Business Matters – Issue 11

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Business exits

Keeping your course

Employees’ financial well-being

Five ways in which you can champion it

Your business, your pension

Time to broaden your horizons?

SMEs and loan applications

It’s all in the planning

Is it time for a tax MOT?

Peace of mind

Business exits: Keeping your course

The pandemic has changed many things, but how businesses are valued ahead of sale doesn’t need to be one of them. Three business advisers share recent client experiences, and how these reflect the current market.

Even at the best of times, exiting a business can be one of the biggest challenges owners face – all the more so for those wishing to sell in the next 12 months while the ongoing impact of the COVID-19 pandemic feels like one more hurdle.

Malcolm Murray, Managing Director of Entrepreneurs Hub, comments:

“We’ve been working closely with our clients, some of whom are looking to grow their business ahead of exit and some who were ready to sell their business. In the first few months, most business owners were affected by COVID-19. Everyone was caught out, whether it was because of projects or orders going on hold, staff sickness, supply chain issues or moving to a working from home model.”

As the dust begins to settle, however, Malcolm believes that there aren’t many entrepreneurs who will need to change their longer-term exit plans, particularly in terms of how they value their business. “For those looking to sell, nothing has actually changed,” he explains. “They still want to exit their business. The only thing that may have changed is their timeline.”

Managing Director of Hornblower Business Brokers, Henry Campbell-Jones, agrees:

“Many of the business owners we’ve been talking to have still been considering the sale of their business and feel quite positive about the future.”

Sector-specific challenges

The pandemic has likely affected all sectors, although the impact hasn’t been negative for all of them. Henry continues:

“Some businesses that are looking to sell have continued to do well, especially service sector businesses and some engineering businesses whose customers are in the healthcare sector. We’ve kept going with those sales and have had a reasonable level of enquiry for those.

“Others that have been affected have put the process on hold to address issues, such as furloughing staff or working remotely if that’s possible. They’re focused on getting through lockdown and coming out the other side.”

And as Malcolm says, the key for some entrepreneurs will be being ready to react as the pandemic develops:

“Construction clients that were hit quite hard at first seem to be coming back quite strongly and are receiving a number of enquiries about new projects coming in. They’re building some momentum.”

Bouncing back

The pandemic has changed many things in everyone’s lives, but not the measures of a valuation, according to Malcolm:

“There is no difference in valuing your businesses now than at any other time. No matter what anyone says, it is still on a return-on-investment basis. Buyers may look at a multiple of revenues or earnings before interest and tax or earnings before interest, tax and depreciation and amortisation.

“You still have to look at your profit, make your businesses as profitable as possible and make your profit consistent. Buyers will possibly be looking at the dip caused by this a little more sympathetically, but they’ll be keen to see how the company has responded and bounced back well.”

Andrew Lock, Co-Founder and Partner at LockDutton Corporate Finance, says that with this in mind, the level of valuations should not change for most businesses: “Good businesses going into COVID-19 are deemed by buyers to be good businesses coming out of it,” he observes.

“Trade buyers, both in the UK, Europe and the US, are saying that if they see three to four months of trading back at the level a business was at pre-COVID-19, they are quite happy to make acquisitions based on 2019 performance. If you can get your run rate back up for three to four months, then buyers are ready to acknowledge that.”

In agreement, Henry says:

“In presenting businesses to the market, we will still present their pre-pandemic performance as well as the future forecast. That sets the tone that we believe the business is going to recover and where we need to get to in terms of the valuation.

“However, for those businesses more affected by the lockdown, it may require a more structured deal where an amount is paid up front and an amount is deferred or contingent on reaching previous performance.”

Building value

So, for businesses that have been set back by the pandemic, what can they do to rebuild value to their pre-crisis levels? According to Malcolm, it is the businesses that have shown the ability to innovate and adapt quickly that are rebuilding value well.

“If you look at restaurants and pubs that have thought: “Well, we can’t supply our usual service, but we can do something else…”, we’ve seen them quickly start offering takeaways and delivery services, and others supplying essential foods to local communities. They have been able to think creatively, and it’s helped.

“Another thing businesses can do at the moment is drive sales and marketing. Many SMEs rely on word-of-mouth and repeat business. They don’t proactively market and sell their business. You can’t wait for things to come back; you’ve got to go out and win it back because if you don’t your competitors will be.”

Planning ahead

But what happens after the sale? After the initial celebrations of this milestone achievement are over, the first thing on your to-do list should be to prioritise securing your financial future. Check back to our article in Business Matters Issue 8 for our top tips on good post-exit financial planning.

Remember, if you’re looking to sell, everyone is in the same boat at the moment – it’s how you react to the crises that’s important to buyers! For advice and guidance, why not reach out to your Wellesley financial adviser today?

Exit strategies may include the referral to a service that is separate and distinct to those offered by Wellesley Wealth Advisory and St. James’s Place.

The opinions expressed by third parties are their own and are not necessarily shared by Wellesley Wealth Advisory.

5 ways you can champion your employees’ financial well-being

It’s no secret that when we’re stressed or worried, our concentration levels aren’t at their best. And, with money being a huge source of concern for many people – plus the added mental-health impact of the pandemic – employers have a golden opportunity to support their employees with their financial well-being. Here are five ways in which you can do so!

Financial worries not only impact your employees’ mental health, but they can also be highly damaging to business performance – affecting their ability to do their job and perform well. And, with finances being the biggest single source of concern for most people – with 26% of us worried about money on an ongoing basis1 – it’s clearly an issue that employers need to take seriously.

However, there’s still progress to be made – a report by Aegon found that, while 71% of employers believe that their employees would be happier at work if their financial well-being were better, many firms remain uncertain as to how best to support employees in this. Just half of the businesses surveyed said they would be able to provide information to staff on debt issues, and 38% admitted that they didn’t fully understand the level of financial information they could offer employees.2

It’s time to change this! Here are five ways in which you can offer your team practical and emotional support for their financial well-being and their general mental health:

 

  1. Raise awareness

Financial well-being is about feeling secure, confident and empowered, according to the Money and Pensions Service. It’s about being in control of your finances. It’s important to raise awareness of this aspect of well-being – for example, by explaining financial terminology, and facilitating conversations that can help employees to understand the nature of financial stress and how it might be affecting them.

Harriet Shepherd, Workplace Financial Wellbeing Manager at St. James’s Place Wealth Management, commented:

“For instance, someone entering a financial-well-being workshop might not realise that finance is the main cause of their stress. It might just be from conversations that people begin to understand the roots of their financial worries.”

  1. Join the conversation

Money can often be a taboo subject, so by engaging with wider discussions about financial well-being and mental health, you can help normalise conversations with your team. Each year, there are various opportunities for employers to take part in these discussions, such as Mental Health Awareness Week, Stress Awareness Month and Debt Awareness Week.

What’s more, the National Wellness Conversation works with organisations to encourage their people to talk more openly about their finances and enable them to tackle concerns head-on, thereby reducing stress levels and developing healthier approaches to managing their money. Find out more about the National Wellness Conversation, and how your company can take part, here.

 

  1. Communicate clearly

Explaining the various financial rewards and schemes you offer in a clear, accessible way can make employees more likely to engage with them. Shepherd continued:

“Offer specific sessions about those rewards and help employees understand the packages that are financially linked, such as health insurance, protection insurance and discounts with local firms. These things are often overlooked, but they can make a real difference to people.”

 

  1. Offer practical support

Commit to giving your team access to a range of resources during work hours, which is when they’re most likely to access them. Workshops can help employees get a better sense of how to deal with their financial worries, even if it’s just information that helps get them started.

Stephen Holliday, CEO of Level Financial Technology, commented:

“Employers can be at the heart of the solution – for example, by running financial-education workshops and getting their people to talk about money more often. They’re the people paying, so if they can make their workers better custodians of that pay, they can help to reduce problematic issues, such as salaries not going far enough and employees having to turn to credit providers.

“And, of course, there’s a big opportunity here – businesses stand to benefit from it themselves by having a happier workforce that’s less financially stressed.”

  1. Bring in the professionals

Consider engaging well-being providers to conduct one-to-one guidance sessions with employees. At Wellesley, our experienced financial advisers can provide financial education in the workplace and support people in different circumstances – this can be an initial chat and providing useful information, rather than formal advice.

We’re ready when you are

To summarise, then, the benefits of championing your employees’ financial well-being are clear to see!

It will support your team members’ overall well-being, and even increase loyalty by showing them that you care about their lives and financial futures. It will also promote the success of your organisation. With an estimated 4.2 million worker days being lost each year due to a lack of financial well-being, equating to £626 million in lost output3, the question isn’t ‘should you invest in your employees’ financial well-being?’, but rather, ‘can you afford not to?’.

If you’re interested in a Wellesley adviser coming into your workplace for a finance guidance session, contact us today!

Links from this website exist for information only and we accept no responsibility or liability for the information contained on any such sites. The existence of a link to another website does not imply or express endorsement of its provider, product or services by us or St. James’s Place.

Sources:

1 Salary Finance, The Employer’s Guide to Financial Wellbeing 2020-21 (based on a survey of 550 clients), November 2020
2 Aegon, Financial wellbeing in the workplace, 2018 (total sample size:500 HR decision makers from a representative sample of British businesses)
3 Centre for Economics and Business Research, Financial wellbeing and productivity, October 2018

Your business, your pension: Time to broaden your horizons?

Taking a pension and removing money from your business tax-efficiently require careful planning. As a business owner, it’s important to be aware that this can diversify your risk rather than solely relying on your company to find a comfortable retirement.

It’s often the case that entrepreneurs take it for granted that their business will fund a comfortable retirement – yet what if things don’t work out as planned? If you’re fully dependent on your company and it fails – or doesn’t perform as well as anticipated – your pension pot could end up on the meagre side.

Trading conditions look to be uncertain over the coming years, meaning a pension is a useful tactic to consider in order to diversify your risk away from your business. Not only that, but it’s a particularly tax-efficient way of extracting capital from it – thanks to the very generous tax relief that companies enjoy on pension contributions.

As things stand, corporation tax is 19% – meaning for every £100 your company earns as profit, you’ll pay corporation tax of £19. This reduces the amount you can extract as a dividend to only £81. Yet when the business pays £100 into your pension, it essentially costs just £81 due to a reduction in corporation tax.

Income tax reduction

What’s more, a pension enables you to take a relatively large sum without being liable for higher-rate income tax. For instance, you could pay yourself a salary and dividends of £50,270 and the business could pay up to the annual tax-free allowance of £40,000 (or 100% of earnings if less) into your pension pot. Indeed, any unused annual allowance from the previous three years can be carried forward, in which case the company could potentially pay you a pension contribution of up to £160,000 in a single year, along with an equivalent reduction in corporation tax.

The contributions would need to adhere to the ‘wholly and exclusively’ test to be an allowable expense. Intrinsically, this means that the contribution must be on a par with the work undertaken by the individual receiving the pension payment.

Simon Martin, Technical Connection Consultant at St. James’s Place, explains:

“A typical company founder might say, ‘My business is my pension.’ That’s fine as long as it continues to be successful. But if, for various reasons, the business struggles, not only may your lifestyle be affected, but your retirement will be impacted as well. If you have a pension, even if your company fails at some point in the future, the pension funds can still be held for your retirement. It’s a way of protecting yourself and your future.”

Tax-efficient extraction

Drawing money from your business tax-efficiently is not limited to pensions. It’s crucial to ensure your remuneration structure is tax-efficient because this will affect the net income received from your company. Consider all of the available allowances and exemptions, such as the personal allowance and dividend allowance.

At present, the personal allowance is £12,570, and the dividend allowance is £2,000. Within these bands, income can be taken from your business without a charge to income tax. Dividend income within the basic-rate band is taxed at 7.5% with no employer’s or employee’s National Insurance – using dividends is often a tax-efficient method of drawing profits from your business.

If you’re looking to create a tax-efficient remuneration structure for your business, contact your Wellesley financial adviser to broaden your horizons.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.

SMEs and loan applications: It’s all in the planning

When approaching a lender for a business loan, SMEs naturally want to be sure their request will be accepted. The secret? It’s all in the planning.

Courtesy of some helpful insider knowledge from Rob Warlow – Founder of Business Loan Services (UK) Ltd. – this article looks at five common reasons why loans are typically declined.

It’s never welcome news to hear that your business loan application has been rejected. Yet hindsight is, as they say, 20/20, in which case it’s best to be aware of the possible reasons why your SME business loan was turned down, in order to plan for the future.

Rob Warlow, Founder of SME loan broker Business Loan Services, shares his thoughts:

“2021 has seen a lack of lending appetite among the main high-street lenders due to the ongoing uncertainty caused by the pandemic. 2020 saw businesses gorging on debt provided by lenders under the Bounce Bank Loan and CBILS. It is this debt hangover that is now concerning both businesses and lenders alike.”

The economy is now opening up again, and many SMEs will find themselves up against the problem of securing access to working capital so as to fund their daily cashflow requirements. For some, this will prove to be a struggle – potentially causing an increase in the number of firms entering into some form of insolvency arrangement during the rest of 2021 and into 2022.

According to Warlow, SMEs looking to borrow would be advised to begin the process well in advance – ideally six to 12 months ahead of submitting an application. This then gives some leeway to be able to scope out all the options, target the most appropriate lenders and then customise the business and loan application to boost the chances of success.

Below, Warlow discusses the routine reasons why loans are rejected, and how SMEs can avoid this fate:

1. Targeting the wrong lender

Two very distinct groups of lenders have materialised in recent years, namely banks and ‘fintechs’. Traditional banks usually avoid small loans now (as a ballpark figure, below £25,000), whereas fintechs, such as peer-to-peer lenders, lead this end of the market.

While banks have more manual loan-application processes (in a low-interest-rate environment, small loans are just not economical), fintechs usually have highly automated online processes that are very much ‘rules-based’.

SMEs need to therefore earmark lenders that are happy with the size of loan they require.

Another point of note is the importance of finding out which lenders are active in your sector. In the current climate, banks and other lenders are steering clear of or being ultra-cautious regarding some areas – for instance, as is to be expected, obtaining finance can be somewhat problematic now for high-street retailers, restaurants and the leisure sector, as these have all experienced higher levels of stress as a result of the pandemic.

It’s a good idea to have a conversation sooner rather than later with target lenders to ensure they’re active in your sector.

2. Weak credit history (of the business or its directors)

Credit scores are particularly important to fintech lenders because of their automated processes. Banks will sometimes delve into the reasons behind a low credit score, while an automated process simply looks at the score itself and a decision is made.

It’s therefore crucial for businesses to make sure they retain a healthy credit history. Some of the common reasons behind a lower credit scores include:

  • Late or last-minute filing of accounts (there can be a few days’ delay from filing accounts to when they’re available for credit-scoring algorithms to read, therefore the algorithm may assume accounts are late if they were only filed at the last minute)
  • Late payment of invoices (reporting late payments to credit-scoring agencies is becoming more commonplace – this essentially puts a black mark against the name of the late payer)
  • Judgements or payment defaults against the company (a CCJ has a notable negative impact on a credit score).

The personal credit history of directors and large shareholders is likewise critical. Lenders are often reliant on the personal guarantees of directors and will want to ensure they’re in a robust financial position.

The financial repercussions of COVID-19 will now be reflected in businesses’ 2020/21 annual accounts, in which case a further downgrading of credit scores is to be expected – this will negatively affect the ability to raise finance and/or the cost of funds.

3. Financial deficiencies

Lenders will be scrutinising certain financial metrics, and no more so than in the case of larger loans. They will want to see how profitable the business is – with the higher level of debt taken on by firms over the last 18 months, the ability to generate enough cash to comfortably cover Bounce Back Loans, CBILS and the proposed loan repayments will be essential. The lender’s main concern will be the overall burden of debt on a balance sheet.

At present, lenders will expect to be able to access the most up-to-date annual accounts – waiting right up until the filing deadline will be deemed unacceptable. Not only that, but the expectation will also be that the latest management accounts are presented with an application. Annual accounts are seen as historic, and subsequently there’s a need for current-year trading information.

A further point that businesses need to be mindful of is that, sometimes, accountants will (quite legitimately) structure the financials in such a way so as to minimise profit (and therefore, tax). However, this can actually hinder a favourable lending decision. Instead, forward-planning and structuring the financials to suit a loan application will be necessary – and well in advance.

4. Problems with bank statements

Especially in the case of loans above the ‘automated’ assessment threshold, lenders will be looking at bank statements – choosing to reject applications in the instance where repeated patterns of bounced cheques or unplanned overdrafts are apparent.

5. Mistiming the application

Start-ups come with increased risk and a lack of trading record, and are therefore a no-go for debt finance. As a general rule, debt finance can be considered following 12 months of trading history having been established.

The final point from Warlow regarding SMEs is that although the government has launched the Recovery Loan Scheme – thus providing an 80% guarantee to lenders – this extra support will not change the way lenders review an application. Essentially, when it comes to making a decision about whether to support the request or otherwise, they’ll continue to apply all the usual rules regardless.

In conclusion, the take-away message is to get ahead of the curve and plan your borrowing strategy – well in advance – before approaching a lender for finance. In case of doubt, always consult your financial adviser to be sure you’re fully prepared.

Is it time for a tax MOT?

Taking the time to do a tax health check this autumn might not just reward you financially, but bring you added peace of mind too.

It’s true – most of us would rather clear out the garage or scrub the bathroom floor than review our tax position. But, by sparing an hour or two to do so, you could potentially be substantially better off – and also gain a surprising sense of calm (no, really!).

Just like a yearly MOT test for your car can save you from an expensive breakdown, checking in on your tax situation throughout the year – and tinkering where necessary – can help everything to run smoothly. Indeed, it’s important not to store up everything for an annual ‘blitz’ – otherwise, you could wind up paying too much tax or, in some cases, not enough, which could see you landed with a nasty fine.

Tax TLC

As much as you might want to avoid reviewing your tax status, it may not be as bad as you expect. Financial guidance can really come into its own when it comes to keeping a watchful eye on your tax situation. An experienced adviser can go through everything with you in an hour or so, from reviewing your tax code and checking you’re making the most of any Stocks & Shares ISAs to maximising tax relief on your pension contributions.

If you’re already drawing on your pension or contemplating dipping into it, an adviser can help guide you through accessing your cash in the most tax-efficient way, taking all your finances into account. After all, the last thing you want to do is risk a big tax bill by taking a lump sum out of your pension when you could have taken it tax-free from another pot!

What’s more, if you own a business, an adviser can help you make sure you’re making the most of your tax allowances throughout the year – not just at tax year-end! Tax breaks and allowances can also help you grow your personal wealth, and taking advice can help make sure you use them to your full advantage – whether you want to build a nest egg to support a child or grandchild, or feather your own nest and grow your retirement savings.

Similarly, if you’re concerned about leaving your loved ones with a large Inheritance Tax bill, your adviser can help you work through steps to mitigate it.

Taking control

To stay in charge of your situation, it’s important to keep the conversation going with an adviser throughout the year and not leave everything for your annual review. What we’ve learned from the pandemic and remote working is that it’s never been easier to stay in touch with your adviser, with most of us able to slot in quick 20-minute catch-ups over the phone or on Zoom relatively easily.

Circling back to the car analogy, you wouldn’t wait for your annual MOT test if the engine was making a funny noise, would you? With your finances, this ‘funny noise’ might be a change of circumstances or upheaval in your life. For example, you might have changed jobs, had a pay rise, been made redundant or become self-employed. All these things could mean you need to manage your finances slightly differently to make sure everything is running as tax-efficiently as possible.

It might even be a minor niggle causing you irritation – for example, a new company car or adding a child to your medical insurance has played with your tax code. Chat to an adviser for an ‘interim’ check-up and you may find a quick and easy resolution.

Added peace of mind

It’s impossible to say how much money regular tax reviews could save; however, when we talk to our clients, it’s clear that the value goes far beyond financial gain. It’s about the sense of calm that a tax review can bring, leaving you safe in the knowledge that you won’t be hit by a surprise tax bill or be caught on the back foot.

Even if you don’t make any changes to your financial plans, catch-ups and regular communication with an adviser always make sense – the more we understand what’s going on in your life, the more we’ll be able to help.

If you’d like help identifying simple but effective tax-saving opportunities, talk to Wellesley for a no-obligation review!

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.