This document discusses strategies for successfully exiting and expanding a business. It covers topics such as raising cash through valuation methods, retaining investor control, employee engagement, qualifying for the Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS), and conducting a share or asset sale. Key considerations for a sale include preparing suppliers, customers and employees; agreeing on a price through valuation multiples; and including warranties and terms in a heads of agreement and purchase agreement. Entrepreneur's Relief is also discussed as a way to reduce capital gains tax on the sale of a business.
4. RAISING CASH
3 key consideration
• Value of business
• How much to give away
• Retaining control
5. RAISING CASH
Valuation
• Art vs. science
• Check one method against another
• Different methods:
- Discounted cash flow
- Market multiple
- Dividend yield
- Net asset
10. What we will cover
What is the thinking behind SEIS and EIS
Summary of hurdles
Tripwires
11. SEIS
• Hard for Companies to get funding from Banks
• Low interest rates on savings
• SOLUTION? SEIS and EIS
12. SEIS
Headline Benefits
• Invest up to £150,000
• Individual up to £100,000
• Income tax relief 50%
• No CGT
• Further income tax relief
if Company fails
• it
14. • Must be a company
• Unquoted
• Assets of less than £200,000 pre- SEIS
• Must not be controlled by another company
• Maximum SEIS £150,000
• Qualifying Trade
SEIS
Company Criteria
15. • Most property based trades don’t qualify
• Lawyers, Accountants and Banks don’t qualify
• Service based trades may qualify e.g. Financial
Advice
• Up to 20% Excluded Activities OK
Qualifying Trade
16. Individual
• Not an associate (business partner, spouse,
parent, grandparent)
• Siblings OK
• UK tax payer
• Not a reciprocal arrangement
• Not an employee (directors OK for SEIS, angel
directors OK for EIS)
18. If the Company Fails
• If the Company fails investor can offset loss
against income tax at whatever rate of tax you
pay.
• E.g. Salary = £50,000; pay approximately
£9,800 tax
• Initial Investment = £10,000
• Initial SEIS relief = £5,000
• Company fails = up to 45% relief set against tax
19. Trip Wires
• Make sure have a bank account
• Beware benefits e.g. repayment of loan
• Controlled by a Company
• Not a Qualifying Trade
• Associates
• Hold shares for 3 year minimum
20. Legal Considerations
• Legal Considerations
• Don’t jeopardise future investment
• Drag Along
• Minority Protections e.g. Tag along, pre-emption
rights, voting thresholds
• al Consideration
21. EIS Company Criteria
• Must be a company
• Unquoted
• Assets of less than £15,000,000 pre-EIS
• Must not be controlled by another company
• Maximum EIS per person £1,000,000
• Total Venture Capital £5,000,000 p/a
• Fewer than 250 employees
22. EIS Tax Benefits
• 30% Income tax relief immediately
• No CGT
• Loss Relief to amount of loss set against income
tax
38. How can we help you?
Visit www.gannons.co.uk for further
information
http://twitter.com/#!/gannons_law
Editor's Notes
Organising your business for expansion – How to maximise your equity.
Explain Pre-emption rights
Check for veto rights on issuing new shares
Valuation is an art not a science – remember that subsequent rounds of financing will lead to further dilution
CG – the buyer and seller will obviously have different ideas about the value of the business. The business may be valued by the seller’s advisers before the business is put on the market. Alternatively, a buyer may approach a company directly with a price for the business. In either situation, both parties are going to want a formal valuation of the business before coming up with a price. As with anything, a business is only worth what someone is willing to pay for it.
There are several approaches that may be used to value a business or shares in a business. Broadly speaking, the different techniques can be:
The discounted cash flow approach
The market multiple approach
The dividend yield approach
The net asset approach
Although some of these methods may be more appropriate than others in certain circumstances, it is important to understand at the outset that valuation is more of an art than a science. All valuations will contain assumptions and estimates. It is therefore useful to check the results of one method against those of another.
It is beyond the scope of this seminar to go through all the different methods in detail, however I thought it would be helpful to summarise them for you so that you can see how the different valuations may be reached.
Discounted cash flow – this approach converts the sum of future cash benefits of ownership into a single present day value. This is achieved by discounting future post-tax operating cash flows by a risk-adjusted rate of return. The valuation therefore focuses on the item most relevant to investors: cash generation. It takes account of future changes in the business’ operating environment. It is company or business specific and therefore most focused.
Market multiples – these typically apply appropriate multiples to an estimate of the future maintainable earnings of the business. The estimate of future maintainable earnings should be based on a reasonable forecasting period. Adjustments should be also be made for items of non-recurring or exceptional nature. For example abnormal tax charges or exceptional directors’ remuneration.
Dividend yield – a company’s dividend yield is just the ratio of its dividends to its value. In practice these valuations are only relevant to quoted companies.
Net Asset – net asset valuations are of little use in valuing businesses where much of the value is tied up in goodwill or other intangible assets such as brands.
1. FTSE-listed companies that encouraged employees to purchase shares outperformed those that did not by as much as 30% last year, according to figures published by corporate finance firm Capital Strategies.13 Jan 2014
The 69 companies tracked by the firm's UK Employee Share Ownership Index (EOI) delivered total average returns of 53.3% in 2013; well above the 20.9% average returns delivered by all 623 companies on the FTSE All-Share Index, it said. The EOI measures the share price performance of companies in the All-Share Index of which employees own more than 3% of the total equity.
"These figures give additional evidence why share incentives are a good thing that can benefit companies, employees and their shareholders," saidJudith Greaves, a share plans expert with Pinsent Masons, the law firm behind Out-Law.com. "They also support the Government's welcome recent decision to increase the limits for the UK's tax-favoured 'all employee' Save As You Earn (SAYE) and Share Incentive Plans (SIPs) from 6 April this year.“
2. Shares in companies that have embraced some form of employee ownership have risen three times as fast as their London-listed peers this year, a specialist index has revealed.
In the first 10 months of 2013, the Employee Ownership Index – a measure of the share prices of 69 quoted companies where employees own at least 3 per cent of the equity – rose 36.2 per cent, against 11.2 per cent for the wider FTSE All-Share index. According to Capital Strategies, a corporate finance company that works with FTSE International to compile the index, this outperformance by employee-owned companies is the continuation of a longer-term trend.
Generous tax reliefs – SEIS if your business has assets of less than £200,000 and running for less than 2 years. Investors can invest total of £150,000, get immediate tax relief on 50%, if business fails loss relief of 45%.
Veto Rights – Balancing act between allowing investors to protect investment (e.g. not allowed to increase directors salaries beyond a certain threshold) and hamstringing the company
Organising your business for expansion – How to maximise your equity.
Talk about EIS at end to avoid confusion about figures.
Run your own due diligence. Think about preparing a data room.
Think about employee incentives
Articles and Shareholders agreement – check have drag along rights
Due diligence questionnaire that buyer will probably ask you to complete
Best single piece of advice – keep running your business as though you are planning to keep control of it for a long time.
No matter what size of business, certain factors will push up the value you receive on sale of your business.
Preparing the Business for Sale
There is plenty of background work to be done when a company or business will be put up for sale. You need to be able to maximise the key selling features.
Prepare the business well-in-advance of sale.
Show good, solid and stable financial record.
Dispose of equipment surplus to needs of the business.
Maintain tight credit control.
Avoid unnecessary debt.
Keep assets in good condition.
Reduce business risk.
Put in place formal contracts for suppliers and customers, and update terms of business.
Retain key employees with appropriate employee incentives.
Consider whether a management buy out MBO vehicle is appropriate or whether objectives are best achieved by a joint venture. If funding is required consider raising capital by way of a new issue of shares.
Restructuring
If it is proposed to sell only part of the business or one or more companies from a group of companies, consideration must be given to the most efficient structure. A review of the current group structure should be taken. This would include dealing with dormant subsidiaries and overseas subsidiaries, arranging for assets and dormant companies to be transferred and companies to be struck off the register of companies.
The timing of such re-organisations is crucial. It must be carried out before the marketing for the sale or negotiations with any buyer are commenced, otherwise anti-avoidance tax law is likely to negate the tax advantages sought.
Tax advice must be sought prior to any such re-organisation to determine the most tax efficient structure and to ensure that there will be no unforeseen tax liabilities. The tax base cost of the subsidiary or part of the business to be sold could be increased to its market value in appropriate circumstances, at the time of the reorganisation, in a tax neutral manner. Therefore, the gain for tax purposes on the sale would be limited only to the amount by which the consideration exceeds such market value.
There are also a number of corporate law issues that need to be considered when a re-organisation takes place. For example, it is currently important that any re-organisation does not breach the complex laws relating to financial assistance (although in the Companies Act 2006 the prohibition of financial assistance will be repealed in so far as it relates to private companies).
Any re-organisation will need to be structured to ensure that the company is not making an unlawful distribution of assets to its shareholders. It is important that appropriate advice is sought before any such restructuring is carried out and that any distribution of assets is properly documented.
Marketing the Business
Marketing plays a part but you need to be careful not to damage your company or business in the process by letting trade secrets slip into the wrong hands. Confidentiality and non-disclosure agreements are quite usual and very necessary.
Put in place confidentiality agreement with potential buyers before releasing any confidential or sensitive information.
Consider stage of economic cycle.
Consents and Regulatory Issues
Consider whether the terms of any shareholders agreement or other arrangement between owners of the business or any regulatory authorities require prior consent of shareholders (or any other person).
Where seller has borrowings, approach and consult with bank early.
Tax is your friend often the value of a company will be based on the profits of the company. Although it is tempting to structure the business so there is as little as possible profit to keep tax down, if your company is going to be valued on a P/E ratio you are better served having better looking profits (and paying corporation tax on them).
Before you start touting your business it helps if you have an idea of the valuation. Whole industry of people to help you
Brokers – help with Info Memo, Introduce potential purchasers, help with valuation
BUT charge non-refundable retainer fee (e.g. £30,000) and success fee.
Ultimately most you can get is what anyone is willing to pay.
P/e multiples in FT
Recurring fee income
No matter what size of business, certain factors will push up the value you receive on sale of your business.
Preparing the Business for Sale
There is plenty of background work to be done when a company or business will be put up for sale. You need to be able to maximise the key selling features.
Prepare the business well-in-advance of sale.
Show good, solid and stable financial record.
Dispose of equipment surplus to needs of the business.
Maintain tight credit control.
Avoid unnecessary debt.
Keep assets in good condition.
Reduce business risk.
Put in place formal contracts for suppliers and customers, and update terms of business.
Retain key employees with appropriate employee incentives.
Consider whether a management buy out MBO vehicle is appropriate or whether objectives are best achieved by a joint venture. If funding is required consider raising capital by way of a new issue of shares.
Restructuring
If it is proposed to sell only part of the business or one or more companies from a group of companies, consideration must be given to the most efficient structure. A review of the current group structure should be taken. This would include dealing with dormant subsidiaries and overseas subsidiaries, arranging for assets and dormant companies to be transferred and companies to be struck off the register of companies.
The timing of such re-organisations is crucial. It must be carried out before the marketing for the sale or negotiations with any buyer are commenced, otherwise anti-avoidance tax law is likely to negate the tax advantages sought.
Tax advice must be sought prior to any such re-organisation to determine the most tax efficient structure and to ensure that there will be no unforeseen tax liabilities. The tax base cost of the subsidiary or part of the business to be sold could be increased to its market value in appropriate circumstances, at the time of the reorganisation, in a tax neutral manner. Therefore, the gain for tax purposes on the sale would be limited only to the amount by which the consideration exceeds such market value.
There are also a number of corporate law issues that need to be considered when a re-organisation takes place. For example, it is currently important that any re-organisation does not breach the complex laws relating to financial assistance (although in the Companies Act 2006 the prohibition of financial assistance will be repealed in so far as it relates to private companies).
Any re-organisation will need to be structured to ensure that the company is not making an unlawful distribution of assets to its shareholders. It is important that appropriate advice is sought before any such restructuring is carried out and that any distribution of assets is properly documented.
Marketing the Business
Marketing plays a part but you need to be careful not to damage your company or business in the process by letting trade secrets slip into the wrong hands. Confidentiality and non-disclosure agreements are quite usual and very necessary.
Put in place confidentiality agreement with potential buyers before releasing any confidential or sensitive information.
Consider stage of economic cycle.
Consents and Regulatory Issues
Consider whether the terms of any shareholders agreement or other arrangement between owners of the business or any regulatory authorities require prior consent of shareholders (or any other person).
Where seller has borrowings, approach and consult with bank early.
Tax is your friend often the value of a company will be based on the profits of the company. Although it is tempting to structure the business so there is as little as possible profit to keep tax down, if your company is going to be valued on a P/E ratio you are better served having better looking profits (and paying corporation tax on them).
Now have an idea of value - what are you going to sell? Shares or Assets?
Often tax driven.
Structure of Sale
The sale of a business can be structured in many different ways. This is often an area the buyer or purchaser will seek to negotiate and you need good representation to ensure you maximise the proceeds you will receive.
Consider taxation implications on various structures for sale such as sale of a company or sale of the company’s business and assets.
Where sale is of business and assets, consider which assets and liabilities will transfer and any ongoing obligations for the seller to the retained assets and liabilities.
Key tax factors in favour of a share purchase
It is not uncommon for the tax advantages to the seller of a share sale to drive the structure of a sale.
The key tax factor favouring a share sale from a corporate seller's point of view is the substantial shareholding exemption (SSE). For an individual seller, the capital gains tax of 18% or 28% is likely to be lower than the income tax that would apply if assets were sold and the proceeds extracted by way of dividend. Furthermore, if entrepreneurs' relief is available and a claim is made, the first £10 million of gain will be taxed at a rate of 10%.
Where the substantial shareholding exemption is available to a seller, the seller may be reluctant to agree to an asset sale. The tax advantages of a share purchase may lead to an asset purchase being "repackaged" as a share purchase, via a "hive down". There is also no VAT, a lower rate of Stamp Tax
The main commercial reason for an asset purchase, as opposed to a share purchase, is usually flexibility:
The relevant business may be a division of a company that is not separately owned.
The buyer may wish to "cherry pick" a company's assets.
When assets are purchased, it is only those identified assets (and liabilities) that are acquired by the buyer. However, from a purely commercial perspective, an asset purchase may, depending on the nature of the business being acquired, be more complex than a share purchase due to the need to identify and document the transfer of each of the separate assets constituting the business.
Also, more consents and approvals are likely to be required than on a share purchase. For example, the consent of customers and suppliers to the assignment or novation of existing contracts may be required. If shares in a company are purchased, all its assets, liabilities and obligations are acquired (even those that the buyer does not know about).
Now you have found the potential buyer – what next? Agree Heads of terms. May be in a better negotiating position at this stage.
Legally binding provisions – confidentiality and exclusivity
Establish time frame for completion.
Heads of Agreement
Heads of Agreement is the framework document which sets out the basic but fundamental terms that the parties have agreed of what you and selling and how you are going to sell. Ideally heads should be agreed before embarking on the sale documentation and detailed due diligence as it terms cannot be agreed you may wish to withdraw sooner rather than later. It will detail the shares being purchased, how much is being paid for them and any other important terms that are known at this stage, such as whether there will be deferred payments of the price, whether the seller might continue to work in the company as a consultant or employee, whether the price is dependent on the asset value or performance of the company, whether the final price is to be linked to an “Earn out” mechanism.
Agree heads of terms with potential buyer and consider responsibility for costs and exclusivity period during which seller may be prohibited from entering into negotiations with any other potential buyer.
Establish time frame for completion of sale.
The Heads of Agreement are usually stated not to be legally binding, with the exception of clauses relating to confidentiality and any “lock-out” provisions. Lock-out provisions are usually intended to stop the seller negotiating with any other prospective buyers for a fixed period, and to allow the buyer to carry out all the necessary investigations into the business.
The advantage of Heads of Agreement is that they help to clarify exactly what the parties understand the basis of the deal to be. Potential “deal breakers” can be identified and dealt with before significant legal fees are incurred.
To improve your negotiating position there are a few points you should consider ahead of any closing
Anti-embarrassment clause – if your business is spun off within a relatively short time of sale, do you want the purchaser to pay you some of the uplift?
Restrictive covenants – how long are you going to be prevented from working for a competitor?
Cap on liability – you are often in a stronger position to negotiate this while everyone is strenuously working to finalise a term sheet.
Timing of payment of consideration – although a headline figure of x million may sound great, you need to check when you are going to get that consideration. Is it tied to achieving certain thresholds?
Terms of Sale
The price at which the company or business will be sold is not usually finalised under the due diligence exercise is complete. The sale agreement is the main commercial contract governing what is being sold and what the terms and conditions are. The drafting is important and you do need to understand and agree to all of the small print.
Ongoing Responsibilities and Restrictions
Most buyers will want to ensure a smooth transition and will want to bind you in to the sale process. It is common for the buyer to require you to give covenants promising not to set up competing businesses. Another common feature is an earn-out linked to the performance of the business over a number of years. You need to strike the right balance and not be bound by unreasonable restrictions.
Consider terms upon which seller may be required to continue to be involved in the business (both personal terms and extent of decision making and influence over business).
Consider nature and extent of any restrictive covenants to which seller may be subject following completion
.
Why are warranties in a UK agreement to buy a business important? The answer is: if the seller provides warranties to a buyer, this reduces the inherent risk in an acquisition. Warranties in business sales are contractual statements as to the condition of the target business. Their importance is underlined by the fact that when buying a business (whether one is buying shares or the assets of the business) the principle of caveat emptor (buyer beware) applies – English law provides no statutory or common law protection for the buyer as to the nature or extent of the assets and liabilities it is acquiring.
On a share purchase the buyer acquires an entity complete with all of its assets, rights and liabilities, both past and present. Unless impacted by change of control provisions in contracts to which it was a party, the change of ownership should not affect any of the target company’s rights or obligations, which will continue to exist following the acquisition. Warranties are as important on an asset purchase, even though the buyer does not inherit all the liabilities of the business.
Warranties can, and usually will, encompass a wide range of important areas, including but not limited to the accounts of the business, finance/banking, property, employees, commercial contracts, IP, IT and tax and will be a key focus in the negotiations, with the buyer’s solicitors seeking to secure as much protection as possible for the buyer and the seller’s solicitors seeking to reduce the nature and/or extent of the warranties provided by the seller. In some instances, there may be a valid argument that the warranties should be much less extensive – for example, if the buyer(s) has previously managed the business and should therefore know if there are any “skeletons in the cupboard”.
But do warranties really provide the buyer with proper protection? Are warranties an effective replacement for due diligence, for example? The answer is an unequivocal “no”; warranties are very important and they should reduce risk for the buyer, but if a buyer discovers something, through its due diligence, prior to completion which justifies, say, a £100,000 reduction in the purchase price, that is much more valuable than, through its warranties, having a potential right of action for £100,000 because litigation in the UK is expensive and the outcome is rarely guaranteed..
Furthermore, in addition to the fact that warranties (unlike indemnities) put the onus on the buyer to prove the breach and show a quantifiable loss, there are other limitations in warranties; in addition to the fact that they will usually be limited to those facts within the seller’s knowledge and which have not been disclosed to the buyer, there will almost invariably be caps on the amounts that can be claimed under the warranties and time limits to give notice of warranty claims and/or initiate legal proceedings in relation to those claims.
Trap in enforcing warranties: The issue of whether or not a warranty claim was time barred arose in a recently heard UK High Court case (Aegeus (UK) Limited v Kwik-Fit Limited), in which the preliminary issue to be decided was whether the warranty claim by the buyer was time barred. Time periods had been specified in the agreement for (i) a potential claim to be notified and (ii) proceedings in relation to that claim to be issued. As would be expected, these time periods were considerably shorter than the statutory limitation periods, but long enough for any issues to come to light. In this case, the seller claimed that it had not been served with the claim in time, using the concept of “deemed service” under the CPR (as the times for service were not specified in the agreement), even though it knew that proceedings had been issued. The court took a commercial approach and allowed the warranty claim to proceed.
Sound bite: This decision places emphasis on the importance for all parties of expressly specifying how legal claims and other legal process are to be served for any contractual purposes, such as a contractual limitation period. And from a practical point of view, it underlines the importance of thorough upfront due diligence and not relying too heavily on warranties. Although this decision favoured the buyer, as recipient of the warranties, in litigation there will always be uncertainty as to the outcome so the ability to sue for breach of warranty should not be viewed as a substitute for thorough due diligence.
Due diligence. Enquiries, including perhaps independent searches, to identify what is being sold and potential problem areas.
Evaluation. The due diligence material is assessed to determine, for example, the significance of the IPRs to the business, and solutions to any problem areas and special needs for the transaction, such as licensing arrangements with the seller.
The business sale agreement. From the intellectual property (IP) perspective, this will principally involve defining the IPRs being sold and agreeing IP-specific warranties and special provisions such as licences.
Transfer. The IP concerns up to this point are essentially the same whether the acquisition is of assets or shares. However, to effect a transfer of the relevant IPRs, there is an important distinction between share and asset sales. For share sales, all IPRs owned by the target are acquired automatically, without the need for separate assignment. Separate assignments are only required when other members of the target's group (for example, an IPR holding company), own IPRs which are used by the business being acquired. For asset transactions, separate assignments will always be required.
Post-completion matters. These are the steps necessary to ensure that the buyer is properly recorded as the proprietor of the IPRs assigned to it.
IP warranties
When negotiating IP warranties, a buyer can reasonably expect protection in the following areas:
Completeness and accuracy of schedule of rights owned. The business sale agreement should contain a schedule of rights owned by the seller's group and used in the business being transferred. The buyer will require a warranty that the schedule is complete and accurate and that the seller owns the relevant rights. The seller may reasonably request that the warranty be limited to registered rights and material unregistered rights. The "materiality" of the unregistered rights owned by the business will depend on the sector in which it operates; for example, for a software house or a publisher, copyright will be among the business' most important assets.
All fees paid for maintenance and renewal. This will relate only to registered rights and should be uncontroversial.
No challenges, oppositions or attacks. The seller may wish to add a materiality qualification to this to avoid the need to disclose objections raised by registries during examination of the seller's applications for registration, which may be voluminous in quantity, but of little commercial significance in the context of the transaction.
Licences-in and licences-out and related breaches. The seller should be required to disclose all IP licences granted to or by any member of the seller's group which relate to IPRs used in the business. It will also be important to ensure that details of all breaches have been disclosed, whether by the seller or the other party to the licence.
Infringement by the business. This warranty will state that the business being sold does not infringe any IPR owned by any third party.
Infringement by third parties of rights owned. This will state that no third party is infringing any IPR owned and used by the business transferred.
Confidential information. There are two aspects to this:
that the seller has not disclosed information confidential to it or to third parties (except in the ordinary course of business and subject to obligations of confidence);
that the conduct of the business is not restricted by virtue of confidentiality obligations undertaken to third parties.
Business owns or has the right to use all IPRs necessary to conduct the business. This warranty is often categorised as unnecessary, as it encompasses many issues addressed by other warranties (for example, licences-in and non-infringement). However, if there are reasons why the number of warranties has to be limited, it can be the best way of seeking a general level of comfort.
Entrepreneurs’ relief is available to individuals who realise qualifying gains on or after 6 April 2008. It operates so as to apply a rate of CGT of 10% to qualifying gains up to a lifetime limit which is currently set at £10million (since 6 April 2011). In the absence of entrepreneurs’ relief, gains are taxed at 18% (basic rate tax payer) and 28% above the basic rate band.
Both the lifetime limit and method by which the effective rate of 10% tax is achieved have changed over the period since entrepreneurs’ relief was introduced.
The legislation governing entrepreneurs’ relief is set out in chapter 3 of Part 5 of the Taxation of Chargeable Gains Act 1992 and the relief is based substantially on the rules for the former CGT retirement relief.
Entrepreneurs’ relief will apply to a disposal of shares or securities of a company provided that, throughout the period of one year ending with the date of the disposal, all of the following conditions are met:
The company is a trading company
The individual holds at least 5% of the company’s ordinary share capital allowing the individual to exercise at least 5% of the voting rights
The individual is an officer or employee (full or part time) of the company or, if the company is a member of a trading group, of one or more companies which are members of the trading group.
The relief will also be available if the company has ceased trading provided the conditions were satisfied throughout the period of one year ending with the date on which the company ceased trading, and the trading ceased within the period of 3 years ending with the date of the disposal.
Provided the individual has held at least 5% of the company’s ordinary shares and voting powers for at least a year ending on the date of the disposal, acquisitions over and above that 5% holding will qualify for relief (assuming the other conditions are satisfied) even if those acquisitions are held for less than a year. For example, if a husband held 10% and would qualify and the wife held 4% but wouldn’t qualify, she could transfer her shares to the husband less than a year before the sale and the husband’s 14% would qualify, not just the 10%.
Entrepreneurs’ relief will only apply to share or security disposals if the individual is an employee or officer of and holds at least a 5% stake in a trading company. There is no minimum number of hours per week that an employee must work in order to meet the employment requirement. As far as office holders are concerned, a person will be an “officer” if they hold an “office” within the meaning of ITEPA. It would include a director or company secretary. Therefore a family company could give a son who is away at university a 5% shareholding and an office as company secretary and he could still qualify for entrepreneurs’ relief.