You have a successful business, and it feels great! You can see that the business that you started and have worked so hard to develop is now achieving its goals. The question now is – what next?
The first and obvious answer is, no change. After all, why swap a winning suit? But there are a number of options available to business owners who want to do more with their company, or those who want to enjoy the fruits of their labour.
Read on to hear about financing for expansion, share options for employees and selling your business.
There comes a time in most businesses when, as turnover expands, there will be a tightening of available resource. Whether it be finance or working space, machinery or manpower, or something else unique to your business.
Sooner or later, you are going to need to look carefully at your options for the future of your business. For example, financing, diversification, increase and maintenance of your workforce, passing your business on or perhaps just simply selling your business.
If you’ve ever asked yourself the question “Does my business need additional resource?”, and the answer is “yes”, then most likely you will need further finance.
The question then is whether the additional finance should be gained through a loan or through equity… or a bit of both.
Pros: Loans have the advantage of not diluting ownership.
Cons: The downside is that they increase operating costs and generally carry latent vulnerability because most lenders will require security over the assets of the business.
Pros: Equity avoids the latent vulnerability of securing your business assets against a loan.
Cons: Releasing equity dilutes your ownership and increases management (particularly accounting) reporting requirements. A mixture of Loan and Equity has the advantages/disadvantages of both.
If you have a growing business, you may well be thinking of diversifying into new areas.
If so, it might be appropriate to consider separating the different trading functions by creating separate subsidiary companies and/or creating a holding company. Then, the major assets (i.e. land, plant, intellectual property, etc.) can be transferred to the holding company.
This allows the subsidiaries to get on with trading in their more focused business sectors, and any profits are dividended up to the holding company. This reduces the risk to the holding company from third-party trading customers and protects the major assets against the commercial risks of the different trades.
One of the key factors in any successful business is a motivated, committed work-force – particularly the senior managers and other key employees. It is vital to your continued success that you retain the motivation and enthusiasm of your workforce.
It may be that you have family who you would like to pass on the day-to-day management (and even ownership) of your business to.
If so, it is vital that you take time to consider the tax implications and also the operational impact (on senior employees and key customers) of delegating responsibility to family members. This is even more important if the family member(s) have not been ’visibly’ or meaningfully involved in the business before now.
In all dealings with your workforce, you will need to adopt a “carrot and stick” approach. The “stick” comes in the form of a clear employment contract, which should include enforceable non-competition restrictions. These restrictions are generally limited in time and scope and depend on the role of the employee and the customers/suppliers your employee communicates with.
The “carrot” is your basic employment package, including perks (car, mobile phone, telephone bill, private health, death in service, bonus arrangements, pension, etc).
You may also want to consider other “friendly handcuffs” in the form of share options, a range of which are available to owners of private businesses (particularly EMI share option schemes).
Share options will generally depend on the employee remaining in the employ of the business and may have limited exercise rights. For example, employees could receive a percentage payment on the potential sale of the business, based on the increase in value since their share option started.
Share options are often a valuable incentivising tool to business owners to keep key employees in your business (and working hard for its success) or risk losing their options.
Ultimately, you may be thinking that now is the time for you to realise the full value of your investment in the business, and to plan for your life without the stresses and strains of business.
If you do think that selling your business is the right option for you, you will need to start ‘dressing the business for sale’.
Dressing a business for sale simply means that you are preparing all the required paperwork, contracts and agreements to prove the full value of your business.
The key element of dressing a business for sale is to ensure that all matters that would be crucial to a Buyer (or their financier) are properly set up and managed. Potential buyers will be keen to look not only at your employment contracts, but also your supply contracts, customer contracts, IT licence agreements, leases and all other trading agreements.
All these things will impact on the continuity and growth of the business. Often, particularly in long-running businesses where you have developed your relationships personally over time, you will have nothing about these agreements in writing.
If you are considering appointing a corporate finance adviser (CFA) to market your business, you should bear in mind that if your shares are sold, you personally (not the business), will be liable for the CFA’s fees. The CFA fee will invariably be (or include) a percentage of the sale value achieved.
Luckily, you can take advantage of a potential exemption from VAT on fees for bona fide third-party corporate finance advice.
For example, on a recent deal which David Williams, the Head of Corporate at Astle Paterson Solicitors advised, the CFA fee was 3% of sale value achieved. On a £4m sale this meant a fee of £120,000. David successfully saved the seller £24,000 by convincing the CFA that their advice should be free of VAT.
Whatever decision you make for the future of your business – whether it be to expand and diversify, or if your only desire now is to sit on a sizzling beach and to leave the work to someone new – you should consider discussing your options with a qualified and experienced professional adviser.
Here at Astle Paterson, we have professionals who are qualified and specialise in a range of corporate and commercial matters. We deal with share and business sales from business valued from £10,000 to over £30 million.
Our professionals have been working closely with and selling businesses for well over 30 years. So, we would be more than happy to discuss any business matters you may have on an initial ‘no fee’ basis. Our expert team can help you focus on the issues affecting you and your business, exploring the various options available to you.
Our Corporate team are happy to assist you and your business. If you would like an initial ‘no fee’ discussion with our experienced solicitors, contact the team directly:
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