Simon MacGovern Realising the value of your business

Baker Tilly A leading professional services firm Client base from OMB to PLC Ranked 7th in the UK by fee income 260 partners, almost 2,000 staff across 28 UK offices A strong regional network with major offices in all key cities throughout the UK Represented internationally through our membership of Baker Tilly International – 8th largest international alliance of accountancy firms Core services are: Audit, Corporate Finance, Restructuring & Recovery and Tax.

A leading professional services firm

Client base from OMB to PLC

Ranked 7th in the UK by fee income

260 partners, almost 2,000 staff across 28 UK offices

A strong regional network with major offices in all key cities throughout the UK

Represented internationally through our membership of Baker Tilly International – 8th largest international alliance of accountancy firms

Core services are: Audit, Corporate Finance, Restructuring & Recovery and Tax.

WHERE IS THE VALUE?

Theoretical Value Multiple of turnover Multiple of earnings EBIT EBITDA P/E Net Assets Discounted cash flow Industry-specific measures

Worked Example (1) ABC Limited Turnover £15m Earnings before interest and tax £1m Long term debt £250,000 Surplus cash £500,000 Illustrative EV/EBIT multiple 6x Enterprise Value: 6 x £1m = £6m Plus cash +£500,000 Less debt -£250,000 Equity value £6.25m

Worked Example (2) ABC Limited Turnover £15m Earnings before interest and tax £1m Long term debt £250,000 Surplus cash £500,000 Illustrative turnover/EBIT multiple 0.5x Enterprise Value: 0.5 x £15m = £7.5m Plus cash +£500,000 Less debt -£250,000 Equity value £7.75m

Valuation (continued) So why the difference? £6.25m vs. £7.75m Value depends on your perspective… Example (1): Standalone investment? Example (2): Bolt-on to existing business?

Valuation (continued) “ The true value of a business is what someone is prepared to pay for it”

What actually drives value? Profit? Yes, but also… Customer base Channels to market Intellectual property/know-how Key individuals Reputation The right place at the right time

Case study Specialist design/manufacturing company Turnover £1.8m Employees 6 Historic net assets £19k Price paid £7-9m Why?

Case study (1) Significant strategic value to the eventual buyer (based in Australia). For them the business provides… Access to a rapidly growing segment of the market Client base in a particularly affluent industry Market leading products Protected by key IP assets Uniquely talented management (design expertise)

Valuation - conclusion Theoretical valuation is interesting, but may have limited meaning in a ‘real’ transaction situation. The key to the value of a business lies in its value drivers. Realising this value depends on how the business is sold, when and to whom …

WHEN TO SELL? WHEN TO PREPARE? (There is a difference!)

Timing of sale Timing can be driven by any number of factors… Personal motivation (retirement, ill-health, financial needs, diminishing fulfilment) Condition of the overall market Financial performance of your business Level of transactional activity in your industry

Timing of sale – market conditions Market confidence Stock market levels Interest rates Availability of debt / equity funding

Timing of sale – business performance Can price expectations be met? Seasonality Working capital position New contracts about to be secured? When is your year end?

Timing of sale – deal activity Is your industry flavour of the month? Appetite from Venture Capital, for example, can drive pricing upwards – herd mentality Is your industry consolidating? Is regulatory change driving deal activity?

Timing – Preparation The key to getting your business to market in the right condition and at the right time is early preparation Adequate time for grooming Tax planning Market testing/research Engaging appropriate advisers Future plans? In some cases this may need to start several years in advance of the final transaction

WHO WILL BUY?

Buyers Broad categories of buyer include: Corporate Trade buyers Strategic buyers Financial MBO / MBI Institutional

Buyers The most suitable type of buyer will depend the circumstances… MBO can work if there is a willing (and capable) management team and if funding can be sourced A strategic buyer may provide a greater chance of achieving a premium price

CONCLUSION

Conclusion Consider your route to exit well in advance This will allow you to: Prepare the business for sale Get the timing right Understand what drives the value Identify who will buy the business… Thereby maximising value

The tax implications of selling your business John Kingsley

Taper Relief 10% CGT is the “holy grail” Trading company Unlisted or officer/employee or 5% of votes Non-trading company Officer/employee and <10% votes 75% taper relief after two years Rules changed on 6 April 2000 Don’t assume: check your status!

10% CGT is the “holy grail”

Trading company

Unlisted or officer/employee or 5% of votes

Non-trading company

Officer/employee and <10% votes

75% taper relief after two years

Rules changed on 6 April 2000

Don’t assume: check your status!

The Charge to Tax on Sale But is CGT the only tax payable? Some specific sale circumstances can lead to some or all of the sale proceeds being charged to income tax. Anti-avoidance provisions Always seek HM Revenue & Customs clearance(s)

But is CGT the only tax payable?

Some specific sale circumstances can lead to some or all of the sale proceeds being charged to income tax.

Anti-avoidance provisions

Always seek HM Revenue & Customs clearance(s)

Consideration for the Sale Many different forms: Immediate payment Payment in instalments – no deduction for delay Contingencies – no allowance Unascertainable – but still has to be valued Earn-outs – no different from above Try to avoid receiving deferred consideration payable in cash Tax liability on value not yet received

Many different forms:

Immediate payment

Payment in instalments – no deduction for delay

Contingencies – no allowance

Unascertainable – but still has to be valued

Earn-outs – no different from above

Try to avoid receiving deferred consideration payable in cash

Tax liability on value not yet received

Consideration for the Sale Paper for paper exchanges No immediate tax liability Swap shares for shares New holding treated as acquired on the same date and at the same value as the original holding Swap shares for loan notes Must be held for at least six months Are they qualifying corporate bonds?

Paper for paper exchanges

No immediate tax liability

Swap shares for shares

New holding treated as acquired on the same date and at the same value as the original holding

Swap shares for loan notes

Must be held for at least six months

Are they qualifying corporate bonds?

CGT More Than 10%? Shares owned less than two years? Swap shares for shares or non-QCBs Shares became business assets in 2000? Time-apportionment of gain Cannot ever get down to 10% Cannot reset clock by passing to spouse or trust Shares not business assets? Currently 30% CGT, minimum 24% after 2007 Pre-sale dividend?

Shares owned less than two years?

Swap shares for shares or non-QCBs

Shares became business assets in 2000?

Time-apportionment of gain

Cannot ever get down to 10%

Cannot reset clock by passing to spouse or trust

Shares not business assets?

Currently 30% CGT, minimum 24% after 2007

Pre-sale dividend?

CGT Less Than 10%? Many planning arrangements no longer available, but bespoke planning might be possible Generally can still use: Payments to pension scheme Non-resident planning NR for more than 5 years NR for less in suitable country using DTA Offshore trusts for non-doms Planning required, well in advance

Many planning arrangements no longer available, but bespoke planning might be possible

Generally can still use:

Payments to pension scheme

Non-resident planning

NR for more than 5 years

NR for less in suitable country using DTA

Offshore trusts for non-doms

Planning required, well in advance

QUESTIONS?