structuring your business for growth
TRANSCRIPT
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
Introductions
Catherine Gannon Helen Curtis Nik Shah Jamie Johnson
Director of Corporate Finance
Tax Consultant Managing Partner Senior Associate
Growth Strategies Jamie Johnson – Director of Corporate Finance
Types of Growth
Organic
Acquisition
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
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
Incr
eas
ing
risk
How?
Funding Growth
Acquisition funding
New plant and machinery
Working capital
Funding Growth
DEBT EQUITY
TAX CREDITS GRANTS
Funding Growth
DEBT:
Overdraft
Bank term (cash flow) loan
Asset based loan – debtors, P&M, stock
Private bond
Crowdfunding
Supply chain finance
Sources of Funding
EQUITY:
HNW / business angels
Regional growth funds
Private equity
Crowdfunding
Public listing
Sources of Funding
TAX CREDITS:
Research & Development (R&D)
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
Sources of Funding
Considerations:
How much?
What is it for? – is it Equity Risk?
Dilution
Time period
Repayment terms
Security
Skills shortage
Tax
Research & Development (R&D) Tax Relief Nik Shah – Tax Consultant
HMRC R&D claim categories
Pure research Development Applied research
9% of claims 18% of claims 73% of claims
What is eligible R&D?
Scientific / technological uncertainty
Systematic approach
Scientific / technological advancement
sought
What qualifies as R&D expenditure?
Qualifying R&D costs – either expensed or
intangible fixed assets
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)
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%
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…
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
Enterprise Management Incentives (EMI)
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
Why EMI?
Performance Incentive
Attract and retain high quality staff
Entrepreneurship
MBO
Seed Enterprise Investment Scheme (SEIS)
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
Money raised should be used for...
SEIS | EIS
Existing trade New trade
Marketing R&D
Hiring Staff Working capital
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
Securing SEIS relief Investor Requirement
Maximum investment £100,000 annually
< 30% Equity
Must hold shares for at least 3 years
Not employee or officer
The Tax Reliefs
SEIS Tax Reliefs
Income Tax 50%
Capital Reinvestment
50%
Capital Loss 100%
Capital Gains Tax (CGT) 100%
Inheritance Tax (IHT) 100%
Enterprise Investment Scheme (EIS)
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
The Tax Reliefs
EIS Tax Reliefs
Income Tax 30%
Capital Gains Deferral
Capital Loss 100%
Capital Gains Tax (CGT) 100%
Inheritance Tax (IHT) 100%
Structuring your Business for Growth Catherine Gannon – Solicitor, Chartered Tax Adviser
What we will cover
If you take investors on board, what governs your relationship?
How to protect the Company while still attracting investment
Default Position
Model Articles:
No restriction on transfer
No protection of IP
Limited information rights
One class of shares
No good/bad leaver provisions
Risk of transfer of shares without restriction
Articles of Association What to look out for
Leaver provisions
Investor director or observer provision
Preference on liquidation
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
Shareholders’ Agreement What is it?
An agreement between some or all of the shareholders
Part of the constitution
A private document
Shareholders’ Agreement Who would want one?
In addition to the founders and employee shareholders:
Private Equity Investors
Angel Investors
Joint Venture Partners
Shareholders’ Agreement What can be covered?
Restrictive covenants – protecting IP
Veto rights / deadlock provisions
Transfer of shares
Shareholders’ Agreement What can be covered?
Exit provisions
Information rights
Funding
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.
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
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
EMI Scheme Points to consider
Headroom and restrictions in articles
New class of share
Drag and tag along provisions
EMI Scheme Points to consider
Cessation of employment
Good/Bad leaver provisions
Exit only/Exercise conditions
Seed Enterprise Investment Scheme & Enterprise Investment Scheme Helen Curtis – Specialist solicitor for equity fund raising
What we will cover
Particular concerns for EIS/SEIS Investor
How a company needs to protect itself and investors
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
SEIS What is the big deal
Greater tax reliefs at 50% compared with 30% for EIS
SEIS/EIS Pitfalls
Not genuine investors
Issued to investors who have not fully paid for shares
Holds more than 30%
SEIS/EIS Investor Concerns
No Preference Shares
No receipt of “Value”
SEIS/EIS Investor Checklist
Veto rights
SEIS or EIS Compliant – Undertaking?
Non-Executive Directors
Any Questions?
Visit www.gannons.co.uk or www.cvdfk.com for further information Follow us on Twitter @gannons_law and @cvdfk