As business owners ourselves we know tax is an unpopular topic for you. We know how hugely dispiriting it can feel when you receive your final tax bill from your accountant; but have you ever considered that paying your taxes now could help to line your pocket in the future when you come to sell your business?
Whilst many business owners are off picking their accountant’s brains for legitimate techniques for mitigating tax, they probably haven’t considered the fact that these methods designed to reduce tax could actually be having a harmful effect on the value of their business.
Please note, we are not talking about increased benefits for the owner, such as pension contributions, but more hidden ones like stock write downs etc, which cannot easily be added back when looking the value in a sale.
If you’ve ever employed techniques to reduce your business’ tax bill then you will know that this often involves reducing your profit figure.
Reducing profit to reduce tax works something like this:
If you can manage to reduce your business’ profit figure by £100, then you stand to save either £20 in corporation tax or even £40 in personal income tax.
These figures look great in the short-term as they mean a smaller payment to the taxman and more cash kept in your business or back pocket.
But how about if we told you that for every £100 you reduce your business profit by you could devalue the business by £200 – £400! I bet these short-term gains suddenly don’t look so attractive, especially when considering your business’ exit strategy.
In other words, every £40 saved in corporation tax could actually be costing you up to £360 when selling your business.
On top of this when a business is sold then you would probably wish to receive full value for the saleable stock. A little hard to argue if previously written down and if you revalue at full cost, you end up paying the tax anyway!
When you come to sell your business, your accounts will not only affect the value of your business and your final sale price, they also help to dictate how much potential buyers can borrow towards the purchase.
By avoiding tax reducing techniques and keeping your business’ profits (and thus value) high you are likely to get more interest and a better deal, i.e. more cash when you sell.
Also, you can probably sleep safer at night, knowing you are giving the buyer minimal scope to claim under the tax indemnities if he finds something he is not happy with after sale.
In our experience reducing profit in business accounts to pay less tax is often a short-sighted move. Business accounts should always be a true and fair reflection of your company’s financial position.
We, therefore, advise businesses to take the hit with their taxes now to reap the rewards in the future; this advice is particularly pertinent if you are planning on selling in the next few years.
Thinking about selling your business and looking for more professional advice? Get in touch with one of our skilled and experienced regional partners for discrete advice about selling your business. Just some of the areas we can help you with include valuation, negotiation, preparation, finance and legal matters.
Regional partner Paul Dodgshon has been appointed to the board of Business Partnership (Management) Limited.
Paul DodgshonIn addition to his executive responsibilities, Paul who covers the Manchester Central, South Cheshire, Staffordshire, Shropshire and Mid Wales areas for Business Partnership and Business Partnership Corporate, also has an equity stake in the company.
Chairman Alistair Glaze said: “We look forward to working with Paul over the coming years. His appointment reinforces our collective desire to embrace the experience of our younger regional partners, whilst providing a plan which will underpin the future of the business into the next generation and beyond.”
Ian Craig has left the board and will continue as a shareholder and regional partner responsible for the Nottinghamshire and North West Leicestershire areas.
Mr Glaze added: “The board and I would like to thank Ian for all his support and wise counsel over the past 16 years. He remains a cherished colleague and will continue to provide training and support for new regional partners joining us.”
If we had a pound for every time we heard the old wartime adage: “Keep calm and carry on” since last Thursday’s Brexit vote, we’d all be on our sun loungers in the Maldives by now.
Experts, along with people who have an opinion on pretty much everything, have been hogging the airwaves and social media and it is easy to be bamboozled by the sheer volume of claims, counter claims and statistics.
Business Partnership has collated post June 23 responses from four high profile membership organisations.
Our first commentator is Mike Cherry, national chairman of the Federation of Small Businesses, who called for clarity on “what these decisions now mean for business, including how businesses will have access to the single market and the free movement of people and trade”.
Mr Cherry continued: “Nearly a quarter of FSB members export, with the majority exporting to the single market, which means access to 500 million potential consumers, more than 26 million businesses and is worth 11 trillion euros.”
Clarity is also the watchword for Dr Adam Marshall, acting director general of The British Chambers of Commerce.
“The immediate priorities for UK business are market stability and political clarity,” he said.
“All companies will expect swift, decisive, and coordinated action from the government and the Bank of England to stabilise markets if trading conditions or the availability of capital change dramatically.
“Business will also want to see a detailed plan to support the economy during the coming transition period – as confidence, investment, hiring and growth would all be deeply affected by a prolonged period of uncertainty. If ever there were a time to ditch the straightjacket of fiscal rules for investment in a better business infrastructure, this is it.”
A “nervy time” ahead was predicted by Simon Walker, director general of the Institute of Directors:
“It is imperative that our political leaders manage the transition as smoothly as possible,” said Mr Walker.
“The weeks and months ahead are going to be a nervy time for business leaders, so they have to know that the Government is focused on maintaining stability while a new relationship with the EU is established.
“British businesses are resilient and, with their characteristic ingenuity, they will weather this storm. Even once we have left, the EU will continue to be our biggest trading partner, and the first destination for many companies when they start to export. One thing the Government must do immediately is to guarantee the right to remain of EU citizens currently in the UK. Companies do not want to have to worry about losing valued staff.”
Completing our round up is Pip Wilkins, chief executive of the British Franchise Association, who said: “We want to be clear that for us, and for franchising, it is very much ‘business as usual’.
“We will continue to work closely with the European Franchise Federation and reap the opportunities that it affords to guide and inform on franchising across Europe.”
As the political wrangling rumbles on, Business Partnership’s regional partners will continue to work hard for their clients, whether they are buying or selling a business. Find the partner for your area on our Offices page.
After the headlines and sound bites comes the task few of us would envy – picking through the fine details of Chancellor George Osborne’s eighth Budget. The proposed sugar tax predictably grabbed the tabloids’ attention but many of the more heavyweight commentators have chosen to focus on the implications for Britain’s small businesses including newsagents in Nuneaton, corner shops in Barnstaple and hairdressers in Leeds.
Most agree that small businesses are the big winners following the announcement that 630,000 small businesses will pay no business rates at all from 2017.
The annual threshold for 100 per cent relief on business rates for small firms will rise from £6,000 to £12,000 and the higher rate from £18,000 to £51,000. Mr Osborne claims the reduction will save small businesses some £7 billion per year.
The Chancellor didn’t hang around to introduce a change to commercial stamp duty, which came into force at midnight on March 17. The rate is now nought per cent on purchases up to £150,000, two per cent on the next £100,000 and a five per cent top rate above £250,000. There is also a new two per cent rate for high value leases with a net present value above £5 million.
Also of significant interest to SMEs is the news that the self-employed will no longer have to pay class two national insurance contributions, which will be abolished from April 2018. Businesses of all sizes will also be relieved that there is no increase in fuel duty.
At Business Partnership, we believe the increase in the small business rate relief threshold will have a significant impact on the profitability of small retail businesses, which in turn will help business owners to realise a higher value when they come to sell their business.
Long term confidence regarding small business rate relief will breed confidence in the High Street which will improve the marketability of these types of businesses. In recent years they have become less attractive to new buyers, especially younger generation buyers.
A reduction in corporation tax to 17 per cent by 2020 will allow small businesses to retain more profit which provides cash flow. This in turn can be reinvested to achieve growth and enhance their value on sale.
The Chancellor has looked after small businesses generally which will make the sector more attractive at the point of sale. This will hopefully encourage young investors to start or purchase a business as an alternative to employment.
If you are considering buying or selling a business, contact Business Partnership’s team of experts, who are based across the UK.
The 2014 Edelman Trust Barometer, which focusses on levels of public trust around the world, has just been published. Its key findings include that (with the exception of Asia) family owned businesses are THE most trusted, outpacing other SMEs and private companies, ‘big business’ and state-owned businesses.
This report follows an earlier one by the Institute for Family Businesses (IFA) which suggests a number of reasons why family firms are not just popular with consumers: businesses buyers are particularly keen on them, too. Why?
Closely linked reasons for popularity
The IFA report found that family-firm owner managers run businesses with an eye to the long-term. They are much better at continuing to invest during recessions and take more modest salaries and dividends, preferring to reinvest instead. They also command greater staff loyalty. These factors help family businesses to build strength in depth – and develop the high levels of trust revealed by the Edelman survey.
Family firms are often criticised by financial industry professionals for being overly-cautious, for a sentimental approach to their staff and for holding cash. But these are the very reasons behind staff and customer loyalty. They were also central to the ability of many family firms to weather recent storms more successfully than highly-geared businesses run by employee managers focussed on quarterly results – and maximising the share price when their options mature.
The challenge facing new owners
No wonder business buyers are keen on family firms. They want a business with strong foundations and thus value the same things that the staff and customers prize. Yes, the transition of ownership out of the family has to be carefully managed but, done with sensitivity, that is rarely a problem in itself. No, the real challenge is in subsequent management strategy and style. Will you, the new owner, follow the practices which made the business so good in the first place, or succumb to shorter-term temptations?
Whether you’re selling, buying, or planning for the future, Business Partnership is here to help. Contact us today to speak with your local Regional Partner and start your journey toward success.
