain’t gonna happen again… I won’t be working with people who don’t have an LPA in future…

LPA… Lasting Power of Attorney…  the Details

A lasting Power of Attorney is a legal document with which you appoint people to represent you during a period of incapacity

You can appoint multiple Attorneys… for health, and for financial aspects of your life… and they don’t have to be a lawyer…

But the Power of Attorney document must be done properly and filed with the Office of the Public Guardian

There are cheap, simple versions available at W H Smiths… but you own and run a company so you’ve got greater duties and responsibilities than most folk… so I’d honestly recommend spending the few hundred quid you need to have it done right by a lawyer to suit your peculiar circumstances

Here’s the Government website

And here’s another post about protecting your wealth

 

EBITDA

EBITDA what it is, where to find it in your accounts and why it matters..

Definition of a profession ? A group of people who come up with terms only they understand… EBITDA proves accountants are true professionals…

An acronym, containing weird terms, representing a number that the finance community heavily leans on but isn’t readily available in a set of accounts that accountants prepare…

… truly professional…

Earnings Before Interest Tax Depreciation & Amortisation

There’s a video below below showing you how & where to find it in a set of accounts… but first I’d like to explain why EBITDA is so important…

The finance community use it to compare your performance over time and with others…

… that’s it…

And to do that they need as clean a sense of your profits (earnings) as they can get…

So… they want a profit figure Before :

Interest

Because Interest is a function of capital structure… (some companies have debt, some don’t)… to compare performance between companies we want a profit figure that ignores a company’s capital structure…

Tax

Tax regimes around the world (and even within industrial sectors) can be / are different… so to compare performance between companies we want a profit figure that ignores Tax

OPERATING PROFIT

Ignoring Interest & Tax gives us your EBIT (Earnings Before Interest & Tax)… in a UK set of accounts you’ll find EBIT as Operating Profit in the Profit and Loss

Depreciation

Finding EBIT is easy… but now we have to dig around the accounts to find the ‘Depreciation charge for the year’ and add that back to the Operating Profit…

Why ? Because Depreciation is a book-keeping entry based on a policy decided by the company’s directors… one company might depreciate its assets (say vans) at 25%… another at 33%… which can affect profit dramatically

To compare performance between companies we want to ignore such a moveable / arbitrary / manipulable number

Amortisation

Fancy, old fashioned (but truly professional) word for Depreciation of an Intangible Asset (such as Goodwill)… and as with Depreciation it needs to be added back if we want to compare company performance

EBITDA… There you have it

A universally used metric to measure performance… that you can’t find…

… you have to work it out… by :

  1. finding Operating Profit (from your P&L)
  2. adding back Depreciation & Amortisation (which you’ll find in the notes to your accounts… it’s the ‘charge for the year’ in the Fixed Asset (Non-Current Asset) table

 

 

 

 

DSCR what it is and why it matters

DSCR is the Debt Service Cover Ratio required by bankers… typically when they are ‘cash’ lending for an MBO, acquisition etc

They want to make sure a company’s annual Cash Flow can cover its annual Debt repayments… and they add a little bit on for comfort

So… let’s play numbers

If a company has £100k Debt repayments (including interest)

And their Bankers apply a DSCR of 1.3

Then the company must have CFADS (Cash Flow Available for Debt Service) of £130k to keep their Bankers happy

In the Real World

The calculation is done the other way round… so

Say our company has CFADS of £500k

And their Banker’s DSCR of 1.25

Then the company has a Debt repayment capacity of £400k

The Bank will then deduct any existing Debt repayments (Funding Circle loan, HP payments) … say e.g. of £100k

The Bank now thinks the company can cope with an extra £300k of Debt repayment each year…

For an MBO they may typically lend over 3 to 4 years… meaning our company can borrow an extra £900k to £1.2m

CFADS

Obviously DSCR is just about symbiotically linked to CFADS… so check out the post and video on CFADS here

 

CFADS how to calculate it and why it matters… and it does

CFADS is a measure of a company’s Cash Flow Available for Debt Servicing… and it matters because Bankers like it… so if you’re looking at an MBO or going on an acquisition spree chances are your bankers will look at your CFADS to see if they want to come along…

Calculating your CFADS… and how much they’ll lend you

Here’s a video working through the nuts and bolts of calculating your CFADS & what a bank’ll lend… and if you want a spreadsheet to help you out drop me a line at pete@pete-wild.co.uk

Essentially Banks :

1.Caluclate your CFADS

2.Adjust for their required DSCR (Debts Service Cover Ratio)

3.Deduct any existing Debt repayments you’re making

4.Multiply the result by 3 or 4

And that tells them what they can afford to lend based on the company’s ability to generate enough cash to pay them back

In the Real World

What if your CFADS won’t get you the cash you need?

All may not be lost if your CFADS doesn’t quite support the money you’re looking to borrow…

… in the real world the banks are often trying to work to a figure you need them to hit because that’s the number you’ve agreed for the MBO or acquisition…

… so your Banker may well work with you to help get the CFADS figure to where it needs to be (see the video above) … hey… your Banker has a target to hit, bonus to earn, and he knows that if he says no you’ll be off somewhere else…

… and bankers hate losing clients

MBO … you know it makes sense

I’m seeing an increasing appetite among bankers to fund an MBO… which is a great thing all round.

Owners get to sell all or part of their holdings and realise value… to people who know the company well and are seriously committed to making sure it survives and thrives

Bankers get to fund a team who know the company warts & all, yet still want to financially hitch themselves to the company wagon for years to come… And if the Bankers funding the deal are the company’s long-time bankers, with a real knowledge of the company and its prospects, so much the better

And there’s more… much more

Not only do seller and funder get what they want (value extracted … chunky low-risk funding)… they get it quick… and I mean quick

High Street bankers can and really do turn an MBO around in less than 2 months.

Think about that.

8 weeks from today you could have sold out… if you’ve a team who’ll buy

Compare that to the market…

I typically tell owners to expect to wait a year for their money if trying to sell in the market… and not to expect any deal to go through… because few do…

A willingness to get the deal done, quickly, by all involved, with minimal-to-no Due Diligence helps cut the time… as does the comfort the bankers get from funding a team who know the business better than any Due Dil team could

CFADS

For the Bankers an MBO is a form of cash lending… they look less for security and more for an ability to repay… and to measure that ability a lot of them lean heavily on the company’s CFADS

I’ve a separate post on CFADS for the seriously interested… but for the passingly-curious it stands for Cash Flow Available for Debt Servicing

Once the Bank have calculated a company’s CFADS they knock off any existing debt repayments the company has… add a margin of cover … and will typically lend up to 3 or 4 times the remaining figure

In the The Real World

Your Company Valuation is irrelevant…

Again… think about that… the Bank works out its willingness and ability to lend you an AMOUNT… no mention of value here…

… so that amount could be for all your shares… or just 70% of them… leaving you with 30% as your team take on the business…

… in fact your Bank would prefer it if you don’t sell out entirely… no whiff of ‘cutting & running’… plus the old owner is still around to help the new owners…

So what’s the catch?

You still need all the deal-making & legals doing right

Heads-of-Terms… an SPA (Share Purchase Agreement)… a Shareholders Agreement… as well as any Service Agreements (e.g. for your new role, and for their new roles)

And the bank will want all the forecasts they can eat…

But none of that stuff should stop the deal happening within 8 weeks from now

Wow

But what about the M in the MBO ?

For Management this will be a big step up… and in the old days it meant lots of  PGs (Personal Guarantees) and some skin in the game (in the form of perhaps one year’s salary)

But the old days are gone… we are in a world awash with cash… and the banks aren’t pushing for skin… and any PGs can be limited to silly low numbers (which the selling owner can guarantee if that helps get the deal done)

Interesting times… 

I’m absolutely convinced there are no meaningful supply side issues when it comes to companies like yours getting funding… it’s the demand that’s lacking…

… and I’m also absolutely convinced the banks keenness for these MBO deals is strongly correlated with this supply / demand mismatch…

… long may it continue…

 

 

Innovate

R&D tax reliefs and grants work … will Patent Box work better?

Innovation is one of the best drivers of growth for an owner managed business… and luckily the Government really does get it… offering some bonkersly brilliant and accessible help that actually works for companies like yours…

As a form of Corporate Welfare (which I’m generally against) these innovation-orientated tax breaks and grants rather surprisingly do what they’re supposed to do… boost productivity and create jobs (which I absolutely love)

Innovate UK are busy getting grant money out to innovative firms… and, as the Enterprise Research Centre recently reported, the range of grants available has made a real impact… Over a 13-year period, R&D grants spurred growth worth £43bn to the British economy – more than five times the £8bn invested – and created around 150,000 jobs

… one helluva an ROI

But R&D Tax Reliefs  are doing even better imo… not only does research suggest this tax saving for SMEs is working financially…  Our current evaluation suggests that for each £1 of tax foregone, between £1.53 and £2.35 of R&D expenditure is stimulated… I believe it is changing the mindset of some of the companies applying…  

What started out as an attempt to justify a claim for a extra tax deductions and get money back from HMRC… is morphing into a mindset shift for the companies involved as they start to genuinely put innovation at the heart of what they do…

And I think the Patent Box could take that shift towards innovation to a completely different level…

The tax relief for having a Patent is now so good that companies I tell about it immediately start to think what they are doing or can do that’ll lead to a narrow patent and get them a 10% Corporation Tax rate for a couple of decades…

Changing minds is surely one of the hardest things for a Government to do… but, because of these innovative tax reliefs, minds really are changing when it comes to innovation

Here’s a couple of older blog posts on the subject…

R&D Relief

First Claim

Patent Box

And a great (if slightly technical) site for keeping up to date with any odd updates to the tax reliefs…

Keeping tabs on changes to reliefs

 

 

 

sales of assets or shares

Selling Shares or Assets ? … it matters

I’m currently helping someone sell their business to a huuuuge perfect-fit buyer who popped up out of the blue with a great life-changing offer…

BUT

… and there has to be one…

… the buyer doesn’t want the company… they just want to buy selected assets…

OOOPS

Below I go into the pros & cons of selling the shares in your company or selling the company’s assets… but just now I want to focus on one thing…

The real Bottom Line…

… I’m talking net proceeds received by the seller on the sale of their single biggest financial asset…

Sell the shares in the company and the seller will be taxed at the Entrepreneurs Relief rate of 10%

Sell the assets of the company and the seller will be double taxed… because… 1st the company will pay corporation tax on the gain on selling the assets… & 2nd the owner will be taxed when they try to extract the cash from the company…

In this case an offer of £4m results in roughly net cash proceeds of

£3.6m if the company’s shares are sold

£2.1m if the company’s assets are sold

They’ll get 70% more cash in their hand if they sell shares and not assets

What to do ?… hold out for a share sale ? … or use the huge difference in net proceeds to shave the selling price and encourage the sale of shares…

In this case the seller can drop the price to £2.4m if the buyer will take shares… and still come out ahead of an asset sale…

That leaves a fair bit of scope for the imagination… and deal-making?

Some slightly dull detail… from the sell side

In a share sale the buyer acquires the shares of the company that owns the trade and assets of the business

In an asset sale the buyer acquires the assets which make up the business (e.g. property, machinery, intellectual property and goodwill)

Typically a share sale is more attractive from a tax perspective to a seller than to a buyer… an asset sale will often be more tax efficient for a buyer than a seller (but recent tax changes have narrowed the gap)

All you need to know about Entrepreneurs Relief 

The seller’s pros and cons

Share Sale

Pros
* A share sale is simpler for the seller as the company is sold as a ‘going concern’

* It is a more discreet sale… the business will carry on as usual

* The buyer of shares takes on all the company’s problems & liabilities

* It is usually significantly more tax efficient for the seller than an asset sale

Cons
* A share sale is a greater risk for the buyer than an asset sale because of the liabilities the buyer may be exposed to… so…

* A buyer may apply a discount to reflect the increased risk

* The buyer may expect the seller to give extensive warranties and indemnities as protection against unknown liabilities

Asset Sale

Pros

* The seller is your company and so any warranties or guarantees you give are given by your company, not you personally… (but you may be bounced into giving them anyway!)

* You can hold onto  parts of the business (and even sell to a different purchaser at a later date)

* An asset sale  involves the buyer in fewer risks and so the transaction may be more straightforward.

Cons
* Not as tax efficient for the seller as a share sale, as there are two layers of tax.

* The buyer will probably ‘cherry pick’ the assets they want to buy.

* The sale will be logistically more complex than a share sale (legally transferring all assets and contracts etc can be messy)

* You’ll still own the company and may have to sort out winding it up before taking out the cash proceeds