Are you a privately owned business who is looking to take the next step. Whether you are considering growth or sale there are many things you need to consider. Please review Gannons Solicitors and Chantrey Vellacott presentation on Structuring your business for growth.

1. Strategies for
Growth Seminar
Helping entrepreneurs, SMEs and Owner Managed
Businesses with the accounting, taxation and legal
tripwires to be considered when raising finance to grow a
business.
Tuesday 24 February 2015

2. Introductions
Catherine Gannon Helen CurtisNik ShahJamie Johnson
Director of
Corporate Finance
Tax Consultant Managing Partner Senior Associate

3. Growth Strategies
Jamie Johnson – Director of Corporate Finance

4. Types of Growth
 Organic
 Acquisition

5. Setting a Growth Strategy
The McKinsey Growth Pyramid model argues that businesses
should develop their growth strategies based on:
 Growth skills
 Special relationships
 Operations skills
 Privileged assets

6. McKinsey Growth Pyramid
Growth can be achieved by looking at business opportunities along several dimensions
New competitive
arenas
New industry
structures
New geographies
New delivery
approaches
New products and
services
Existing products to
new customers
Existing products to
existing customers
Acquisitions
Joint Ventures
Minority Stakes
Strategic Alliances
Marketing Partnerships
Organic Investment
Increasingrisk
How?

7. Funding Growth
 Acquisition funding
 New plant and machinery
 Working capital

8. Funding Growth
DEBT EQUITY
TAX CREDITS GRANTS

9. Funding Growth
DEBT:
 Overdraft
 Bank term (cash flow) loan
 Asset based loan – debtors, P&M, stock
 Private bond
 Crowdfunding
 Supply chain finance

10. Sources of Funding
EQUITY:
 HNW / business angels
 Regional growth funds
 Private equity
 Crowdfunding
 Public listing

11. Sources of Funding
TAX CREDITS:
 Research & Development (R&D)

12. Sources of Funding
GRANTS:
 Regional grants, InnovateUK and the EC Horizon 2020 grants
 Target the SME sector
 Funding range from £30,000 – £2.5 million
 Matched funding in paid arrears
 Innovative and ground breaking projects
 Multiple phase funding
 Set application process

13. Sources of Funding
Considerations:
 How much?
 What is it for? – is it Equity Risk?
 Dilution
 Time period
 Repayment terms
 Security
 Skills shortage
 Tax

14. Research & Development
(R&D) Tax Relief
Nik Shah – Tax Consultant

15. HMRC R&D claim categories
Pure research DevelopmentApplied research
9% of claims 18% of claims 73% of claims

16. What is eligible R&D?
Scientific /
technological
uncertainty
Systematic
approach
Scientific /
technological
advancement
sought

17. What qualifies as R&D expenditure?
QualifyingR&Dcosts–
eitherexpensedor
intangiblefixedassets
Energy & materials
consumed Subcontractors
(SME only)
Independent
research
(large company
only)
Externally provided
workers (freelance
contractors or employees
in same group)
Staffing Costs
(salary, NIC and
pension)
Software
(used by R&D
staff)

18. Benefits
SME
from 1 April 2012
Large company
from 1 April 2013
Profitable company Up to 29% 10%
Loss-making company
Up to 25%
Increased to 33%
from 1 April 2014
7.7%

19. Case Studies
Manufacturer of
plastic castor
wheels
R&D tax refunds
£200,000 for new
technology in
mature sector
Demolition
company
R&D tax refunds
of £250,000 for
contaminated
buildings and on
space-restricted
sites
Software
developer
R&D tax refunds
£750,000 for new
software
development
Architect
R&D tax refund of
£50,000 for the
design of novel
projects
Construction
company
R&D tax refunds
of £120,000 for
devising new
construction
methodologies
Roofing specialist
R&D tax refund of
£50,000 for
bespoke roofing
system
development
Specialist
engineering
company
R&D tax refunds
£2 million. Started
as a second
opinion
Aerospace
Contractor
R&D tax refunds
of £650,000 pa
even though
work was funded
by customers
Scaffolding
company
R&D tax refunds
£50,000 for the
design of new
scaffolding
systems
Imagination
is your only
constraint…

20. Why R&D Relief?
 It is free money
 HMRC are encouraging UK industry to make claims
 Second opinions – it is possible to review existing
claims

21. Enterprise Management
Incentives (EMI)

22. Enterprise Management Incentives
 Share option scheme offering equity interest to employees
 Staff incentives at low cost (no upfront money)
 No loss of control for owner managers
 Tax efficient – no additional salary costs
 Increases after tax profits due to corporation tax relief
 HMRC approved
 Entrepreneurs’ Relief (ER) rules relaxed

23. Why EMI?
 Performance Incentive
 Attract and retain high quality staff
 Entrepreneurship
 MBO

24. Seed Enterprise Investment
Scheme (SEIS)

25. Seed Enterprise Investment Scheme (SEIS)
 Introduced in 2012 by the Government to encourage
investors to fund small business start ups that find it
difficult to attract investment
 Offers tax reliefs to investors to encourage investment in
companies
 Designed for small and early stage businesses
 Investors could offer valuable business advice

26. Money raised should be used for...
SEIS | EIS
Existing trade New trade
Marketing
R&D
Hiring Staff
Working capital

27. Securing SEIS relief
Company Requirement
Seed
Company
Qualifying
Trade
Employees
<25
New Trade
Gross
assets
< £200,000
Equity
Investment
Monies
raised
should be
used for the
trade within
3 years
Maximum
£150,000
funding
 HMRC approval available prior to raising finance
 Ongoing HMRC compliance process

28. Securing SEIS relief
Investor Requirement
Maximum
investment
£100,000
annually
< 30%
Equity
Must hold
shares for
at least 3
years
Not
employee
or officer

29. The Tax Reliefs
SEIS Tax
Reliefs
Income Tax
50%
Capital
Reinvestment
50%
Capital Loss
100%
Capital Gains Tax
(CGT)
100%
Inheritance Tax
(IHT)
100%

30. Enterprise Investment
Scheme (EIS)

31. Enterprise Investment Scheme (EIS)
 Similar to SEIS designed for companies requiring more
than £150,000
 Company can raise no more than £5 million in EIS
investment annually
 Maximum 250 employees and gross assets under
£15 million
 Maximum annual investment of £1 million by the investor

32. The Tax Reliefs
EIS Tax
Reliefs
Income Tax
30%
Capital Gains
Deferral
Capital Loss
100%
Capital Gains Tax
(CGT)
100%
Inheritance Tax
(IHT)
100%

33. Structuring your
Business for Growth
Catherine Gannon – Solicitor, Chartered Tax Adviser

34. What we will cover
 If you take investors on board, what governs your
relationship?
 How to protect the Company while still attracting
investment

35. Default Position
Model Articles:
 No restriction on transfer
 No protection of IP
 Limited information rights
 One class of shares
 No good/bad leaver provisions

36.  Risk of transfer of shares
without restriction

37. Articles of Association
What to look out for
 Leaver provisions
 Investor director or observer provision
 Preference on liquidation

38. Articles for Association
What to look out for
 Restriction on transfer of Shares
 Valuation of their Shares (no premium or discount being
attributable to the percentage of the issued share capital)
 Drag along clauses

39. Shareholders’ Agreement
What is it?
 An agreement between some or all of the shareholders
 Part of the constitution
 A private document

40. Shareholders’ Agreement
Who would want one?
In addition to the founders and employee shareholders:
 Private Equity Investors
 Angel Investors
 Joint Venture Partners

41. Shareholders’ Agreement
What can be covered?
 Restrictive covenants – protecting IP
 Veto rights / deadlock provisions
 Transfer of shares

42. Shareholders’ Agreement
What can be covered?
 Exit provisions
 Information rights
 Funding

43. EMI Scheme
What is the big deal?
 Hot Shot receives a nil cost option over 500 shares when
employer in start up mode
 Employer sold 5 years later @ £200 per share and Hot
Shot’s slice of the proceeds are £100,000
 Assuming Hot Shot hangs around he walks away with
NET OF TAX £90,000.

44. EMI Scheme
Benefits
 Tax-efficient way to remunerate employees – help
reduce employment costs
 Recruit, retain, motivate and improve performance
 Help with succession and exit strategies

45. EMI Scheme
How it works?
 Discretionary – don’t have to be offered to all employees
 Usually no income tax or NICs payable on exercise
 Potential capital gains tax liability – but entrepreneurs’
relief may be available

46. EMI Scheme
Points to consider
 Headroom and restrictions in articles
 New class of share
 Drag and tag along provisions

47. EMI Scheme
Points to consider
 Cessation of employment
 Good/Bad leaver provisions
 Exit only/Exercise conditions

48. Seed Enterprise
Investment Scheme &
Enterprise Investment Scheme
Helen Curtis – Specialist solicitor for equity fund raising

49. What we will cover
 Particular concerns for EIS/SEIS Investor
 How a company needs to protect itself and investors

50. EIS
What is the big deal
 Think Big raises £500,000
 Take a Risk invests £50,000
 Take a risk claims income tax relief of £15,000 reducing
actual cost of investment to £35,000
 Think Big sells and TAR receives £100,000 – TAX FREE
 Think Big crashes and TAR claims income or CGT loss
relief of £35,000

51. SEIS
What is the big deal
 Greater tax reliefs at 50% compared with 30% for EIS

52. SEIS/EIS
Pitfalls
 Not genuine investors
 Issued to investors who have not fully paid for shares
 Holds more than 30%

53. SEIS/EIS
Investor Concerns
 No Preference Shares
 No receipt of “Value”

54. SEIS/EIS
Investor Checklist
 Veto rights
 SEIS or EIS Compliant – Undertaking?
 Non-Executive Directors

55. Any Questions?
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