Fast Growth - Navigating the tax & funding cycle
•Download as PPTX, PDF•
0 likes•81 views
For innovative businesses it is vital to take advantage of support that can enable a business to grow. This includes tax reliefs aimed at the different stages in a business’s life cycle and the various avenues that are available for raising finance to take the business to the next level of its development. In this session we will look at the early stage of R&D claims and funding opportunities, through to share schemes, EIS and international expansion and the correlation with raising finance, both equity and debt, culminating in the final stage of the business being sold, what this can look like and how to be prepared.
Recommended
Recommended
More Related Content
What's hot
What's hot (20)
Similar to Fast Growth - Navigating the tax & funding cycle
Similar to Fast Growth - Navigating the tax & funding cycle (20)
More from PKF Francis Clark
More from PKF Francis Clark (20)
Recently uploaded
Recently uploaded (20)
Fast Growth - Navigating the tax & funding cycle
- 1. FAST GROWTH – NAVIGATING THE TAX AND FUNDING CYCLE 7 November 2019
- 2. WHO WE ARE NICK TIPPETT CORPORATE FINANCE ASSOCIATE DIRECTOR STUART ROGERS CORPORATE TAX PARTNER
- 3. HOUSEKEEPING
- 4. PKF FRANCIS CLARK 57 partners 750 professionals £50m turnover 8 offices
- 5. GLOBAL REACH PKF International • 200 firms • 150 countries • 400 offices • 18,000 people
- 7. PKF Francis Clark | Private & Confidential 1 TAX CHARGES AND RELIEFS Start-up Early stage Growth phase Mature growth What next? Rejuvenation Stagnation Decline Time Revenue Tax Relief VCT EIS SEIS BPR Gift relief EOT relief Share scheme Investor relief VCT Entrepreneurs relief R&D CGT/ Income Tax / Corporation Tax / IHT/ VAT / International / Duty
- 8. PKF Francis Clark | Private & Confidential 1 FINANCING OPTIONS THROUGH BUSINESS LIFE CYCLE Start-up Early stage Growth phase Mature growth What next? 2017 2018 Rejuvenation Stagnation Decline Individual investors Venture capital Crowdfunding Financing options Individual investors Time Revenue Individual investors EIS / SEIS Asset Based Working Capital / Bank Debt Mezzanine / Subordinated Debt Cash Flow Based Term Debt Private Equity
- 9. START UP Limited liability Loss offset Identifying IPR and who owns it Only companies may benefit from R&D, patent box, SEIS / EIS and EMI share options What happens if business fails?
- 10. R&D CLAIMS Enhancement to qualifying costs SME regime v RDEC Qualifying activity – be broad minded
- 11. R&D CLAIMS - SECTORS Advanced manufacturing Software Construction Renewables Food & drink Agri-business Waste management & recycling Lifesciences / pharma / medical
- 12. Its all about risk and reward In banking terminology – an equity proposition! What is the true cost? More than just money? Drive growth (in the business of growing businesses!) Mentoring & discipline Introductions Further capital DEBT VS EQUITY
- 13. SEIS / EIS Venture capital investment schemes Attractive to high net worth investors Key benefits CGT deferral Income tax credit CGT exemption
- 14. SEIS / EIS Where do you find HNWIs? The ‘right’ person / people? Crowdfunding Valuation Articles / Shareholders’ Agreement
- 15. SEIS / EIS Complex qualifying criteria both at point of fundraising and beyond FA 2015 changes Age of business / knowledge intensive Risk to capital Growth and furtherance Follow on capital / business plan Process Advance assurance Forms EIS1 to EIS3
- 16. Understand your requirements Understand funding options and funders requirements FUNDING OPTIONS
- 17. CHOOSING YOUR FUNDER/INVESTOR Funder/ Investor selection Size of investment Sector focus Non- financial attributes Region Investment structure Use of funds EIS and SEIS Size of business
- 18. INTRODUCTION TO DEBT FUNDING Wider than you may think Family and friends – overlap with equity? Start-up loans 1st and 2nd tier funders Asset-based finance Export and trade finance Venture debt
- 19. RECRUITMENT & RETENTION Basic pay Bonus scheme Pension provision Life assurance Healthcare Company car / cycle to work Share scheme
- 20. SHARE SCHEMES Recruitment and retention tool Aligns key staff members with shareholder objectives Be clear on the purpose and objective Focus on the commercial needs first, not the tax wrapper How will the participant realise value? Will the plan be attractive to the individuals?
- 21. SHARE SCHEMES - FLAVOURS Direct award EMI options CSOP Growth shares Partly paid shares Phantom share scheme
- 22. GROWTH & GLOBAL MARKETS Group structure Demerger International Expansion Withholding taxes Permanent establishment risk Overseas employees / global mobility Transfer pricing Overseas VAT, customs and duties
- 23. TAX & ‘EXIT’ MBO – the company on top Entrepreneurs’ relief Structuring consideration Ordinary shares Preference shares Simple debt Loan notes Cash Employee Ownership Trust
- 24. VALUING A BUSINESS CORPORATE FINANCE Start-up Rapid expansion High growth Mature growth Decline Value drivers Potential market Promise in product Trust in founder Revenue growth Target margin Access to capital Quality of growth Operating margin Asset earning power Debt capacity Cash return policy Liquidation proceeds Debt payouts Financing decision Equity funding – optimal Debt – only if desperate Primarily or entirely equity funded Some debt capacity opens up Debt capacity expands Debt capacity exists but shrinks as firm becomes smaller Pricing measures Market Size Cash on hand Access to capital Number of users User intensity Revenue Growth Rate Earnings Earnings growth Return on Capital Asset Liquidity Cash Flows Pricing metrics EV/Market Potential Cash Burn Ratio EV/User EV User Intensity EV/Sales PE EV to EBITDA Price to Book EV/Invested Capital
- 25. Be prepared for the investment process The process Business plan Financial projections Housekeeping Licences / contracts? IPR ownership in the company? Books and records in order? VAT, PAYE/NI Statutory Accounts/management accounts MAXIMISING CHANCES OF SUCCESS
- 26. Plan ahead from a tax perspective – and revisit Very active market with a high level of funding available If you are an ambitious business with strong growth potential, equity could provide more than just the money to support you in this Important to match your and a funders needs Finding the right funder can be a complicated process Seek advice and be prepared CONCLUSIONS
- 28. WHO WE ARE NICK TIPPETT CORPORATE FINANCE ASSOCIATE DIRECTOR STUART ROGERS CORPORATE TAX PARTNER
Editor's Notes
- SAR – intro NT - Good morning ladies and gentlemen. For those of you who I haven’t managed to introduce myself to this morning, I am Nick Tippett and I work as part of the Corporate Finance team at PKF Francis Clark. I have worked within the team for nearly 10 years across our geography, more recently focusing supporting clients in and around Bristol. I am proud to say that during the last 10 years, as a team, we have been the most active deal advisers in the South West, successfully helping more businesses complete transactions than any other. I was also recognised as the South West Business Insider Young Dealmaker of the year in 2017.
- SAR Before we get started on proceeding, there are some general housekeeping points I would like to cover. Firstly, in the event of the fire alarm sounding, please follow the fire exit signs sings out of the building. The exits from this room is [where]. We aren’t expecting a fire drill today, so hopefully this is the last we will think of it! For those who may need a comfort break, the ladies and gents are both located in the hallway. Finally, whilst your phones may be useful during the session, more on this from Stuart shortly, we would ask that these are set to silent.
- NT Briefly, I wanted to provide a little background to PKF Francis Clark. Having recently opened our new office on Victoria Street, you may not be aware of the history of our business. Founded in 1919, we have celebrated our centenary year this year. We have 57 partners and around 750 staff spread across our 8 offices, which are all within the wider South West. As a firm we have continually invested in specialists, enabling us to provide specialist services beyond just supporting you in your day to day accounting needs. Whilst we have operated within the Bristol market for many years, our recent investment in the new office and well-regarded staff in the city is representative of our intention to grow and support businesses in the city and we hope we can work with you all in the future.
- SAR – From April 2016 we’ve become part of PKF International which means we are part of a network of over 200 firms in 150 countries, 400 offices and 18,000 people.
- SAR
- SAR This is a very simple diagram which helps us map out the kind of tax events or milestones which are likely to occur through a business’ life and what the strategic tax issues that might arise will be as that journey progresses. We often sit down with clients and talk through this journey and explain what the various tax issues that might arise will be and that gives them the opportunity to begin to consider those issues, the risks and the opportunities. Without going into any great detail I’m now going to go through each stage of the lifecycle and look at what issues should be discussed with the client.
- NT The Idea - Early stage where business is being formed. Launch - Early part is proof of concept Profitability – Establishing position in market, with customer buy-in and potentially multiple income streams Established & growing – Market leader, brand name? Continued development of product and or offering ke. Often a funding decsions around “phase 2”, do you push again or is the business in a mature position? Maturity/continued growth – The launch of new products/new market may have led to exponential growth – can you fund this yourself? When do you take money out? Time to realise some value and share equity? Talk here about exit options
- SAR To some extent these are very basic issues but it’s surprising, particularly with intellectual property, how many businesses begin with no clarity around what the IPR is and who owns it. Likewise, if you’re planning on claiming R&D tax credits or raising money under EIS or issuing share options under EMI (all very common), you can only do this with a company. In certain circumstances owners will want access to early year losses to set against personal income from other sources – if the business is in a company these losses are not available.
- SAR As you’d expect this is a large focus of the Innovation team at FC. I’m sure most, if not all of you, have a good understanding of the benefits of R&D tax credits, so I’m not going to cover what they are in any great detail other than to say they give rise to additional deductions for qualifying R&D expenditure. There are two regimes – the SME regime (the most beneficial) and RDEC (less beneficial) – and so being clear on which regime your claim is in is vital. Remember in certain circumstances an SME claimant may only be able to claim RDEC. The key thing from a general practitioner’s perspective is to be broad minded – the R&D boutiques have become sophisticated in terms of how they identify companies with potential qualifying activities and they will chase your clients. If they get to your client before you do this has the ability to damage your relationship with them, and could ultimately result in a client loss. It is therefore important that you consider which clients might qualify and ensure that you talk regularly with clients about the possibility of a claim. In terms of approach to fees the R&D boutiques will start off asking for 20% to 25% of the tax benefit secured. We aren’t aggressive on fees – we will often look for a contingent fee of 15% to 17.5% and consider fixed fees in certain circumstances. Because we offer a wide range of services to clients we aren’t focused on a transactional fee structure – but rather a longer term, broader, deeper relationship.
- SAR As I said before being broad minded is so important when dealing with R&D opportunities. The world is increasingly complex from a technical perspective and so there are R&D opportunities in a whole host of sectors and areas. Here is a list of some of the areas that we see cropping up time and time again. [TALK THROUGH SOME EXAMPLES]
- NT The questions that people often ask us are: - why is private equity the appropriate source of funding for me? - why won’t the bank support my growth plans; and, with some frustration, - aren’t the banks supposed to lend money? Ultimately, lending from any funders perspective is all about risk and reward. Typically, the higher the risk, the greater the reward needs to be. However, the highstreet and second tier funders are not set-up to take on higher risk opportunities, their funding structures do not allow it. In these instances, the opportunity you are presenting to them is known as an “equity proposition”, meaning that in order for the risks and to be balanced by the rewards the funder would require an equity stake in the business. Now, there are no hard and fast rules as to what constitutes an equity proposition, but it is more likely to fall into this category where some or all of the following conditions exist The business has Ambitious growth plans. In order to deliver such plans significant up front expenditure and investment is often required, but the business does not currently have the cash available to meet the repayments which would be required under a debt fund structure. Funds from a private equity investor are unlikely to have any such terms attached at the outset of investment. Security– the low rates of interest charged by banks do not allow for losses and must normally be backed by tangible security. Equity will take the risk of essentially no security but consequently will seek a higher return. Track record – all investors like track record and for banks it is often a must. However, equity can look wider than the track record of the company and look at the management and sector to assess the risk. So, you turn to equity funding. And, while the cash that equity funding brings is essential, you are also entering in to a partnership to ensure the success of the business. As such, equity looks to maximise the chance of that success by supporting you in driving growth, not just with money but with access to their expertise and networks be it: Mentoring – using their past experience of helping businesses grow: Discipline – to your internal management and reporting to enable the business to grow. Introductions to portfolio companies or commercial contacts, sometimes overrated, but often very useful; and Further capital – for both positive and negative reasons. For example if trade was ahead or behind of expectation.
- SAR Where businesses are looking to grow quickly they will often look to attract equity funding from high net worth investors – those investors will typically look for the advantages of SEIS / EIS. Whilst there are important differences between the two essentially each provides three types of benefit – CGT deferral, an income tax credit and CGT exemption on the sale of the shares invested in. Whilst there is a tendency to focus on the income tax break, the really big benefit is the CGT exemption, particularly if the business accelerates quickly. SEIS / EIS is often therefore seen as a specific area of risk for accountants when advising on qualification (and dis-qualification).
- NT?
- SAR There are a variety of rules, the majority of which are very similar to EMI option criteria – however in FA2015 a range of new requirements were introduced which taxpayers, HMRC and advisers are still getting to grips with. The age of business requirement (seven years or ten years if a knowledge intensive company) seems to catch a lot of people out, as does providing evidence of risk to capital and the use of funds being applied to the growth and furtherance. However it is HMRC’s interest in business plans that is causing the most interest – this request is seemingly made to assist with some of the issues already mentioned, but also to deal with follow on funding outside of the seven / ten year window. The business plan is therefore becoming a much bigger part of the EIS process and needs to be given much greater attention – and will drive up the cost to complete EIS advance assurance applications and complete statement of compliance. Many people don’t fully understand the EIS ‘process’. There is an advance assurance process which is often required by the investor before the investment will be made but isn’t obligatory. This takes place before the shares are issued. Once the shares are issued and the money in the bank, the company completes a statement of compliance (Form EIS1) and submits this to HMRC. If HMRC concur EIS is available they issue the company with an EIS2 and EIS3 forms which are then completed and passed to the investors – who then pass them to their accountants who include the details on their personal tax returns and claim the relief. If the income tax relief is not claimed the CGT exemption is not available.
- NT When considering your funding options, it is first and foremost important to understand your requirements, such as; Your planned use of funds; How much investment you need to achieve your plans; and also Any non-financial help you cold get from an investor. Secondly, when considering which funders to approach, you need to understand their requirements, some of which I will cover on the next slide, but this is a an area your advisor can support you in, by applying their current market knowledge, based upon experience.
- NT Set out on the screen here are a number of the criteria which should be considered when going through the investor selection process. Whilst I don’t intend to go through all of these points, to pick up on a few; Non-financial attributes. Matters such as - What sector experience does the would be investor have, both the individuals you would be working with and then fund itself - Does the fund have other portfolio companies which are competitors or may bring enhanced opportunities for growth Investment structure. - Are they looking for a controlling v’s non-controlling interest? - Interestingly on this point, BGF, an investor funded by high-street banks as a result of Government initiative which concluded that the banks weren’t lending sufficiently to the SME market, is now the most active investor in the UK and they do not take a controlling interest on their first investment. The use of funds is also an important consideration. Whilst some funds will allow the cash they provide to be used to pay off an exiting, or sometimes remaining, shareholder, many won’t. These funds who don’t want to see the funds being used as development capital, being invested in the business to drive the projected growth. Finally, although there are many of my tax colleagues who are far better placed to discuss this with you, consideration must be given to whether your proposition is EIS or SEIS qualifying, thus providing certain tax breaks to your investor as qualifying investments are often attractive to investors.
- NT Wider than you think – same may take a small slioce of equity, bullet repayment, fully/partially amortising 1st and 2nd tier funders – highstreet banks, specialist lenders Asset based finance – Common thought is HP, operating lease, mortgage, but what about debtor or stock funding? Export and trade finance Venture debt
- SAR It’s true to say that EMI options are usually the preferred vehicle because that offers a range of tax advantages that the other schemes don’t. However, EMI options will often not be appropriate or the business in question will not qualify and an alternative will therefore need to be considered. This might be include growth shares, partly paid shares or a phantom share scheme (a structured bonus scheme).
- SAR This is increasingly a critical area of what we do and get involved in. Businesses undertaking R&D and with great ambitions to grow need to attract and retain the best staff. Getting and keeping talent is more competitive than ever and with key hires often some form of equity incentive is expected or anticipated. Very often clients approach us requesting an EMI scheme without really understanding what that is and without going through a proper thought process around what they are trying to do. It’s so important to be clear on what the objective of the share scheme is, and determine what the purpose is and how and why the individual will be excited and motivated by the award – whatever form that takes. The crucial part of this is understanding how the participant will realise their value. Sometimes we see clients wanting to issue exit only options (i.e. options that only become exercisable on a sale) but don’t have a clear plan to achieve an exit – in that case often the key staff members don’t value the options awarded because the value seems too distant. This whole area needs thought and should come before any thoughts around the tax issues that follow.
- SAR It’s true to say that EMI options are usually the preferred vehicle because that offers a range of tax advantages that the other schemes don’t. However, EMI options will often not be appropriate or the business in question will not qualify and an alternative will therefore need to be considered. This might be include growth shares, partly paid shares or a phantom share scheme (a structured bonus scheme).
- SAR
- SAR Whilst not universally the case, generally speaking the utopia of many entrepreneurs is to build and then sell their business. A sale may take a number of different forms and together with our colleagues in corporate finance we help clients determine what is the most likely / best form of exit for them. This might be a trade sale, a partial exit with a private equity house coming in, or a management buyout of some kind. In planning all of that we will work on how the consideration package is structured and ensure that this benefits from entrepreneurs’ relief where possible.
- NT
- NT As the final part of my presentation, I would like to briefly run through concept of making sure you are investment ready. Firstly, I would highlight that this can be a whole session in itself, but it is essentially making sure the business is in the best shape possible and you are prepared for a fund raising process. From a process perspective you need to ensure that… - The cash requirements match a documented and supportable business plan and that - You have monthly profit and loss, cash flow and balance sheets available. The key to these being that they are sensible and that consideration has been given to cash headroom. From a general perspective, it is important to ensure that… - licences and contracts are in place where required; - IP is owned by the company, not the shareholder or developer. This is a factor often overlooked; - That statutory books and records are in order; and finally - That your accounting records and compliance matters such as PAYE and VAT will stand up to the scrutiny of a due diligence process.
- NT I hope this has been a useful session and provided some food for thought to those considering raising funds from an equity investor. In summary, I would highlight that the private equity is a very active market and that there is a huge amount of funding available to SMEs with ambitious and deliverable growth plans. It is important to match your needs to those of the funders you are seeking to work with and also to seek advice. On this point, BGF, who I mentioned earlier, have monitored their transaction track record and identified that advised transactions have a 50% higher chance of completing where an advisor is involved! Finally, make sure you are prepared for what can be a complicated process. If you are considering your future funding options, its probably already time to start speaking to the right people! Thank you for your time today. I will be around during the break and at the end of the day to answer any questions you may have.
- Both – deal with questions