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

 

Pareto

Playing with the Pareto Principle

It’s the law of the vital few… first articulated by an economist who spotted it in Italian land ownership… and peas… but you’ll have seen various versions of it on Linkedin

80% of your sales come from 20% of your customers

80% of your sales come from 20% of your products

80% of your complaints come from 20% of your customers…

The idea for guys likes us is to use this 80/20 distribution to focus on what really matters… and see some serious performance improvement

… so… I heard one version  of the Pareto Principle recently…

We should spend 80% of our time acting… 20% thinking

I get it… but 20% thinking seems a helluva lot… so if I have to live with an 80/20 distribution I’d like to add one refinement to make Pete’s Perversion of the Pareto Principle this…

Spend 80% of your time acting… 20% thinking…

… but act first

 

 

 

finance

Finance further up the food chain…

I like to think this blog is for scale-up owner managed businesses… so here’s a few aspects of finance further up the food chain that may be useful to know as your capital requirements change as you grow…

And since I like to give a few ‘insights & angles’ I’d rather not list all the types of finance available… just pull out a few interesting points…

Bullet Loans

Fancy a capital injection where you make no interest payments and no repayments of capital until the end of the loan… say 3 or 5 years later ?

That means you get to use all of the cash to grow your business… and pay absolutely nothing back for 3 to 5 years…

… and even then you can ‘roll it’ into a new loan…

They’re called Bullet Loans… and larger companies can get them from high street banks… so why not you?

I know a big name bank doing Bullet Loans for guys like you… if you’re looking to borrow £500k or more… and it’s one of those things where the more you’re trying to borrow the easier it can be to get

Private Equity

PE investment companies come in all shapes and sizes… with different specialisms and interests… and for me they differ from Venture Capitalists by liking less speculative opportunities…

PE outfits will gravitate towards companies & teams already well on their way who’d like to unload some (or all) of their shares to professional investors who’ll help drive continued growth…

Once you’ve got EBITDA (Operating Profit adjusted for Depreciation) around the £500k mark, picking up interest from PE outfits gets easier… and if you can show a route map to trebling EBITDA in the next 3 years it’ll definitely get them excited…

Venture Debt

I love finance… it’s an incredibly innovative space… full of developing financing options you may not know of… like Venture Debt

While PE houses gravitate to EBITDA producing investment opportunities… Venture Debt providers will be there for zero profit companies… early stage growth companies… and even start-ups…

I include it in this blogpost because you can’t get Venture Debt for just a few grand… it’s serious money for serious growth prospects…

The debt terms can be very flexible… ranging from traditional repayment models to interest only with balloon payments… but it comes with some rights to convert debt into equity so the lenders can become shareholders in the company under certain conditions…

The lender gets traditional security levels (charges over company assets etc) but the extra risk of lending to riskier companies is compensated for by equity warrants (chance to own shares in a growing company)

Personal Guarantees

As you take in more capital the Personal Guarantees you might be asked to make can get a bit big on you…

… you may not mind PGing a £20k overdraft facility… but PGing a £600k loan might make you & those back at home wince…

You can now insure against a PG being called in… and as the PGs get bigger this option may well suit

But if insurance doesn’t appeal… and if the PGs are called in… there are specialist Lawyers who negotiate with the banks for you and drive the amount you have to pay up waaaaay down… often with a no gain/no pain fee structure…

Loans against your shareholding

Rare as rocking-horse poop… but as your company grows and attracts outside investment you may find yourself locked in…

… you can’t sell your shares… can’t earn money outside the business… and your wages etc may be capped…

And to add to the frustration… your shareholding in your company may be your biggest financial asset… but you can’t use it !

Or can you?… there are people out there who’ll let you raise money using your shares as security.

Interesting times for Finance

Even if none of the above works for you…  the point is… different sizes of companies, at different points in their growth cycles have lots of different options…

… and the financial innovation at the moment can seem absolutely dizzying with oodles of new offerings…

… so…

… at the risk of invoking the ‘Chamberlain Curse’… why not make the most of living in interesting times… ?

 

 

Floating on a Stock Exchange… a secret dream? If not… why not?

So Mark Fahy from the London Stock Exchange dropped by to talk about a cracking programme they run for growth companies who 1. fancy knowing more about how scaling, capital & finance work… 2. fancy making some great connections and 3. maybe flirt with the thought of a float one day…

If that might be you… then get in touch

Here’s Mark’s linkedin profile with contact details

Main thing is the guy is a Man City fan… ’nuff said 🙂

 

Floating on the Stock Exchange… a secret dream? If not… why not? from Peter Wild on Vimeo.

 

Brett Reasons to Be Cheerful

Brexit : Reasons to be cheerful ?

So we’ve gone and done it… (for now?)… I’m going to leave the hand-wringing, virtue signalling, and Brexit fear stuff to other people… and just see if there aren’t a few reasons to be cheerful for Owner Managed Businesses…

Let me pick some less obvious ones (I do try to work on ‘insights & angles’ in this blog after all)

1. Pricing Power…

The £ dives and the cost of imports skies… leading to inflation… not necessarily a bad thing after close to a decade of ‘disinflationary’ / deflationary pressures…

… and if the general expectation is that prices are going to go up… then you guys may find yourselves with pricing power you haven’t had in a while…

2. Access to Funding…

After the financial crash the Government & Bank of England did a great job of pumping liquidity into the system… problem is it took about 5 years to seep out to businesses like yours… over the last couple of years access to finance for SMEs has really improved, in part due to the new Fintech industry with fast & flexible funders like Funding Circle really helping out

… if the economy wobbles get ready for a wave of money as the Bankers (here & in Europe) try to keep the real economy on track & properly funded… this time it won’t take years for that cash to be accessible by the likes of thee & me… so be ready to have access to more money at better rates

3. Mergers & Acquisitions…

I know Corp Finance guys who are licking their lips right now… as barriers go up they see an increase in cross border M&A deals… and even before any barriers appear they think European companies will be busy ensuring access to our markets by buying UK Owner Managed Businesses like yours… so be ready for the phone to ring

So that’s 3 slightly odd positive takes on the Brexit issues facing SMEs…

There are other obvious ones like amazing Export Opps… with the £ being spanked our exports are way more competitive this week than they were last week… BUT I’m not out to produce an exhaustive list…

What I’d like to do is encourage businesses to leave the passion & drama back home infront of the tele… and flip your mind away from the risks (which are many and scary… and which will be pre-occupying your competitors too)… and ask yourselves are there any opportunities for you from Brexit?

Go on… I dare you…

(and here’s a link to an interview I gave on the Saturday after the vote… bear in mind I was there at Manchester Town Hall through the Thursday night of the count… spent all Friday in meetings pretending I’d had some sleep… and drank slightly to excess on the Friday night… so being interviewed on the Saturday a.m. was not a lot of fun)

Brexit Bits for SMEs interview

 

Innovate

An innovative competition ?

Innovate UK continue to have a ton of money to help SMEs do good stuff… and don’t let the titles of some of their funding initiatives put you off…

You’d think this multi-million pound pot of grant funding to be given away soon applies just to George Osbourne’s ‘makers’ …

Innovate UK Launches Manufacturing and Materials Innovation Competition (UK)

… not true… e.g. it can be the novel application of a digital technology or approach to manufacturing or materials development (such as automation, modelling and simulation, data analysis). 

 

 

audit

Audit… hear, hear

I never liked auditing… but I like audits

Way I see it there are only two reasons not to have an one… cost & hassle… but here’s a few thoughts on why having an audit can be a good thing

Credit Ratings…

… the agencies love audits… it means a pro has checked your systems to make sure the numbers produced are solid & that they class you as a Going Concern (likely to continue in business for the next year)… and that gets you a better credit rating…

Funders…

… bankers, shareholders et al get comfort from an audit… wouldn’t you, if you were them?

Buyers…

… you’d be happier buying a company whose numbers have been audited, right?

Hassle is good…

… the systems checks auditors do can help improve business processes, introduce best practice, and prevent fraud & cock-ups

 

The Government keeps lifting the limits and reducing the number of companies who MUST have an audit… but for companies looking to really scale-up that may not be doing them any favours…

I’m with the Norwegians… this ‘let’s exempt smaller companies’ has gone too far… they’re looking to introduce a Nordic audit for smaller businesses… but I won’t be holding my breath here in the UK…

Yet I’m not the only one to say hear hear to an Audit

Just over a quarter of respondents to an ICAEW survey of small businesses carried out in 2014 felt it would be better for the economy if businesses like theirs were required to have an audit. Nearly half of businesses with between 10 and 50 employees said they would have an audit even if this were not compulsory.

For financial years beginning 1st January 2016, a company is exempt from needing an audit if they meet 2 of the following :

Turnover over £10.2m

Total assets greater than £5.1m

More than 50 employees

That’ll stop another 10,000 companies needing an audit 🙁

survival rates

Survival… a fitness test

Here’s a table I knocked together from ONS data showing the survival rates of companies founded from 2007 onwards

If you’ve survived 5 years, take a bow… one of only 4 in 10 who made it…

And the third year seems to be the toughest

survival rates

Asset Lives

Asset Lives… they matter

How long you plan to use an asset affects the Depreciation going through your accounts… which means asset lives matter to your Profits and your Balance Sheet.

Assets are depreciated over the period you expect to use them…

If you expect to use a £100,000 asset for 4 years… this year’s Depreciation could be £25,000

If you decide instead you’ll use it for 5 years… this year’s Depreciation could be £20,000

That’s £5,000 extra profits Tax Free… (because Depreciation of Tangible Assets has nothing to do with tax)… and at the end of the year the asset will be carried in your Balance Sheet as worth £80,000 instead of £75,000

Profits up… Balance Sheet strengthened… a win win

All about Judgement

How long you’ll be using the asset is down to you… it’s all a matter of judgement (or educated guesswork)… and you can review asset lives every year...

So when you buy, say, a £100,000 asset you may expect to use it for 4 years… the Depreciation cost each year for the next 4 years will be £25,000

After 2 years it is in your Balance Sheet as an asset of £50,000

BUT… you realise you can now get another 5 years out of it … (perhaps because of repairs you’ve done, or you were being too cautious when you made your original estimate)

… so the Depreciation in year 3 will drop from £25,000 to £10,000 … !

Asset Lives… Definitions

The Useful Life of an Asset is defined by FRS102 as either…

1  The Period over which an asset is expected to be available for use by an entity… or

2  The number of production or similar units expected to be obtained from the asset by an entity

If you bought a £200,000 lorry you may have a policy of selling all lorries after 4 years… in which case you are using definition 1. and will depreciate the lorry over 4 years… so in the first year Depreciation would be £50,000

If instead you have a policy of selling lorries after 100,000 miles, you’re using definition 2…. and if in the first year you clocked up 50,000 miles… then the first year’s depreciation charge would be £100,0000

FWIW

Repairs & Maintenance do not stop the need to Depreciate assets… but they may change the expected Useful Life of the asset and so will either impact the Residual Value.. or prolong the period that the company will use the asset (and so reduce the Depreciation charge each year)

Useful Life… An asset’s life in this context is not the total expected life of the asset… but the period that the company will get use from it… (“the period from which the entity expects to consume economic benefits from the asset”).

FRS 102 para 17.21 gives 4 points to consider when determining the Useful Life of an asset

 

 

 

 

 

Residual Value… there’s real value in there

Accounting rules mean your profits get hit by Depreciation… but you don’t have to take that lying down.

Ask your accountant how they handle the Residual Value of your assets… it could boost your Profits… tax free.

Residual Value… definitions

Your company’s depreciation policy is “the systematic allocation of the depreciable amount of an asset over its useful life”*…

… a few strange technical phrases in there.. but it’s the ‘depreciable amount’ that I’m interested in here… because that’s defined as “the cost of an asset… less its residual value“*

and ‘residual value’ is in turn defined as “the estimated amount that an entity would currently obtain from disposal of an asset… if the asset were already of the age and in the condition expected at the end of its useful life”*

What’s it mean?

You take the cost of your asset… and then deduct the expected value of that asset when you stop using it… before working out the annual Depreciation cost of using that asset

… say this year you bought a company Car that cost you £100,000… and you expect to use it for 4 years…

… some accountants would charge £25,000 Depreciation against this year’s profits for using the car… (£100,000 spread over 4 years)

BUT

… at the end of the 4 years the car still has Residual (second hand) Value… estimated today to be, say, £40,000

So the REAL cost of using the car this year should be…

Original Cost £100,000 – £40,00 Residual Cost … =  £60,000  spread over the 4 years you’ll be using it…

That would make this year’s Depreciation charge £15,000… instead of £25,000

So accounting for the Residual Value of your company car when you stop using it has generated an extra £10,000 Profit… tax free… and a stronger Balance Sheet too.

Who decides the Residual Values… & how?

You’re responsible for your accounts so it’s really up to you.. but best to get your accountant on board…

…  under the new FRS102 rules Residual Value is calculated by looking at the price your asset will fetch at your year end date… but making allowance for the age & condition it will be in when you stop using it…

(so… your £100,000 car may have been new this year … but at your year end you can figure out its Residual Value by looking at prices for a 4 year old version of the same car)

Objections?

How can there be?… rules is rules and the new FRS102 says Residual Values should be considered regularly to make sure they stay up to date… so you can revisit any old Residual Values your accountant’s been using…

… and if your accountant hasn’t been using Residual Values before… get them to start doing it… changing the way they depreciate your assets would be considered a change in an ‘estimate’ so needs no extra disclosure or any restating of old numbers…

FWIW

The old rules said Residual Values should be based on prices prevailing at the date of acquisition (or revaluation)….

The new rules say Residual Values should be based on prices prevailing at the Balance Sheet date*

*FRS102 Glossary of Terms

also FWIW…

A change in depreciation method is accounted for as a change in an estimate … IFRS 102 para 17.23