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					Phil Scott, Director, AFR Consulting




                                       1
Welcome
Selling Your Business

              March 2012
Agenda

•   Introduction
•   Current Environment
•   Why Consider an Exit Now
•   Sales Timeline
•   Grooming
•   Tax Planning
•   Buyer Motivations
•   Synergies in Action
•   10 Pointers to a Successful Sale
Current Environment
•   Mid market (£10-100m) the most resilient sector and the least impacted by the
    slowdown
•   Smaller M & A deals have become increasingly difficult to “get across the line”
•   Volume of overseas corporate transactions both in the North West and UK
    increasing
•   While advisors and investors are starting to see an upturn in opportunities this
    is not coming through in the number of completed deals
•   Pricing index is now at its highest since Q3 2007
•   Reasons to be optimistic although M & A market remains delicate over
    concerns of debt levels in the US, degradation of credit ratings for Greece &
    Italy and the ongoing Eurozone crisis
Why Consider an Exit Now – Macro Factors

•   Large corporates have cash and are seeking growth
    –   Synergy opportunities will create profit opportunity
•   Weakness of sterling has reduced the relative valuation of UK assets
•   UK is attractive entry point into the EU
•   Increasing evidence of purchasers from outside EU/USA
•   Pressure on Private equity funds to release substantial uninvested funds
•   Private equity starting to move down the value chain below £5m deal size
•   Private equity willing to pay higher values than trade for good quality
    assets operating in unique and interesting sectors

    “Despite gloomy economic backdrop there are factors driving the M&A
    market”
Why Consider an Exit Now – Personal factors

•   Retirement/lack of management succession?
•   Organic growth is tough – will valuations get better?
•   Is your business facing long-term challenges?
•   High income tax rates in comparison to low capital gains tax rate
•   Favourable tax environment – 10% Capital Gains Tax Band covers first
    £10m of gains for each qualifying shareholder




“Most owners are surprised when we explain the sales timeline”
Sales Timeline

                            Year 1   Year 2   Year 3   Year 4   Year 5


     Grooming & Planning


     Sales Process


     Implementation Phase



 •      Most owner managers will need to remain in situ during the Implementation
        Phase
Grooming
•   Start 1-3 years before sale
•   Establish who the buyers are likely to be
•   Build a business those buyers want to buy
•   Increase profits:
     – Organic growth
     – Bolt on acquisitions
•   Identify potential value destroyers
     – Major contract renewals during sale process
     – Unresolved legal disputes
•   Reduce company debt and build up cash balances
     – Review shareholder/directors remuneration policies
     – Reduce working capital cycle
     – Review capital expenditure v lease options
     – Review sale and lease back options
     – Eliminate discretionary capex
     – Pre-empt “cash free/debt free” negotiations
Grooming Strategy
•   Increase earnings multiple:
     – Reduce reliance on key customers
     – Reduce reliance on key suppliers
     – Increase recurring revenue
     – Strong order book
     – Tie in key personnel with employment contracts and incentives
     – Secure and protect intellectual property rights
     – Plc level governance:
           Quality infrastructure and systems
           Quality of management reporting
•   Understand the synergies
     – Cross selling opportunities
     – Cost synergies
•   Tax Planning
Tax Planning - Capital Gains Tax Regime
•   Currently have a very attractive Capital Gains Tax (‘CGT’) regime
•   Business assets potentially attract a top rate of tax of 10% due to availability of
    Entrepreneurs relief
•   Available on first £10 million of gain subject to qualifying conditions
•   Disposals of shares in a personal trading company or business assets where a
    material disposal of a trade is being undertaken
•   For shares to qualify the individuals need to have the following:
     – Over 5% of beneficial share ownership and 5% voting rights
     – Hold shares for minimum period of 12 months
     – Must be a company officer or employee
Tax Planning - Capital Gains Tax Regime

•   Possible to “double up” on available relief by moving shares to spouse (initial gift
    is free of tax)


    Example
    Sale of business for £20m
    CGT
    10% on first £10 million          1,000,000
    28% on next £10 million           2,800,000
                                      3,800,000


•   If share stake can be divided between 2, CGT would be reduced by
    £1.8 million to £2 million
Tax Planning - Capital Gains Tax vs Income Tax

Differential between Capital and Income


Sale of 100% shareholding qualifying for Entrepreneur’s Relief
− Sales proceeds          -         £10,000,000
− Total Capital Gains Tax paid      -        £1,000,000
− Net income     -         £9,000,000


•   In order to receive the same income how much would the company need to pay
    to the shareholder/director and what is the tax impact?
Tax Planning - Capital Gains Tax vs Income Tax


•   Earnings required to receive equivalent income


     − Annual net income for 10 years        -       £900,000
     − Total income tax paid for period      -       £9,367,347
     − Total cost to company                         -       £20,902,041


•   Additional tax cost = £8,367,347
Benefit of Grooming/Tax Planning
                                Pre        Post
                              £’000       £’000
 Profits                      2,500       2,750
 Multiple                          6.5       7
                             16,250      19,250
 Debt                         3,000       2,000
 Gross proceeds              13,250      17,250
 10% CGT on first £10m        1,000           -
 28% CGT on next £3.25m        910            -
                              1,910           -
 10% on all proceeds                 -    1,725
 Net proceeds                11,340      15,525
Buyer Motivations
 Private Equity             Overseas Purchaser            Trade Purchaser

 Strong Management Team     Access to Major Customer(s)   Synergies

 Strong organic Growth      Branding                      Synergies

 5 Year Financial Plan      Market Position               Synergies

 Ultimate Exit              Market & Industry Expertise   Synergies

 Financial Commitment       Access into Europe            Synergies

 Acquisitive Growth         Critical Mass                 Synergies

 Plc Governance             Strong Management             Synergies

 Robust Financial Systems   Synergies                     Synergies
Synergies in Action
                                        Company A           Company B
                                            £’000               £’000
 Turnover                                      3,000               5,000
 Gross margin                                    600               1,750
                                                  20%                 35%


 Overheads                                     1,600               1,500
 (Loss/Profit)                               (1,000)                 250
− Company B lacks funding to grow its business and appoints HURST to advise
− Company A based overseas needs UK presence to serve global customers in
  Europe
− Company A has no warehousing/logistics infrastructure and pays 15%
  gross margin to third party
− Company A to close its operation and transfer business to Company B
Synergies in Action

                      Post transaction
                                  P&L
 Turnover                       8,000
 Gross margin                   2,650
                                   33%


 Overheads                      1,750
 Profit                           900
10 Pointers to a Successful Sale
1.    Appoint advisers early on in the process
2.    Groom the business – better to plan than react
3.    Get the timing right
4.    Be realistic about valuation
5.    Minimise your tax
6.    Approach purchasers with strategic interest and financing resources – buyer due diligence
      is key in the current climate
7.    Create competition
8.    Maintain confidentiality to minimise the threat of collateral damage to your business and
      its goodwill
9.    Present the business to highlight:
        – True profitability
        – Synergy benefits
        – Growth opportunities
10.   Last but not least focus on the business – make your adviser earn their fees!
Contact
Nigel Barratt
Corporate Finance Partner
Tel: 0161 429 2523
nigel.barratt@hurst.co.uk


Tim Scott
Corporate Finance Associate Partner
Tel: 0161 429 2518
tim.scott@hurst.co.uk


Lisa Dicken
Tax Partner
Tel: 0161 429 2516
lisa.dicken@hurst.co.uk
Thank you
22
                             March 12




Ed Clivery & Brian Devlin,
        NatWest,
  Commercial Banking




                                   1
                         Accessing Business Finance


MANAGING YOUR DEBT
     Funding Options

     Your Bank Relationship – make it work for you

     Business Planning

     How NatWest is supporting the SME Market?

     Financing the Supply Chain

     Sector Focus Support
Bank Debt Finance
                                                                                                                                       March 12




                                                                                                              capital Structure
                                                                                                              Bank Funding Model and
    Customer Funding need




                     Security may be required. Product fees may apply. Over 18s only

                             ANY PROPERTY USED AS SECURITY, WHICH MAY INCLUDE YOUR HOME, MAY BE
                            REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR OTHER
                                                     DEBT SECURED ON IT
      Invoice Finance is provided by RBS Invoice Finance, part of The Royal Bank of Scotland Group, Registered in
      England No. 662221. Registered Office: Smith House, Elmwood Avenue, Feltham TW13 7QD.

                                                                                                                                             3
 Financing Options
•    Overdraft (Unsecured) – Review the trade debtor book discount intercompany and overdue. Lend a
     percentage of the book up to 60%. Contractual debt much lower perhaps 20%. Renewal every 12
     months, fee, agreed limit and margin plus base charged on the outstanding balance.

•    Term loan- Defined expenditure within a business, payback over a period of time i.e. a term
     fee, margin over base/Libor (size), committed, covenants (size)

•    Asset Finance – Funding is provided against kit/vehicles- Hire Purchase (HP), Lease Purchase,
     Receivables Finance – (Lombard)

•    Revolving Credit Line – A commitment overdraft, something that can be repaid and redrawn and provides
     flexibility for a business that has a constant need for finance.

•    Invoice Finance- Capital efficient hence very attractive to the banks. Payout up to 85% as soon as the
     invoice is raised, the balance of 15% is paid to the customer when their client settles the invoice. Flexible,
     grows with sales, confidential (not disclosed to customers), allows the co to negotiate with suppliers –Pay
     early discounts from suppliers, insure against loss, help with customer viability/ongoing secondary
     checks. Fees higher due to extra work.


Security may be required. Product fees may apply. Over 18s only

ANY PROPERTY USED AS SECURITY, WHICH MAY INCLUDE YOUR HOME, MAY BE REPOSSESSED IF
YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR OTHER DEBT SECURED ON IT
Asset Finance is provided by Lombard, part of The Royal Bank of Scotland Group, Registered in England No.
337004. Registered Office: 3 Princess Way, Redhill, Surrey RH1 1NP.
Getting the most from your relationship


What you should do                               What your bank should do

•    Reporting Systems – share what you have     •   Alternatives and suggestions

•    Honesty – avoid surprises                   •   Understand the business and your
                                                     ambitions
•    Future – share the plan.
                                                 •   Transparency and Honesty
•    2 way Communication
                                                 •   Review services, funding structures and
•    Ask – one level up                              costs regularly.

                                                 •   Add value!



    Security may be required. Product fees may apply. Over 18s only

    ANY PROPERTY USED AS SECURITY, WHICH MAY INCLUDE YOUR HOME, MAY
    BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE
    OR OTHER DEBT SECURED ON IT
Business Planning

Firstly before approaching the bank, prepare a coherent business plan. New deal -

•   Entity Structure/Ownership

•   Business Profile

•   Management – Who are you ? What have you done before?

•   Financials- Realistic? understand trends? Base Case?

•   Facilities – Right Structure? Right Amount?

•   Security – What are you happy with? You know we will ask? What are you happy with?

    Remember it is your business plan so if the accountant has prepared it you still have to
    understand it


    Security may be required. Product fees may apply. Over 18s only

    ANY PROPERTY USED AS SECURITY, WHICH MAY INCLUDE YOUR HOME, MAY BE
    REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR
    OTHER DEBT SECURED ON IT
How have NatWest supported the SME
Market?

  •   In 2011 RBS Group provided of £30bn of new lending to SME’s

  •   RBS Group provided 48% of all SME finance in 2011

  •   48p in £ to SMEs from RBS Group – we lent two times as much to SMEs as our competitors

  •   Discounted lending – Manufacturing Fund, Cap Ex fund, Renewable Energy Fund and
      Franchise Fund.

  •   Out of 27 lenders NatWest and RBS have provided over 40% of EFG loans

  •   Support for Exporters




Security may be required. Product fees may apply. Over 18s only

ANY PROPERTY USED AS SECURITY, WHICH MAY INCLUDE YOUR HOME, MAY BE
REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR OTHER DEBT
SECURED ON IT
 How have NatWest supported the SME
 Market?

•    Number one provider for Asset Finance (Lombard) as advised by the Finance and Leasing Association
     and Invoice Finance (RBSIF) is one of the largest providers of invoice finance in the UK

•    2 years Free Banking For Start Ups, Business Start Up Courses & Business Plan Review Service

•    Business Hotline & Start Up Hotline

•    RBSG lent £550m to SME’s which benefited from the discounted rate supported by European Investment
     Bank (EIB)




   Security may be required. Product fees may apply. Over 18s only
ANY PROPERTY USED AS SECURITY, WHICH MAY INCLUDE YOUR HOME, MAY BE REPOSSESSED
   IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR OTHER DEBT SECURED ON IT

Fee Free Banking: Free banking means that the charges for the day to day running of your account (know as your “service
charge”) will not apply during the free banking period. At the end of this period, you will automatically move to the Standard Tariff.
Charges for “Additional Services” and “Unarranged Borrowing” are not part of the free banking offer. Free banking applies to
businesses that started trading within the past twelve months with projected or existing annual turnover not exceeding £1 million.
Financing the Supply Chain

•   Trade Finance – Covers a massive area of specialism within the Natwest.

•   Voted Best Trade Finance Provider in the UK in Euromoney’s 2011 Trade Finance Survey
    and Best Trade Finance Bank 2012 in the United Kingdom by Global Magazine

•   Presence in 36 countries and partnership arrangements in 24 countries.

•   We can help you secure payment for exports.

•   Increase your margin by offering payment terms.

•   Reduce the cashflow impact on your business of paying for your supplies.

•   Introduce you to in country banking specialists on overseas visits.

•   Strategic relationship with UKTI who can help you explore the potential of overseas
    markets, make in-country introductions, educate your staff on the issues that arise when
    exporting and provide training courses.
Other Sources of Finance
                                                                       March 12




     Security may be required. Product fees may apply. Over 18s only

      ANY PROPERTY USED AS SECURITY, WHICH MAY INCLUDE YOUR HOME,
       MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A
                MORTGAGE OR OTHER DEBT SECURED ON IT

                                                                            10
Questions
            March 12




                 11
WORKSHOPS


            34
Workshop: Effective credit management is an
essential element of a well run business, particularly
in these difficult economic times

  •     What are the most important considerations in designing
  an effective credit management policy and procedure

  •    What are the most effective strategies for ensuring your
  customers pay on time and to terms

  •   What can you practically do when customers won't pay
  What other options does an FD have to reduce credit risk




                                                       35
 Workshop: Exchange rate volatility can affect the
 bottom line of any business in many different ways


• How do you identify these exposures in your business
• What strategies can you employ to manage these risks
• What are the biggest challenges in implementing these
strategies and
• How can you best deal with these challenges




                                                          36
Workshop: The role of an FD in de-risking a business



• Name the main categories (areas) of a business that can be looked
at when considering the de-risking of a business? (maximum 5)

• Discuss the steps that can be taken to manage the risk in each
category? Also, discuss whether they should de- risked in house or
outsourced?




                                                         37
Thank you!




             38

				
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