Pbm sept 12 cf ct final

Advisory circle “Powered by Mazars”

Corporate Finance

12 September 2012

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Adrian Godfrey, Corporate Finance Partner

Adrian specialises in M&A and private equity work.

He has experience in a wide range of sectors including manufacturing, engineering, support services, food, healthcare and education.

He also provides advice to higher and further education institutions on mergers and strategic projects.

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John Hughes, Corporate Finance Manager

John is a former senior banker with 6 years experience in corporate finance and is well known within Bristol’s professional community.

He specialises in M&A transactions and debt raising in a wide range of sectors including food and drink, healthcare and property.

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Responsible for tax compliance and advisory across Bristol and the South West region

Specialisms include share schemes, transactions, corporate restructuring and other complex corporate tax planning

Focused on tax planning for owner managed businesses, assisting both the shareholders and the directors on tax planning across potentially conflicting responsibilities

Amy Goold, Tax Director

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Agenda

• Vendor Initiated Management Buy Out’s (VIMBO)

• Business Valuations

• Recent Developments in Finance Raising

• Corporate Tax update


VIMBO’s

12 September 2012

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VIMBO…..

Vendor Initiated Management Buy Out

VIMBO — a vendor-initiated management buyout, where the business owner effectively acts as the venture capitalist, while taking cash out of the business and passing it on to the management team.

Through a VIMBO, a business may be sold to the management team using part cash (funded by the business and/or the management team) and part vendor loan notes. Loan notes are essentially an IOU which the business issues to the seller. The IOU is paid off over time through the profits of the business and, once fully paid, the business will pass to the next generation.

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VIMBO…..

Key Features:

• The Vendor sets the price • Both the purchasers and vendors will have shareholdings post VIMBO • No immediate retirement from the business necessary • No private equity/third party equity required • Management need not be the "finished article“

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VIMBO – Pros and Cons

Pros• Can help achieve Premium value• Allows the business owner to stay in the business• Can help if there is an incomplete management team• No/little external financing requirement• Allows an exit over time in market conditions where other exits may not

be available

Cons• Longer exit from business• No synergies to be gained for the business• Vendor retains risk (query – is this any worse than in an ‘earn out’)• Owner needs to be able to relinquish control (fundamental change in

thinking)

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VIMBO – example structure

Purchase price + fees = £1m

Financed by:

Cash in business £100,000

Management team £50,000

ABL funding £100,000

Vendor loan notes £750,000

This structure allows for little/no external funding and enables the vendor to extract the value of the business over time.

Vendor contribution may be in loan notes (part/all convertible) and/or shareholding.

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Transaction Tax

Vendors

• Tax structuring e.g.– removing non-trade assets– extracting cash tax efficiently– maximising entrepreneurs relief– planning re timing of tax payments

• HMRC Clearance– re: paper for paper exchange– re: “transactions in securities” (unless 75% change of control)

• Restricted securities elections (s.431) on new shares and loan notes• Mechanics of the tax covenant

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Transaction Tax

Purchasers

• Tax due diligence • Specific tax indemnities• Restricted securities elections (s.431) on new shares• CT Deduction and VAT treatment of deal costs• Associated company issues• “Upstream loans” (s.455 tax)


Business Valuations

12 September 2012

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Business Valuations

An art not a science!

Different types of valuations• Earnings multiples (P/E or EBITDA)• Asset valuation• Discounted cashflow

Other considerations in valuing:• Economic climate• Assets (if not using asset valuation)• Reason for sale• Market sentiment – political, social, microeconomic factors• Risk assessment (including revenue sustainability, management capability,

scale and competitive position and many other things)

Ultimately it’s understanding who are the possible buyers and what value will they perceive.

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Business Valuations

Basic Methods (1)

Net asset value (sometimes plus a premium or minus a discount)• Assets valued individually not a combination value• A break-up value• Sometimes appropriate if the value of the business lies in the market value

of individual assets (e.g. property developer)

Multiple of earnings value• After tax earnings (available to shareholders) x a multiple

aka P/E (price/earnings) valuation• Alternatively EBITDA x a multiple• Assumes ‘normal’ asset and debt levels, can be adjusted for abnormal

levels• Based on expected future maintainable earnings• What multiple?

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Business Valuations

Basic Methods (2)

Cash generation value• Future cashflows available to shareholders discounted to present value• Simple example is a property value based on rental yield• But now widely used by PLC analysts (Shareholder Value Analysis –

SVA)• ‘Cash is a better yardstick of value than net profit’ (cash not paper profit

pays shareholder returns)• Takes account of investment cashflows as well as operating profit• The best/most reliable measure of value• What discount rate?

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Business Valuations

Key factors

• Maintainable profit before owners’ returns and non recurring items• Quality and consistency of profits• Critical mass• Asset base and any surplus assets or deficit• Investment needs• Management• Combination gains (?)• Risk (again)• Competitive advantage and positioning• Strategic opportunity/benefit for an acquirer• Financeability

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Business Valuations

Key messages in current market:

• Over estimated multiples• Over exaggerated view of the competitive position/strength/scale of the

business• Under estimated view of the dependence of the business on owner• Under estimated view of the importance of management structure,

process, controls, consistency of business performance

It is a difficult market for buyers and sellers. Lots of transactions are aborted because of the above.

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Tax Valuations

• Generally lower than commercial value• HMRC methodology• Combination of maintainable earnings/net assets/dividend yield• Based on historic information• Published information only (although may ask for management accounts)• (Beware of items in the news!)• Generous minority discount• State exit intentions• Agreement pre transaction only for approved share schemes• Post transaction agreement available


Market Developments – Finance Raising

12 September 2012

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Market Developments - Financing

Crowd funding

• A way for businesses to raise equity investment through a ‘pool’ of small investors.

• Typical funds raised will be between £1,000 and £250,000, with individual investors pledging as little as £20 or £30.

• Sites such as Crowdcube and Funding circle have developed over the past few years.

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Funding for Lending

• Under the Funding for Lending initiative, the Bank of England will lend money at below-market rates to the financial institutions to encourage them to lend to household and non-financial institutions

• £80bn cash pledged by the government• Those that lend more will be able to borrow more from the scheme and at

a lower cost.• The policy will compliment other actions such as QE (Quantitative

Easing)

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Regional Growth Fund

• The Regional Growth Fund (RGF) is now a £2.4 billion fund operating across England.

• It supports projects and programmes with significant potential for economic growth that can create additional, sustainable private sector employment.

• It aims particularly to help those areas and communities which were dependent on the public sector to make the transition to sustainable private sector-led growth and prosperity.

• Two ways to access the fund (i) existing project run by public/private partnerships, (ii) applying directly to the fund if the project is over £1m.

• Round 3 closed June 2012, dates for Round 4 yet to be announced.

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Business Growth Fund (BGF)

A private initiative, not a government backed scheme. The fund has regional offices, including Bristol. The aim is to support fast-growing UK businesses.

Criteria:• Business typically £5m-£100m turnover• £2m-£10m of funding with term to match business owners goals

(generally longer term than traditional VC and PE)• BGF take an equity stake of between 10%-40%• Board seat for BGF to provide guidance as well as capital• Consider all sectors, except for financial services and real estate

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……and Traditional

PRIVATE EQUITY

ABL

BANK DEBT


Corporation Tax update

12 September 2012

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Corporation tax update

• Patent box introduction– 10% tax rate– Profits from products including a patented part– Phased in over 4 years

• Increase in R&D rates– 225% deduction– lower limit removed– PAYE limit removed– Above the line credit for large companies from April 2013

• Capital allowances– Purchase of buildings from April 2012– Pool expenditure in existing buildings before April 2014

• Short life assets – more beneficial with reduction in WDA

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Corporation tax update

• GAAR – effective from April 2013– “tax arrangements” test– “abusiveness” test

• EMI schemes – extended to include academics– Limit per person increased to £250k from 16 June 2012

• OTS share schemes consultation document– simplify or remove approval process– extend period of exercise after disqualifying event to 6 months– remove restrictions on the type of shares that can be used– review the future use of CSOP

• Not corporation tax but…– HMRC harsher on daily penalties for late returns

Clifton Down HouseBeaufort BuildingsClifton BS8 4AN

Tel : 0117 973 4481 Fax: 0117 974 5203

www.mazars.co.uk

Any questions?

[email protected] [email protected]

Mobile: 07794 031484 Mobile: 07710 158371

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Mobile: 07794 031527

Economy & Finance

Pbm sept 12 cf ct final