Zoe Davies: Well, good morning, everybody, and thank you very much for joining our what's next to fund growth in your business webinar.
I'm Zoe Davis, I'm a tax partner at Mazars and head of privately owned businesses in London and I'm delighted to chair today's discussion on the variety of debt and equity options available to you, including private equity, venture capital, private debt funds, and high street banks and outline the key factors to consider, to make sure your next step is right for your circumstances, both from a business and the personal perspective.
This webinar is part of our wider what's next series, which is taking place over the next few months, where we're focusing on the options available to either grow or sell your business, looking at the tax landscape, as well as maximizing your business value.
So, onto today's discussion I'm joined by my colleagues, Paul Joyce who is head of our deal advisory team in London and James Robinson senior financial planner. Between us we've got 50 years combined experience working with entrepreneurs and business owners, and we work together at Mazars specializing in delivering a holistic service to businesses and business owners who are looking at their what's next, and we're looking forward to sharing some of our experience with you today.
We will be holding a Q&A session at the end of this live discussion, so please feel free to ask any questions at all in the Q&A tab please and not the chat, it makes it much easier if that's okay.
So, let's get on with the discussion, we're going to start with one of the most important things we think to be thinking about when assessing your options, and that's understanding the landscape and the aims.
So, if I can ask Paul to talk us through the important factors to consider understanding these, please.
Paul Joyce: Thanks Zoe, morning everyone.
I think this is one of those topics that we're talking about today, so I think a key takeaway, for me at least, is that it is something you want to spend quite a bit of time thinking about and discussing, but hopefully we can spend today talking about some of the things you should be thinking about, life reflecting on funding for the business.
I think the first thing is think about is what are the priorities for you and your business. I think it's very simply going in and thinking, I want to raise some debt or want to raise some private equity, but I think actually if you start right at the beginning, is what are you trying to achieve.
Because, depending on what you're trying to achieve really drives what we think the right advice is. One of the things we go through with a lot of our clients is we try to work out, firstly, what you're trying to achieve. And then we try to work out what the right output, for that would be and what the right outcome is, and what the right source of funding is. There are loads of different options, I think, hopefully we'll touch on some of them today.
I think the second thing is, what in terms of growth you're looking for and what opportunities are you trying to exploit, how much flexibility do you need to do that, what quantum of fundings you need today, or over a period of time.
Because different types of growth options, and potentially different types of exit options, have different kind of priorities and areas that you need to think about.
Secondly, think about what it is you're trying to fund, when you need it, how you need it, do you need all at one go, or do you need over a period of time, I think that's a really important element.
Next, and this really applies, I think, to people who are looking to exit, particularly the owners or managers of businesses, who are looking to use some of this capital to facilitate an exit for them from the business, either in whole or in part. And that's what selected management look like, are they ready to take on the business, and if you're looking to bring in private equity, for example, they're going to be really interested in knowing what the management team they’re going to be backing.
Have you thought about succession planning and bring you to that next level of management? Or actually is the responsibility of business still with you as a manager. Because that's really important and that's something that you can't put in place overnight so that's something you really need to be thinking about weeks, months and probably years in advance, so really thinking about this early is really important.
And then, what additional expertise might you need, what else beyond the capital you're looking for. That's one of the things that we often speak about when we're talking about bringing funding into the business, looking for more than just the check book. Whether it's debt, or whether its private equity, there's a lot of skills that can be brought in, and actually finding the right partner for the business can be really important.
So, what is it you need and what is it you want to bring in, do you need a partner who's got expertise in building a business internationally, do you want to bring in a partner who has a great network of finance or other professionals that they can bring in to supplement that management team that we were just talking about?
So, I think really thinking about what you want, beyond the check book is really important, and that helps you find the right partners to deliver to the business.
One of the things Zoe and I often talk about, and this leads really nicely into what James does as well, are you looking to relinquish equity of the business today, so do you want to sell some of your shares, do you want to take the backseat, or you want to have another partner on there, or do you just want to raise debt finance and potentially raise the whole of the capital via debt.
And actually, you know, Zoe one of the things we often talk about is what the tax impact of that might be, so is there anything that we need to be thinking about on that side.
Zoe Davies: Yeah absolutely, and timing is actually really important for tax, and it can really influence some of the reliefs that could be available. It can also trigger potentially some of those anti avoidance provisions that stop you getting the tax treatment you would assume you would get.
So, it's crucial, and Paul talks about how it's really important to understand the timing of when you need the cash, it's also important to understand the timing of when you need the cash from the tax perspective. You can really understand how it pulls together and we can go back and forth a little bit on trying to put this together for something that meets those business aims. But also, doesn't make HMRC think that it's doing something they wouldn't be happy with, you know sort of pulling that all together and getting to the right answer.
Starting with what Paul's talked about on you know what you want to achieve and what does your business want to achieve and linking that back through to those cash flows is absolutely crucial.
Paul Joyce: And actually, that's a really good point I think that's where this holistic approach really comes into play. It's not about considering those items in isolation, what the commercial impact is, what's the impact of tax, what's the impact on me going forward. It's bringing those altogether.
One can very much influenced the other. If you haven't thought about them together, you can end up with a great commercial outcome.
So, for me it's about finding and getting the highest value for the business, but if the timings wrong or that type of capital is wrong, you can end up in a very adverse tax position, and therefore you end up with less capital in your pocket than you thought you would because you just haven't bought those three things together.
Zoe Davies: Absolutely, and this is where we need James, because one of the things that is often quite crucial when we're thinking about “what's next” is what do the business owners want and what are their personal positions and what are the cash flows, they need or want. And where I’m grappling with is this route will get this tax treatment; this route gives us this tax treatment, James can then put that together with the net position for the individual, and how does that influence with what they want to or need to do.
James, do you want to touch on, from a personal perspective, the thoughts that will go through your mind there.
James Robinson: Good morning, everyone by the way as well.
In terms of how we approach it from a personal perspective, a lot of the work is to just help understand the areal management team, whoever it is going through, whatever deal transaction, whatever you want to call it.
It is helping them understand what they actually need, what it is they want, and what actually is, ultimately, the goal for them as individuals, after running this business for however many years. After spending so much of their time, so much of their life running it for so long that actually, sometimes, there's not a full understanding of what it is they actually want for their lifestyle. If much of your life has been running the business and working with people to help understand actually what sort of level of expenses would be right for you what's achievable what's aspirational, and basically working with them to understand what it is, they actually need for them personally to make sure they're okay.
But then translating that into working with, well, actually, what do you need from the business to then achieve this as well and to help set yourself some lines in the sand or some parameters that you know “as long as I achieve and a net result of X, whatever it is that I'm personally going to be okay with it.”
Which is really powerful and going into any sort of negotiation for private equity or debt raise whatever it is.
Zoe Davies: Yeah, thanks James and it's also really helpful because sometimes as much as I like to think tax is the most important thing, it's worth us having a slightly higher tax charge if it meets the commercial aims or the personal aims of the individual combined.
So it's really important we work together to not just be focused on our own specialisms to try and get the best possible outcome I can possibly get, for example, from a tax perspective if it actually doesn't achieve what you as a business owner want to achieve, or the best deal that we could possibly get, for what we're looking to do so, these things really do intertwine, which is why you know all three of us sitting listening and understanding what those aims are personally from a business perspective, what the cash is needed for, and all of the topics we've just talked about, and it is really, really important actually.
Paul Joyce: I was going to say I remember one that the three of us worked on not that long ago where, a business thought they would need to sell the whole business, to be able to deliver the amount of money they wanted to live the lifestyle, a kind of envisage for them, you know in retirement.
And actually, when James worked his wonders and sort of mapped out, with a certain amount of capital, what the lifestyle would be in terms of putting some aside, putting some in investments and what will be delivered from an annual salary, we actually worked out that we only actually had to sell about half the business.
Zoe, you did a great job of making sure that the tax was delivered in a really efficient way, and so what it meant was they were able to deliver exactly the lifestyle that they were hoping for, but they also got to retain just under half of the business and therefore there's a future upside and still being involved in the business going forward. It actually shows that you can really come up with some innovative solutions if you work the right the way around through the whole process to make sure you're thinking very careful about what is it you want to achieve and therefore how we're going to go in and achieve it.
I think that's actually a really nice case study, where we are over-delivered, because we were able to put the pieces together and work out what the output would be.
Zoe Davies: Yeah absolutely. That leads us quite nicely actually I think, Paul, because we're going on to the topic of debt finance, and that one actually did have an element of debt finance.
So, let's go into debt finance and talk about what are the main things that somebody should be considering if they think this might be for them or it's an idea they might have.
Paul Joyce: Yeah thanks. I think it's really interesting, because when you speak to most businesses and most individuals, when we talk about debt people think about the big high street banks or going to existing bank and ask them if you can borrow some more capital, and I think the world, particularly last five years has moved on materially, and I think often when people go and speak to their own bank, those guys aren't necessarily the right people to get debt finance from. Therefore, considering what the other options are, opens up a whole world of possibilities.
And a number of businesses that we meet say “well I’ve already spoken to a bank; they can’t really do anything differently.”
Once we go and speak to some other people, you find that there is quite a lot of flexibility when you're making a big purchase or you will go and look at different providers, go look at different places to go and buy whatever it is you're looking for. I think the same applies here in terms of going with the debt.
Think beyond just your current bank, think about where you might be able to get some capital from. I think the key benefits of debt finance over private equity is one it's a lot of cost of capital so you're going to be paying, even in a raising interest rate environment, you know 5/6/7 % interest on capital.
Versus with private equity, you're talking about more like 30-35% cost of capital. Plus, the other benefit is you get to keep all the equity and keep all the upside. So, by putting debt into the business, you get to stay, you know 100% owners of your own business and masters of your own destinies and actually have a lot of a lot of benefits.
Obviously, there are some challenges and some risks involved in that. There is leveraging the business, the bank tends to want its money first and therefore you might have to think about dividends. You might be paying dividends out at the moment whether you're still able to do that but think very carefully about your ability to service that and what happens if the business goes backwards for a period of time, making sure you've got sufficient cash flow to cover your debt obligations.
A bit like when you own a house, you go through exactly the same sort of process. And thinking about “how much can I afford today? what happens if the business goes backwards by 20%, am I still able to service that debt? What does it mean in terms of the value of my shareholding? I don't want to overload my business and put it through undue risk.”
You need to think carefully through that and that's obviously one of the things that we spend a lot of time doing and putting together financial models that help you understand that. We can play around with sensitivities to answer, “what happens if?”.
That will hopefully give people comfort that the amount of debt they're taking out is the right amount. And I talked about high street banks, so in the last five years we've seen an influx of what I would call the alternative lenders. And this is predominantly private debt funds.
People have gone out and raised some capital in the private markets to then lend it into debt instruments in private businesses. And we've now got dozens and dozens and dozens of those that are available, and the benefit of those groups is they tend to be a lot more flexible, than high street banks.
They might be prepared to lend a little bit more versus your high street bank, so you might be able to get more capital in the business than you have thought. It might be that they’re more flexible in terms of covenants and therefore you've got a bit more flexibility and the risk for breaching covenants is much lower. It might be that they’re actually prepared to discuss and allow you to keep taking dividends out of the business if that’s something that you've done historically.
So, one of the things is, they’re a lot more flexible, you can have much more personal one-to-one conversations, they're much more bespoke in terms of structure and what they’re prepared to put in versus a high street bank.
Now clearly, high street a bank still is the cheapest source of capital. So, you are paying those debt funds a higher interest rate to get that benefit of that increased control that increase flexibility.
So again, it comes down to how much debt do I want raised in the business and, therefore, what is the cheapest most flexible best balance between those different sources.
And then in terms of the process of trying to raise that I think one key thing I would reflect on is preparation. I think that too many people go speak to the bank unprepared and then get the answer, no and then, it is difficult to go back and resume that conversation or reengage in that conversation.
It's really important to go and think very carefully about how much you want to raise, what your capabilities in terms of servicing it, what your cash flows look like and often that means having a three- or four-year plan from a financial perspective and integrated P&L balance sheet and cash flow to really enable a bank or a debt fund to know how much cash will be available to service a debt, therefore, how much do I feel comfortable lending.
And then thinking about the timing it's not going to be a case that you go to the bank and say I want some money and then tomorrow they relinquish that money, particularly if you're looking to make a sizable change in terms of the amount of debt you want to raise.
So, thinking really carefully about how long, in what time period, you need the capital. Because it's probably a six-to-eight-week process, assuming that you've got that information ready to go. To then go and speak to the banks, go speak to the debt funds, get some indicative offers, negotiate your heads of terms and negotiate term sheets, and actually, get the funding in place.
So, if you're thinking, crikey, I need to invest in that new equipment tomorrow, that's going to be a real challenge, but if you're thinking well, I want that in six to eight weeks’ time that's a great time to then start to go to have those conversations.
And what it gives you with that time is the flexibility to get the right package, and not just end up with a whatever source of funding you can get in the short period of time. I think, having that time, gives you the flexibility gives you an openness to be able to do what is right for the business rather than just what is available in that period of time.
Obviously, there's an impact on acquisition as well, of debt versus equity, you know it’s helpful just to get your thoughts on that.
Zoe Davies: Yeah, and it was as Paul was talking through the preparation side you know, the thing that's going through my mind is, that's always what I want to be aware of and understand at that stage as well. What’s the money going to be used for and when's it going to be used.
And just getting that understanding and the reason being you always want to be thinking okay well what's the corporation tax position going to be within the company itself, and obviously how that money is going to be used, and when it's going to be used, etc. It’s going to be crucial and to just hopefully, make sure that it is going to be corporation tax deductible and that's one of those assumptions that people can often just assume, well if it's a cost of business, of course, it's corporation tax deductible, but you do need to be thinking through how it's going to be used and then thinking about those shareholders, for example, are we planning on just using this within the business to fund growth, to buy things we might need to buy to go forward with the business, you know into a new market or to enhance what we're doing.
Is it clearly very much trade related, which is more straightforward for a tax perspective, or is there an interaction with the shareholders here, and honestly, this is something that comes up quite regularly? Part of potentially what those funds need to be used for is moving the business on and potentially moving the business on might mean a bit of a change of guard; new people coming through, existing people potentially going out as part of this plan of you know, over years potentially of what the business is doing so really getting that interaction and understanding what's going on and how the funds going to flow etc, and when is crucial and we're thinking, then, about those shareholders, so is any part of this getting money into their hands.
And if the answer is yes, and the easiest way of getting money into shareholders hand is to declare a dividend, usually that’s the easiest way to do it. It's usually also the most tax inefficient, so I can't help, but then think okay well, what are we doing, why are we doing it. If this is part of an exit, should we be taking dividends, or is there some capital transactions that could be or should be going on as part of this, that means we're not triggering those not overly pleasant dividend tax rates and actually looking at this as a capital transaction, as part of an exit, a part of a reduction in an individual shareholding. And therefore, going down that line with usually far more efficient tax rates and respective a capital transaction, which potentially then also give you an opportunity for things like business asset disposal relief, which was entrepreneurs relief. I still think that as entrepreneurs’ relief, so you can get a much lower tax rate than the usual 20%, you can get 10% on a chunk potentially, so it is a really important discussion to understand what those funds are going to be used for, when and how, and to make sure that we're being sensible with the tax implications of doing that and doing it up front.
Because it's much harder to change something once it's been done, than it is to think about what's the plan to start with the debt in order to make sure it's really going to work. I’m going to say, of course, one of the things that's crucial is if the client is saying well actually, I need to get X out as part of this deal because you know the obvious thing is okay James, how do we fund X, so James do you want to have a quick chat about that.
James Robinson: Yeah I mean what you mentioned it's also important to have noted things as part of if we are ever getting capital out of the business one way of the cash capital, whatever we want to call it, there's other routes as well, like making use of owners pensions, for example, as well as a way of extracting funds that's really efficient for the business and efficient for the owners, but then requires us to gather information on those options as well so as part of that preparation stage.
It's not just again about the business or bits looking at what is everything, and how can we get each and every piece of this to fit in. And even then, once the right tax outcome has been achieved for the business from the sale, there's then other techniques you can use for the individuals once they've got their money to say, right well, do we aim to take a bit more risk but then go into some more tax efficient vehicles that give us some upfront tax relief.
Is it about just protecting the capital and doing standard planning, is this being used for the next project as well, how does your cash flow build into this? And understanding what capital those individuals need to keep, but then working again with the likes of Zoe and Paul to say right, well, if you're a serial entrepreneur, and you want to go on to the next thing, how do we then fund that next venture as efficiently as possible as well.
When thinking about debt finance, just from a personal financial planning perspective, something that regularly comes up is what's called key person protection, which is if you're taking out this debt financing within the business, what happens if certain individuals or key members of the business are ill or die, how does that affect the profitability of the business and repaying loans and making sure that you've got life covers in there.
Life cover itself is very cheap, if you're fairly young it can be very cheap, I should say, but it's something that does need to be considered. When I mentioned key person, I saw Paul on my screen smiling a bit there, but then when you're coming up into later sale or transaction, it can be something that flags up.
These people are really important to the business and if something happens to them, there could be a big hit and profitability. So, again with every single facet of what we're looking at here it's really important they're considered properly and fully to make sure you are protected, and your business is protected. But you need to have a plan of how that's going to work over the longer term for to know then how it develops within the business, and what that next stage is for the for the business as well.
Paul Joyce: Yeah, I was going to say James, I mean without getting too morbid on a PE and debt webinar, there have been so many high-profile examples of where you've had a very charismatic leader of a business, who has tragically died, and the businesses failed almost immediately.
So, it is actually really important when you're taking on new forms of capital or thinking about your planning. You know we've just gone through one of the know biggest pandemics in in global history and I don't think anyone would have predicted that three four years ago.
So, preparing yourself, running those systems, analysing and thinking about what the upsides and the downsides might be is really important. Because if you're going to take on new capital that comes with obligations and making sure you're prepared for the impact of those obligations, I think, is really important.
Zoe Davies: Okay let's go on to PE then. I think we've covered debt, and so can you talk us through PE, please Paul and what do we need to be thinking about.
Paul Joyce: Oh yeah, PE, I find to be a controversial topic when you're talking to certain groups of individuals.
On my bookshelf I’ve got “Barbarians at the gate”, which is a classic cautionary tale of private equity gone wrong back in the 1980s, and I think the reality is the world has moved on materially since then, in terms of not only the sophistication of the private equity community, but the breadth of the private equity community.
There's a lot of talk and people have heard about what we call dry powder in the market and that's really been a combination of a huge bull-run market, up until probably the beginning of the BREXIT process, where returns were fantastic, both public and private markets that caused a lot of money to be put into alternative assets and a lot of funding opportunities for private equity funds.
So, a lot of capital was raised during that period, and then we went through a period of quite a bit of uncertainty with BREXIT, we then had COVID, we've now come into a period of record fuel prices, and obviously war in Eastern Europe. And I think what that has meant is that the deployment rate of some of that capital has been a lot lower than probably most of those funds would envisage over that period. So, they are sitting on a huge amount of capital to deploy, which for those people seeking capital, I think, is exciting, it means probably supply of that capital exceeds the demand at the moment.
I think what that means is that if you want to go and look for private equity capital, you as a business owner, are in a great position to go and get that. Some of the benefits are clearly these funds have very deep pockets, so maybe you're looking for 2-3-5-10-15-20 million pounds of funding today, but actually there is the opportunity and a lot of appetite amongst those who want to continue to reinvest their capital in existing businesses so you know, if you think about a processed for a private equity investor to make an initial investment that's probably 6 to 12 weeks of due diligence, assessing the business really getting under the skin, doing a lot of financial analysis. That's quite a long and expensive process, you know, to use a lot of us a lot of third-party advice to do that.
Once they've invested in the business and if you're spending time in board meetings sitting there understand the business better building that confidence with you and the management team, the process for them deploys more capital into that business is a lot easier so whether that's additional M&A so making bolt on acquisitions, whether it's further investments in a business. It is a lot quicker and easier for them to invest in businesses they've already understanding spent you know 1-2-3 years working with so the idea of following on that investment, I think, is interesting and exciting, so you know you might only want X amount today, but if you want another 20-30-40% in the future, that’s a much easier source of capital once you have that private investor on board.
And probably a little bit different and easier than if you're doing it through debt finance, we have to go through that whole process again and the credit committees have to go through their banks and have to go through those processes again. It's also much easier to take capital off the table and Zoe I’m sure touched with you on how that process worked.
It is a much easier source to take capital off the table. That is one of the process for which private equity investments is often buying shares from you as individuals, and that can be greater or smaller chunk, that's obviously up to you guys individually. But the idea of taking some capital off the table is very much part of the private investment process, and obviously they tend to bring a lot of expertise.
They tend to be very used to running and working with high growth, internationalising businesses. You can get some great expertise when you bring a private equity investor on board, and that's one of the things that lead on to, you know one of the things I really want people to think about when you're thinking about your options and thinking about private equity. I think the easiest thing in the world now is getting private equity capital on board.
Now, that relies on you having a good quality business and one that's growing and one that you can demonstrate to an investor that it is a good financial investment. James will be advising you from a personal perspective and in terms of investment you all want to make. A private equity investor is doing exactly the same. They're going to want to invest in a good quality business that's going to generate financial returns. But if you can demonstrate that you've got lots of options and actually, I think we talked about beyond the cheque book earlier in the webinar, I think thinking about personality and style is really important.
One of the key processes that we go through when we introduce businesses and management to private equity is to get them in front of a lot of people. You’d be amazed at the different personalities, different styles, different approaches, some are very hands on, some are very hands off, some want a lot of representation. Some want relatively limited representation on the board, some want to contribute to strategy, and some will let you just get on with it.
And different people want different things, so some people love having another expert, another set of experienced professionals on the board giving their perspective, giving that guidance, giving their years of expertise of running dozens and dozens of businesses.
And some people want a very hands-off approach, they frankly want the money, and they want to be able to get on and continue on the business.
And there are both styles of investor there, you know depending on exactly what you want.
I very much advocate that there are a number of factors that you want to go through and assess when making decisions, one who to partner with and for me, you know pricing and equity splits is one of them, but also thinking do I think I can work with this person for the next five years? Do I want them on my board contributing to my business? Do I think they will add value because you might get an extra pound again today, but you might cost yourself 10 pounds in the future because you've not got the right partner with you?
So, I think that's important, and I think it's really important to know that if things are going well, the last thing a private equity investor wants to do is run your business for you. They are investing in you to run your business and to grow your business, because they know that you know your business more than anyone else in the world and certainly better than they do.
So, the ideal relationship for a private equity investor is to make an investment and to give the capital to allow you to grow more quickly than you would do without it. But then to let you get on with doing that and for you to guide and run your business that's really important.
And again, that's why meeting different partners, different parties, is really important because then you can make a real assessment about the kind of character you want to work with, the kind of style you want to work with and then actually get to know the individuals along that process. And that's why coming again back to timing, this again is not something that happens overnight, and actually is an even longer process than debt financing because clearly the investor equity, they will want to understand the business in a lot more detail than the debt financier and their returns.
We talked about them, they're looking to generate 20-35% return annually on that capital employed, so they want to understand what they are investing in and for me the preparation is super important, not just in terms of the financial information, but really in terms of how you deliver the message about how you're going to grow the business what is the investment proposition.
And we would often spend you know months working with businesses to make sure that information is ready to go, the business is prepped, the business is positioned in exactly the right way, and making sure that all the information is there such that when they're due diligence processes, which will be time consuming, which will be intensive, you are ahead of the curve; you know the answers to the questions before you even get there.
And I think that's really important and sometimes we'll spend 2 to 3 years working with a business in that preparation phase, so you know from me that preparation is really important in terms of timing once you're actually ready to go to market, you're probably looking at a 3-month period from starting to actually signing SPA, and actually, getting capital in your hands in your pocket, and having capital in the business you know, that is going to be an intensive 3-month period.
So, make sure you're ready and prepared to do that. And I think a day preparing in advance is worth 5 or 6 at the back end, when you’re trying to get information on the types of questions that you know are going to be asked during the process, so let’s ask ourselves those questions in advance and then make sure we know what those answers are.
Zoe Davies: As soon as Paul starts to talk about preparation and due diligence, I need to comment on the taxpayer.
Really, the last thing you want is during the due diligence process, that lots of tax skeletons come out of the closet and it's such an area that people can get carried away with, because of the tax world we live in now and it's the last thing you want.
So, making sure you know what's going to come out, have you potentially got employment related securities issues that you didn't know exist, most people do. You know the payroll side of it is always a hot topic when it comes to HMRC and tax and due diligence, thinking about how everybody acquired their shares to start with, what was paid etc all that type of thing that can have tax implications will come out. And also, what paperwork is in place, what does HMRC expect to see unless everything is perfect, it will come up on due diligence and then what you have got is a discussion of how that's going to be dealt with you don't want to be doing that, at the sharp end when you're really focusing on everything else.
So, everything that Paul's talking about and being preparing for those discussions with the PE houses, it's also really important to be working out what are those skeletons that may come out in advance and making sure you correct them rectify them. Do what you need to do, or at least know they're coming and then have them up front is really, really crucial as part of the prep to make sure you've got that process still going smoothly.
Also stress levels are hugely helped by doing this in advance, I would say it's always hard when a client hasn't been able to do that, but, for whatever reason, and then it comes out at the end, and there are difficult discussions and it's not pleasant for anybody.
So yeah, I would definitely recommend that. I think a few days extra HMRC delayed on clearance before you've gone to market is a frustration, but it's five days in the scheme of things. When you're a few days from completion and you're waiting for something to come in that five days can seem like forever, and you know it can be the difference when the deal completing or not frankly.
So, it makes such a difference, as you say, when you're at the sharp end when you're in the process, you want things to be as smooth as possible, so many things you can get out of the way in advance, I usually recommend.
And we've actually had one pulled, I remember it was the night before the deal was supposed to close, where we had the final clearance coming through, the day before it had us two on the phone with the client saying that I was trying everything we can, it might not come through if it doesn't come through are we still going to go ahead with the deal and trying to help them through. That scenario and you know it is stressful it's hard, and you know there's always a solution and we work out how to deal with it, but it's not something that I would choose for somebody if we could, if we could avoid it the night before the deal, I mean my heart was really going I got to say and we got it, by the way, in case anyone wants to know but it's not the point until you got that bit of paper in your hand it's challenging.
Paul Joyce: We always talk about not letting the tax influenced the commercial too much, but, but when you're in that position and the difference in tax treatment is worth material or sum of money, then it starts having an influence on the commercial so you know, trying to do what we can to prep and separate those two, is really important.
So, you can then run the process you want to run from a commercial perspective, knowing that the tax is settled and organised, and you know what the outcome is.
Having that certainty then enables you to then make the other decisions on the back of that.
Zoe Davies: Absolutely, and one of the other things that's crucial there, is thinking about the shareholders and what their plans are as part of this transaction, this is this PE coming in for a period of time, and then everything carries on which is part of an exit plan for them and shareholders.
We really need to understand what the individuals and the shareholders are looking to achieve, because we've then got quite a lot of interaction with their personal tax position. And understanding what we need to do, how they're going to be taxed what we can do by way of the deal structure to make sure that hopefully getting capital treatment, which again is something people will always assume they're getting capital treatment, they'll always assume they're getting entrepreneurial relief for business asset disposal relief. And it's just not that straightforward. Knowing what you're expecting and what you want to do there in advance and getting those clearances and getting that comfort and where it's appropriate to do so well, making sure you potentially can tweak the dealer little bit to make sure HMRC are completely happy and then not got to worry about anything in due course.
But also, if it doesn't affect the deal it’s a gift, you know I do think clearance applications are a complete gift, because you can still get the opportunity to tweak something, which might not have any commercial impact from Paul's perspective, but that has a real difference on the shareholders, and their net position, which then of course James is thinking about in respect of how we meet those individual owner goals.
James Robinson: It's also, I think, as well in any PE transaction is to think not only what does the initial transaction look like and how much cash you are getting from the shares, but also what's the remuneration structure going to look like for those few years after the deal. And are you going to be moving from a dividend remuneration strategy to now you're being salaried because now, the shareholding is different within the business so it's worth thinking about again for those individuals, if you get an initial capital, you might have some lower salary, for example, then you will use to previously, how do we plug that gap for a few years between that second tranche maybe as well.
Zoe Davies: Yeah brilliant. Thank you, James so I’m just conscious of time, and I’m going to ask for key takeaways please gents and what, what do you think other sort of top tips that people to be taking away James.
James Robinson: Yeah, sure my top tip is just thinking about what you need personally, as well as for the business it's very easy to say I need to get this deal over the line and I’ll worry about what I do with it afterwards, but there's so much you can be doing ahead of time, so it's a lot all at once, but do you think about the personal side as well.
Zoe Davies: Thank you. Paul?
Paul Joyce: I always start with the why.
I think it's very easy to jump into either I want to raise private equity debt or debt finance. I think start with what you're trying to achieve, what your objectives are, what time frame, how much capital do you need, what other aspects are really important to you.
Then you can work out, which is the most important and most relevant sources of capital. I think people often start with the answer or go straight to the answer, rather than starting with the question and I think asking yourself those questions will often lead you to a different answer to maybe not what you thought originally. But that's hopefully where we can help you work through some of those considerations and come to the right answer for you for your specific business.
Zoe Davies: From a tax side will be check those assumptions because often people assume they're going to get capital treatment, assume transaction securities won't apply, assume employment related securities won't apply, assume they get the benefits and the anti-avoidance doesn't apply and it's often some niggly things in there, so just check whatever your assumptions are just get those checked across the board.
Okay right Q&A and we've got a couple come through and, and this is not a surprise the first one is going to be for you, Paul.
So, on the debt side, can you please explain the differences in senior debt junior debt where mezzanine debt fits and what's meant by equity kickers and how and when these would apply.
Paul Joyce: Absolutely, and I think the finance community generally have come out with a lot of weird and wonderful acronyms and jargon, to make it almost impossible to understand what any of this means. And people tend to throw these phrases out as much to confuse us.
To clarify that the difference between senior junior mezzanine debt is where it sits in the hierarchy of capital repayments. So senior debt will tend to be the first step that gets often repaid that is through high street banks (but does not have to be they get the priority), what are some of the windings up whether it's in the pool of capital, it will tend to be the lowest cost of debt, but also, it will tend to be the lowest risk for the lender because it's the one that comes out first.
Junior debt then tends to sit behind senior debt, it’s a little bit more expensive but gets paid out after senior debt, so the increased cost reflects the increased risk to the lender. But putting that money in it tends to also be a little bit more flexible in terms of some of the assumptions.
And then mezzanine debt, if you think about a mezzanine floor in a building it tends to sit between two different floors, and mezzanine debt literally sits between the debt layer and the equity layer of capital, so it, it tends to have a bit of a combination of aspects of typical debt. So, it will often have a fixed repayment profile, but it will also sit behind the senior and junior debt so it's more risky and therefore it's more expensive and that's where this piece about equity futures come in.
We'll call it a warrant or an option or something of that sort, it is where a debt instrument has an equity obligation attached to it. So, I might lend some money into this, say 10 million pounds, it will cost you 5% per annum, and you will pay over five years, but in doing so, I also want a bit of an extra it's done on top of my 5% so I'd like a 2% warrant on a business, so if you sell a business, I want to get 2% of the equity as well.
Again, this tends to be something that comes in, with things like debt funds it tends to be an additional return where you're maybe pushing the amount of capital you're putting into the business. But it tends to sit on top of a debt type instrument so it's not necessarily a big shareholding but it's a bit of an extra kicker in terms of the return that the lender can get and again that just reflects the risk profile, you know tends to be in situations, I say were either sitting lower down the capital chain, whether they're sitting behind a senior lender who's going to take their money out first and therefore it's riskier or were they just need a bit of extra return. Because maybe they're putting more capital into the business, then they pure debt return would cover.
Zoe Davies: Thank you very much.
Okay, well, I think that's all we've got time for today, so thank you very much for joining us and also thank you to Paul and to James for giving some great insight there.
As we mentioned earlier, this webinar is part of our what's next series so look out for future webinars where we're going to going to be discussing the options available should you wish to exit the business, the tax landscape, and how to maximize the business value. In the meantime, we have released our latest newsletter for business owners, which covers all the growth options available, and also our previous webinar, which discussed what's next to secure the future of your business. We will share these with you, along with the recording of today's session and the contact details of James, Paul and myself.
If you have any questions for us at all, please don't hesitate to get in touch, we'll be happy to help. And if you do want to talk through your specific circumstances, we are happy to sit down and have a have a meeting to do that as well because it's always bespoke so thank you very much, and I hope you have a lovely Tuesday thanks everybody.