Powered by Mazars - September 2012

1. Advisory circle
Corporate Finance
“Powered by Mazars”
12 September 2012

2. Mazars Corporate Advisory Services Adrian Godfrey, Corporate Finance Partner
Adrian specialises in M&A and private equity work.
He has experience in a wide range of sectors including manufacturing,
engineering, support services, food, healthcare and education.
He also provides advice to higher and further education institutions on
mergers and strategic projects.
2

3. Mazars Corporate Advisory Services John Hughes, Corporate Finance Manager
John is a former senior banker with 6 years experience in corporate finance
and is well known within Bristol‘s professional community.
He specialises in M&A transactions and debt raising in a wide range of
sectors including food and drink, healthcare and property.
3

4. Mazars Corporate Advisory Services Amy Goold, Tax Director
Responsible for tax compliance and advisory across Bristol and the South
West region
Specialisms include share schemes, transactions, corporate restructuring
and other complex corporate tax planning
Focused on tax planning for owner managed businesses, assisting both the
shareholders and the directors on tax planning across potentially
conflicting responsibilities
4

5. Agenda
• Vendor Initiated Management Buy Out‘s (VIMBO)
Mazars Corporate Advisory Services
• Business Valuations
• Recent Developments in Finance Raising
• Corporate Tax update
5

6. Advisory circle
VIMBO’s
“Powered by Mazars”
12 September 2012

7. VIMBO…..
Vendor Initiated Management Buy Out
Mazars Corporate Advisory Services
VIMBO — a vendor-initiated management buyout, where the business owner
effectively acts as the venture capitalist, while taking cash out of the business
and passing it on to the management team.
Through a VIMBO, a business may be sold to the management team using
part cash (funded by the business and/or the management team) and part
vendor loan notes. Loan notes are essentially an IOU which the business
issues to the seller. The IOU is paid off over time through the profits of the
business and, once fully paid, the business will pass to the next generation.
7

8. VIMBO…..
Key Features:
Mazars Corporate Advisory Services
• The Vendor sets the price
• Both the purchasers and vendors will have shareholdings post VIMBO
• No immediate retirement from the business necessary
• No private equity/third party equity required
• Management need not be the "finished article―
8

9. VIMBO – Pros and Cons
Pros
• Can help achieve Premium value
• Allows the business owner to stay in the business
Mazars Corporate Advisory Services
• Can help if there is an incomplete management team
• No/little external financing requirement
• Allows an exit over time in market conditions where other exits may not
be available
Cons
• Longer exit from business
• No synergies to be gained for the business
• Vendor retains risk (query – is this any worse than in an ‗earn out‘)
• Owner needs to be able to relinquish control (fundamental change in
thinking)
9

10. VIMBO – example structure
Purchase price + fees = £1m
Financed by:
Mazars Corporate Advisory Services
Cash in business £100,000
Management team £50,000
ABL funding £100,000
Vendor loan notes £750,000
This structure allows for little/no external funding and enables the vendor to
extract the value of the business over time.
Vendor contribution may be in loan notes (part/all convertible) and/or
shareholding.
10

11. Transaction Tax
Vendors
• Tax structuring e.g.
Mazars Corporate Advisory Services
– removing non-trade assets
– extracting cash tax efficiently
– maximising entrepreneurs relief
– planning re timing of tax payments
• HMRC Clearance
– re: paper for paper exchange
– re: ―transactions in securities‖ (unless 75% change of control)
• Restricted securities elections (s.431) on new shares and loan notes
• Mechanics of the tax covenant
11

12. Transaction Tax
Purchasers
• Tax due diligence
Mazars Corporate Advisory Services
• Specific tax indemnities
• Restricted securities elections (s.431) on new shares
• CT Deduction and VAT treatment of deal costs
• Associated company issues
• ―Upstream loans‖ (s.455 tax)
12

13. Advisory circle
Business Valuations
“Powered by Mazars”
12 September 2012

14. Business Valuations
An art not a science!
Different types of valuations
• Earnings multiples (P/E or EBITDA)
Mazars Corporate Advisory Services
• Asset valuation
• Discounted cashflow
Other considerations in valuing:
• Economic climate
• Assets (if not using asset valuation)
• Reason for sale
• Market sentiment – political, social, microeconomic factors
• Risk assessment (including revenue sustainability, management capability,
scale and competitive position and many other things)
Ultimately it‘s understanding who are the possible buyers and what value will
they perceive.
14

15. Business Valuations
Basic Methods (1)
Net asset value (sometimes plus a premium or minus a discount)
• Assets valued individually not a combination value
Mazars Corporate Advisory Services
• A break-up value
• Sometimes appropriate if the value of the business lies in the market value
of individual assets (e.g. property developer)
Multiple of earnings value
• After tax earnings (available to shareholders) x a multiple
aka P/E (price/earnings) valuation
• Alternatively EBITDA x a multiple
• Assumes ‗normal‘ asset and debt levels, can be adjusted for abnormal
levels
• Based on expected future maintainable earnings
• What multiple?
15

16. Business Valuations
Basic Methods (2)
Cash generation value
Mazars Corporate Advisory Services
• Future cashflows available to shareholders discounted to present value
• Simple example is a property value based on rental yield
• But now widely used by PLC analysts (Shareholder Value Analysis –
SVA)
• ‗Cash is a better yardstick of value than net profit‘ (cash not paper profit
pays shareholder returns)
• Takes account of investment cashflows as well as operating profit
• The best/most reliable measure of value
• What discount rate?
16

17. Business Valuations
Key factors
Mazars Corporate Advisory Services
• Maintainable profit before owners‘ returns and non recurring items
• Quality and consistency of profits
• Critical mass
• Asset base and any surplus assets or deficit
• Investment needs
• Management
• Combination gains (?)
• Risk (again)
• Competitive advantage and positioning
• Strategic opportunity/benefit for an acquirer
• Financeability
17

18. Business Valuations
Key messages in current market:
• Over estimated multiples
Mazars Corporate Advisory Services
• Over exaggerated view of the competitive position/strength/scale of the
business
• Under estimated view of the dependence of the business on owner
• Under estimated view of the importance of management structure, process,
controls, consistency of business performance
It is a difficult market for buyers and sellers. Lots of transactions are aborted
because of the above.
18

19. Tax Valuations
• Generally lower than commercial value
• HMRC methodology
Mazars Corporate Advisory Services
• Combination of maintainable earnings/net assets/dividend yield
• Based on historic information
• Published information only (although may ask for management accounts)
• (Beware of items in the news!)
• Generous minority discount
• State exit intentions
• Agreement pre transaction only for approved share schemes
• Post transaction agreement available
19

20. Advisory circle Market Developments
“Powered by Mazars” – Finance Raising
12 September 2012

21. Market Developments - Financing
Crowd funding
• A way for businesses to raise equity investment through a ‗pool‘ of small
Mazars Corporate Advisory Services
investors.
• Typical funds raised will be between £1,000 and £250,000, with
individual investors pledging as little as £20 or £30.
• Sites such as Crowdcube and Funding circle have developed over the past
few years.
21

22. Market Developments - Financing
Funding for Lending
• Under the Funding for Lending initiative, the Bank of England will lend
Mazars Corporate Advisory Services
money at below-market rates to the financial institutions to encourage
them to lend to household and non-financial institutions
• £80bn cash pledged by the government
• Those that lend more will be able to borrow more from the scheme and at
a lower cost.
• The policy will compliment other actions such as QE (Quantitative
Easing)
22

23. Market Developments - Financing
Regional Growth Fund
• The Regional Growth Fund (RGF) is now a £2.4 billion fund operating
Mazars Corporate Advisory Services
across England.
• It supports projects and programmes with significant potential for
economic growth that can create additional, sustainable private sector
employment.
• It aims particularly to help those areas and communities which were
dependent on the public sector to make the transition to sustainable private
sector-led growth and prosperity.
• Two ways to access the fund (i) existing project run by public/private
partnerships, (ii) applying directly to the fund if the project is over £1m.
• Round 3 closed June 2012, dates for Round 4 yet to be announced.
23

24. Market Developments - Financing
Business Growth Fund (BGF)
Mazars Corporate Advisory Services
A private initiative, not a government backed scheme. The fund has regional
offices, including Bristol. The aim is to support fast-growing UK businesses.
Criteria:
• Business typically £5m-£100m turnover
• £2m-£10m of funding with term to match business owners goals
(generally longer term than traditional VC and PE)
• BGF take an equity stake of between 10%-40%
• Board seat for BGF to provide guidance as well as capital
• Consider all sectors, except for financial services and real estate
24

25. Market Developments - Financing
……and Traditional
Mazars Corporate Advisory Services
PRIVATE EQUITY
ABL
BANK DEBT
25

26. Advisory circle
Corporation Tax update
“Powered by Mazars”
12 September 2012

27. Corporation tax update
• Patent box introduction
– 10% tax rate
Mazars Corporate Advisory Services
– Profits from products including a patented part
– Phased in over 4 years
• Increase in R&D rates
– 225% deduction
– lower limit removed
– PAYE limit removed
– Above the line credit for large companies from April 2013
• Capital allowances
– Purchase of buildings from April 2012
– Pool expenditure in existing buildings before April 2014
• Short life assets – more beneficial with reduction in WDA
27

28. Corporation tax update
• GAAR – effective from April 2013
– ―tax arrangements‖ test
Mazars Corporate Advisory Services
– ―abusiveness‖ test
• EMI schemes
– extended to include academics
– Limit per person increased to £250k from 16 June 2012
• OTS share schemes consultation document
– simplify or remove approval process
– extend period of exercise after disqualifying event to 6 months
– remove restrictions on the type of shares that can be used
– review the future use of CSOP
• Not corporation tax but…
– HMRC harsher on daily penalties for late returns
28

29. Any questions?
john.hughes@mazars.co.uk adrian.godfrey@mazars.co.uk
Mobile: 07794 031484 Mobile: 07710 158371
amy.goold@mazars.co.uk
Clifton Down House
Beaufort Buildings
Clifton BS8 4AN Mobile: 07794 031527
Tel : 0117 973 4481
Fax: 0117 974 5203
www.mazars.co.uk