Funding, Floating and Selling Your Business Post-COVID
Lord Leigh of Hurley:
After the unprecedented disruption caused by COVID-19, it is critical that businesses are assisted in every way possible to ensure the UK’s economic recovery over the next few years. But at the moment, many entrepreneurs are uncertain about the direction in which they should take their business, fearing that Brexit, elections, and now COVID-19 have caused them to delay and miss listing at the peak of AIM.
In addition to the fear of missing out on the next best opportunity to exit their businesses, owners also have to consider and account for the range of potential effects that could arise from the Government’s ongoing review of CGT – a tax which is currently particularly benign for entrepreneurs. Beyond rescinding Entrepreneurs’ Relief (ER), the Government could equalise the rate of CGT to that of income tax, spelling very bad news for business-owners.
Nevertheless, there are steps business-owners can take to mitigate the impact of any changes to CGT, guard the value of their business and grow it before floating or selling once the pandemic is behind us and recovery is in full swing.
Advice for entrepreneurs in the wake of COVID-19 & CGT reform
Those business-owners looking to raise funds now or sell in the near-future should be aware that institutions, such as private equity houses, are investing selectively in SMEs. And whilst many investors are gravitating towards certain sectors during the pandemic, notably healthcare, they are still generally looking to allocate capital to companies with good profit histories and strong profit potential.
Entrepreneurs therefore need to ensure that profits earned and realised are being recorded in full – and this means they ought to examine their business’s accounting policies, as revenue recognition can make a huge difference to profit and EBITDA. And if you are a business-owner seeking to IPO, then you will want to re-examine your accounting policies to maximise the bottom-line anyway.
Regardless of whether the long-term plan is to float or sell, putting money and experience into a business now is vital, as it will help it to become a better-quality enterprise, making it more likely to attract the necessary investors or buyers later down the line, once current economic conditions have improved.
Entrepreneurs, particularly those running their business for capital, should therefore consider launching investment in order to see the returns in two to three years’ time when the economy has recovered. For those intending to sell, it is critical that they set up management structures that can run the business without the founder – in order to show the business is viable enough to be run independently.
To support these efforts, business-owners should also start writing new business plans, especially if their business is part of a sector badly affected by COVID-19. In particular, entrepreneurs should consider which sectors have the highest multiples and where their business sits relative to those sectors. If necessary, business-owners should then plan to move their business into the higher value sectors to see their multiples increase.
At the same time, business-owners should identify which types of companies are most likely to be purchased at this moment in time. Once identified, they should start pitching their business in-line with these more ‘buyable’ businesses, making their own firms more attractive to purchasers in the process.
Lastly, it is also important that entrepreneurs carefully consider to whom they would like to sell their business. This is because pinpointing the kind of institution, business or individual to whom it would be desirable to sell will improve the chances of a successful transaction. Indeed, entrepreneurs grow understandably attached to their businesses, so identifying the right buyer will help facilitate a smooth selling process.
Are there reasons to be optimistic?
Given the size and scale of the challenges and obstacles in the current business environment, it is easy to feel pessimistic about the road ahead. A number of deals died in March which are simply not going to come back, along with the companies involved in them.
However, a number of businesses are doing well in the current environment, including ones which were not generally expected to do so. This should offer other business-owners in hard-hit sectors some cause for optimism.
To further boost a positive outlook, there is a possibility that the Government will leave CGT unchanged. To facilitate this, entrepreneurs should put pressure on Parliamentarians by highlighting the problems that tampering with CGT would cause both them and the wider economy.
Furthermore, private equity and venture capital companies are sitting on an estimated $1.5 trillion of dry powder and have a strong incentive to invest, since they depend on regularly buying and funding new businesses to deliver value for investors.
Undoubtedly, there has been what some refer to as “a flight to quality” – particularly amongst these private equity and venture capital investors – as no-one wants to buy bad businesses, only good ones. However, if entrepreneurs take the time to reappraise their business and its place within its industry, and obtain the right advice, they should be able to implement a new business plan to capitalise on this trend, helping benefit themselves and the wider economy.
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