British businesses are increasingly looking to exit ahead of a potentially scary Brexit departure on 31 October.
According to the Office for National Statistics inward mergers and acquisitions (M&As), where foreign firms buy British, jumped in value to £18.3 billion in the second quarter of this year, up from £7.6 billion in the first quarter. Domestic M&A rose by £1 billion to £2.8 billion1.
Many of these, according to the Barclays Entrepreneurs Index2, are growth firms. It recently found that M&A activity involving firms under five years old had risen to 505 deals, a rise year on year from 395 since 2015.
Motivated to exit
Peter Gray, partner at Cavendish Corporate Finance, isn’t surprised. “It’s the best time ever for entrepreneurs concerned both by Brexit and a potential change in Government to exit. A lot of our clients are motivated about getting out,” he says. “Pricing and multiples are at an all-time high, driven by a huge amount of private equity and trade interest from overseas. Private equity has a massive wall of money looking for a home and the weak pound is making high quality UK firms more attractive.”
Entrepreneurs, Peter suggests, are also taking advantage of attractive levels of Entrepreneurs’ Relief (ER) on exit. “We’ll never get any better than its current tax rate of 10%,” he says.
He says tech firms, particularly artificial intelligence and ‘software as a service’ (SaaS) providers, are attracting strong sales interest as are property services.
However, there is a lack of interest in firms with a big exposure to Brexit such as those exporting or importing large quantities to and from Europe. “Purchasers hate uncertainty and it is difficult to get value if they need to take a leap of faith in profit projections,” Peter says. “It is probably why most entrepreneurs will not look to sell. They hope that nothing will change post-Brexit.”
Whatever decision is taken, Martin Brown, chief executive of business advisors Elephants Child, says owners should consider this period of uncertainty as a ‘moment’ to take stock.
“SME leaders are incredibly busy in their businesses and making them grow and rarely get a chance to take a helicopter view. You can treat this as time to review and make a strategic assessment of your personal and business aspirations as well as what impact Brexit might have. It can give you the right answer of what to do next,” he says.
“When do you want to retire, how much do you need to retire and what does the business need to do to provide for that? How much value do you want to create and where is the business on that journey? To drive that growth could be a merger or sale. A volatile market brings many opportunities and interested purchasers.”
Conversely if after the review process it is clear that your business does not currently have the value you are seeking then you should stick to your guns and keep focusing on your own growth journey.
“Waiting around just to see what happens is not proactive. Take time to do your analysis, come up with your plan and commit to it,” he says. “I know of one business going through exit that started planning three years ago, whilst another kept their head down and only now, a few weeks before we leave the EU, they are rushing around looking to sell. But it is not in a fit state to go to market.”
If you do decide to sell, then get organised. “You can truncate the sale process. It means preparing a three-page document rather than doing an information memorandum,” Peter says. “It is focusing on targeting key prospects who you can do a quick deal with rather than heading off to China or Japan to determine any interest. But you still need fundamentals such as having a strong management team, profit projections and a full online data room.”
He admits that such a truncated sale could make it harder for owners to maximise their headline valuation but by selling now the attractive ER rate would cushion some of the blow.
Martin says owners can gain financial security during the current volatility by other measures, such as a partial exit to private equity. “You can take care of your mortgage and family but still have a chunk of the business to move forward with and exit at a later date,” he explains.
Owners could also take out a pension and get their companies to pay into it and mitigate high rates of tax. So even if the business struggles they still have a pension fund to fall back on. In addition, an owner could pay themselves a dividend and then invest it into a Venture Capital Trust or Enterprise Investment Scheme. This would effectively result in 30% income tax relief.
“Do something to maximise your position,” urges Martin. “If you do nothing, you’ll get caught out and never benefit from your years of hard work.”
1. ONS, Mergers and acquisitions involving UK companies: April to June 2019
2. Barclays Entrepreneurs Index, viewed September 2019
Venture Capital Trusts and Enterprise Investment Schemes are suitable only for experienced, sophisticated or high net worth investors who accept that they may get back significantly less than the original investment.
– These represent a much higher risk than investing in larger well established listed companies listed on the FTSE All Share Index and are inherently more illiquid.
– The legislation surrounding VCTs and EISs and, as a result, their tax treatment, is subject to individual circumstances, may change in the future and could apply retrospectively.
Entrepreneurs’ Relief is complex and it’s important to take professional advice before deciding on a course of action.
The levels and bases of taxation, and reliefs from taxation, can change at any time. Tax reliefs are dependent on individual circumstances.
Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.