Support for UK business owners has been continued by the government in the March 2016 Budget, with the maintenance of Entrepreneurs’ Relief and introduction of new tax-saving measures.
Entrepreneurs’ Relief allows those people selling a business to pay capital gains tax on their gains at a reduced rate. Instead of paying capital gains tax at the prevailing rate, these business owners pay just 10 per cent on profits on disposals subject to a lifetime limit of £10 million.
Some 65 years ago, in an area of the Syrian desert now occupied by Islamic State fighters, a future billionaire was born. Mohed entered this world in poverty as part of a Bedouin tribe; his mother died soon after he was born and he had to fight to be allowed the basic privilege of attending school. Read the rest of this entry »
Business owners are increasingly reliant on their business as a ‘job for life’ which will pay for their retirement, and this is leading them to neglect planning for both their personal finances and the succession of their business.
Research undertaken by Crimson Publishing on behalf of accountancy firm Kingston Smith LLP revealed that over half of entrepreneurs have no pension plan in place, and are instead relying on their business to be their pension. Read the rest of this entry »
Five years of research by the Centre for Economics Performance at the London School of Economics, and the consultancy McKinsey, into the gap between Britain’s productivity performance and that in the US, France and Germany, has resulted in the stark conclusion that family-run firms are largely to blame when it comes to low productivity
The research team spent years studying performance indicators for 730 medium-sized manufacturing companies in the UK, the US, Germany and France. Their aim was to try and discover the reasons for Britain’s poor productivity performance. The surprising results of the study found that firms which have handed control over to the next generation account for a third of Britain’s productivity gap with the US.
Poor Management a Problem for Family-Run Businesses
In general, family-run firms have poor management practices. “They lack effective monitoring, have dysfunctional targets and limited incentives for staff,” says Nick Bloom, one of the report’s authors. The researchers found strong statistical links between management scores and sales, productivity, profitability and the likelihood of bankruptcy.
The results were so strong that Mr Bloom advised the introduction of a cap on the value of large private businesses that could be handed over the eldest son or daughter.
So why is it proving so detrimental to hand the family business down to the next generation? It seems that passing down ownership in itself does no harm at all – it is when the running of the company is passed down as well that productivity begins to suffer. There are two major problems with family succession. The first is that selecting a Managing Director from a small group of family members imposes a severe restriction on the pool of managerial ability. The larger the company, the larger the problem this is. While it may be feasible to pass on the running of a small shop to the eldest son, the running of a large corporate firm will require someone with considerable skill. Compounding the problem is the fact that many men do not have children until their 30s or 40s, meaning that by the time they retire, they may be handing over the business to a young, inexperienced, successor.
The Carnegie Effect
The second major problem with family succession is what’s known as the ‘Carnegie effect’, whereby the eldest child may lack motivation to work hard at school or early in their career because they have a guaranteed job waiting for them. Thus they are unlikely to have developed the skills necessary to do a good job. Also, morale is likely to be lowered amongst the rest of the staff as their opportunities for promotion are limited.
If Britain is to close its productivity gap with the US, it seems owners of businesses would be better off passing equity stakes onto their children, but handing over the running of the company itself to someone else.
If you are considering making an acquisition this year the Business Sale Report offers guidance and advice on businesses for sale in the UK, so if you’re looking for a small company, perhaps a struggling family enterprise that you can turn around, then you had best get in touch with us today.
While buying a business out of insolvency may not seem an obvious choice, there are many advantages to it and it is increasingly becoming a preferred method of expansion by many companies. The fast pace of insolvency deals often leads to bargain prices, and the option of buying assets rather than the whole company can be an attractive proposition. However, all this must be offset against a higher level of risk. This article covers some of the main pitfalls specific to buying an insolvent business.
Firstly, the sale of an insolvent business is handled by an insolvency practitioner (IP), who will have been appointed either by the courts or by company creditor(s). Find out on what basis the insolvency practitioner has been appointed. Legal requirements and procedures vary depending on whether the business is in administration, administrative receivership or liquidation and you will need to research the differences between these states. Of the three options, administrative receivership is the more complex, but due to changes to the Enterprise Act in September 2003 these are becoming less common.
As previously mentioned, when buying an insolvent company, it is often possible to “pick and choose” the parts of the business you want. The downside of this is that it is not always clear what is included in the sale. Some assets, such as office machinery or equipment, may be subject to hire purchase or leasing agreements, which can be terminated when the IP is appointed. Likewise, computer software licenses supplied by third parties may well have ended when the company entered insolvency, and suppliers can reclaim stock.
What to watch out for
Find out if the business premises is included, and if this is leasehold you will need to check whether the landlord is prepared to offer you a new lease and on what terms. Retaining book debts will enable you to continue relationships with customers, but these may have already been assigned through factoring or invoice discounting.
If you want to purchase the goodwill of the business, make sure you are legally entitled to use the company name. Under section 216 of the 1986 Insolvency Act (Restriction of re-use of company name), it is an offence for any director or shadow director to be involved in the company if any of its trade names are re-used. So if you retain senior staff, you need to know the procedures for complying with these regulations.
A second important piece of legislation to be aware of is the Transfer of Undertakings (Protection of Employment) 2006. This relates to the employees of the business, who you will automatically assume when buying from an IP. Although there are certain legal loopholes where you can make redundancies if they are in the interests of the survival of the business, you need to prepare for the possibility that you may need to make substantial pay-outs in this situation. On the other hand, make sure you have not paid a high price for staff who will walk away as soon as a better opportunity comes along. You need to assess whether the human assets of the business will really remain committed to it, otherwise you are wasting your money.
Speed matters when buying a distressed business
Sales of insolvent businesses move very quickly, with most selling within a month of the appointment of administrators and a great many in a matter of weeks or days. To increase your chances of finding a suitable business and your chances of making a profit from buying a distressed business, it is a good idea to write to all the main insolvency practitioners stating your acquisition criteria, the funds you have available, and that you are ready to move on suitable opportunities. This way, you may be contacted directly as soon as the administrators are appointed, giving you a valuable head start on buyers relying on announcements in the press.
A high-speed sale also puts extra pressure on the due diligence phase of the deal, so it is sensible to have an advisory team in place so that when the ideal opportunity appears you are in a position to act on it. As well as the usual due diligence questions (see the “Due Diligence – Over 1000 key questions” resource on the Business Sale Report website), you need to examine exactly what went wrong with the business, and do your calculations for how much capital you will need to invest to turn the company around once you have bought the assets.
Remember that the insolvency practitioner is not liable for any oversights during due diligence – once you have bought the business, any claims over stock ownership, etc. are your responsibility.
Finally, when negotiating the price of the business with the IP, be aware that you may be competing with the existing management team, who are often approached first once the business has entered insolvency. To avoid a bidding war, try and negotiate a period of exclusivity with the IP to allow you to conclude the deal. On the other hand, remember that the IP wants a quick sale, and is likely to accept the lowest price he can justify to the creditors.
The Business Sale Report team are experts when it comes to distressed acquisitions. If you’re considering buying a business out of insolvency, get in touch today to discuss your approach and gain access to some of the most comprehensive business resources for distressed acquisitions.
Taking over another company can quickly turn from an exciting venture into a nightmare if the deal is not properly thought through and resources are not in place.
Along with the excitement of expanding and the new possibilities for your bigger company, comes a minefield of potential dangers. We detail the top ten takeover danger zones and advise how you can avoid them.
Inadequate due diligence
There is no bigger mistake you can make than not doing your research about the company you wish to buy. Everyone knows its important to look through the books and be clear about what money is coming into the business and what money is going out. But on its own this is insufficient. You also need to be clear about what contracts exist with the company’s suppliers and customers, what liabilities the company has, and what market legislation exists in the sector you’re buying into. Failure to check all of these factors in detail could result in lawsuits, unanticipated expenditure, and loss of sales.
Ignoring the target’s culture
When you’re buying a company with the intention of incorporating it into your existing organisation, one of two things must happen. Either you must mould your existing company to fit in with the corporate culture of the new company, or the new company must adapt to your own model. What you can’t do is accommodate everyone. The two companies will inevitably have differences in management styles, pay scales, office procedures, and even differences in things such as the extent to which staff members socialise with each other, and whether staff are expected to work long hours. You need to establish a clear and consistent policy to encompass all of these things. To an extent you must allow for two-way leverage, i.e. the takeover target should be allowed a say in the construction of the new policy, but ultimately there should be a dominant culture in order to drive the new organisation forward.
Forgetting to tell your customers
Do not be under any illusions about how your competitors will react when you announce you are launching a takeover of another company. You would be very lucky indeed if there were not some attempt to persuade your customers to jump ship. All your competitors need to do is beat you to the phone to tell your customers why they should move their custom away from you. You need to make those calls before the competition do. Reassure your customers that the takeover is in their best interests and explain why they can expect an even better product or service from you as a result of the takeover.
Failing to retain key employees
As well as moving in on your customers, it is likely your competitors may also try to poach your key employees once it is known you’re going to be involved in a takeover. Competitors will often play on your staff’s insecurities about your intentions as the purchaser and, just like with your customers, try to persuade them to move away from you. The loss of key staff can take a severe toll on the value of the company. What you have to do in this situation is very simple. Give your key staff as much information about the takeover as possible, including assurances that their jobs are safe, and keep them informed at every stage of the takeover process. If jobs are to be lost, let it be known as soon as possible which jobs these are, and reassure the others their jobs are safe. The last thing you want is for uncertainty and lack of information to create unease and rumours amongst your staff. If they aren’t made aware of the positive changes that are going to take place in their working environment they will be vulnerable to approaches from competitors.
It sounds obvious, but make sure you don’t pay more than the target company is worth. Particularly with e-businesses, the market value of a company can tend to be based on what the company could be rather than what it is. This may be acceptable to you if you have reason to believe you can drive the company forward to maximise its full potential and make a good return on your investment. The risk with this strategy is one of over-estimating current market conditions. Look at what your competitors are paying for similar companies and if you’re paying more, ask yourself why. The target is worth no more than the value it can add to your existing business.
Nothing kills an organisation like inefficiency. Fragmented, misdirected leadership will result in a slow, clunky organisation, wasting time and money. Be very clear from the start who will be in charge of what, and implement a system to monitor everyone’s progress. Synergy in leadership is crucial because strong, unified leadership is what drives companies forward. When leaders from two companies are forming a new leadership team everyone must be clear about what their new role encompasses. It is also important for the CEO to address any concerns the leaders may have, because a disgruntled leader in a position of some authority is capable of damaging the takeover process to the extent where it can’t go ahead.
Not understanding foreign markets
Cross-border takeovers are the most risky of all. Added to the considerable number of concerns you would have about a domestic takeover is the fact that you could get it badly wrong if you don’t understand the market in the country you’re entering. Never assume that an industry in another country works in the same way as that industry works in the UK. There could be swathes of legislation affecting the way the industry operates in the other country. You must also be careful not to make unsubstantiated assumptions about customer behaviour and attributes in the other country.
Poor IT integration
As part of the due diligence process you should ask the right questions about the IT systems in the company you want to take over. Systems integration can make or break a takeover because companies rely on technology to facilitate just about everything. Do not just assume you can swap one system out and replace it with another things are rarely so simple. When you start changing a company’s IT system, you will inevitably be changing a fundamental part of how that business operates. This doesn’t have to be a bad thing, but you must make sure the changes are well thought-out and planned in advance of the takeover so they can be followed through smoothly. You must consider the impact and costs of IT integration early on in the takeover process.
Failed brand consolidation
Brand consolidation is a crucial part of the takeover process and it is also one of the hardest to achieve. Brands should convey functional and emotional benefits, eg. value for money, reliability, and assurance of quality. If the purpose of the takeover is to achieve scale you should move to consolidate as soon as possible, and you must get your marketing people involved in order to do so. Brands are very expensive to support and, post-takeover, you may want to create a single new brand to promote your products or services. If you have to choose one brand to encompass both companies, choose the stronger one. Alternatively, you may be looking to offer a portfolio of brands to encompass a wider scope. Either way, brands make up part of a company’s assets and your marketing team must be clear about which ones they are expected to transition, cull completely, or bring under an umbrella’.
Mis-timing the takeover process
Prevailing wisdom will say speed is of the essence when taking over a company. But with the majority of takeovers ending in failure it is time to rethink this notion. Spending too long on the deal can be fatal for the running of the business something that should never be overlooked. It is also true that efficiency is needed when you are integrating systems and practices in two companies, but it is important to prioritise. Some elements need to be integrated with more urgency than others, so instead of setting a strict timetable for all areas of the company to integrate by a certain date, you should allow each part to pursue consolidation and integration at its own speed. Moving too quickly in some areas can be just as disastrous as moving too slowly.
Takeovers rarely run as smoothly as hoped, so it is important that you have a timetable of how the integration should progress. Implement the steps that are necessary to achieve your key objectives. These will probably include: securing and improving customer relationships; establishing the trust and motivation of the employees; and improving the financial performance of the business. Regular reviews of the integration should be performed over at least two years to ensure it moves ahead as planned.
These ten tips for avoiding takeover disaster were produced by the Business Sale Report, the UK’s leading listing of companies for sale. http://www.business-sale.com. Tel: 020 8875 0200.
We are offering a complimentary due diligence guide with 1,200 questions answered to all readers of this publication. If you would like to receive this guide, please send an email to: [email protected] The guide will be emailed to you as a pdf file.
While it may not be the first thing that springs to mind, smooth IT integration is vital to the success of your merger or acquisition. If you sideline IT integration and leave it until too late, you can find it becoming a giant distraction and expense.
The IT experts of the acquiring company should ask for a list of: the most critical applications used in the target company; details of reporting structure for personnel in the IT department; and details about company culture, vendors, budgets and current projects.
It may be tempting to prioritise cost reductions to IT, but it is important not to become locked into short-term thinking. Long-term business direction should always be first and foremost in your mind, even if this doesn’t allow for initial IT cost reduction.
Integrate new IT systems or keep separate?
When you’re making an acquisition, decide if you’re going to integrate the two systems or keep them separate. It is usually advisable to choose one system over another, but if you are making several acquisitions you may find it to be less disruptive and more cost-effective to keep systems separate. Think like a customer if you’re trying to decide between two similar systems – which one will be of the most customer benefit?
There are two major considerations when you’re implementing your IT system: prioritising and planning. Work out which are the most urgent IT projects, such as billing, VAT or compliance issues and take care of those first, and so on. It may be necessary to shelve some projects altogether, or at least until things have settled down. When you have a list of what needs doing, and an idea of what is urgent and what can wait, you will need a detailed migration plan and routine for data transfer.
You need to decide between manual and automatic migration. Manual migration takes time and human resources and carries the risk of human error. Automated integration is faster and more accurate but requires IT staff to construct complex routines and mapping. Because of the risk of customer confusion, however, any migration must be broken into manageable pieces.
Moving forward – strong leadership required
As with any other aspect of merger integration, strong leadership is essential. The CIO and CEO will be relying on IT workers to complete the integration process. These key staff need to be given reasons to remain with the company during the difficult transition period and not to jump ship and join another company, which will likely be all-too-happy to snap up good IT people. If the IT department are resistant to change, the CIO must listen to their concerns, but ultimately make the decisions that are best for the company, and move the integration forward at a healthy pace. The objectives and benefits of the merger must be clearly communicated to the IT staff. It is important the CEO and CIO are accessible to IT staff and that they keep information current.
No IT department exists in isolation. Have weekly meetings between representatives from each IT application development team and key representatives from the other business units throughout the integration process. Make sure that IT representatives are present at integration strategy meetings from an early stage.
Successful IT integration can be achieved with a healthy mix of planning, strategy and leadership.
The Business Sale Report is the UK’s leading acquisition service. Buyers can search for businesses for sale here.