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