Horwath Clark Whitehill - Entrepreneur's Outlook - November 2008

May 5, 2009 | Publisher: CroweClarkWhitehill | Category: Business & Jobs |  

Entrepreneurs’ outlook November 2008 Inside this issue: Sitting in an office on a dismal wintry morning often makes people think about what else they could be doing. As a business owner you may have pictured yourself on the golf course or a Caribbean island and asked yourself “So how much is my business worth?” Essentially the realisable value of your business is the commercial price that you are able to negotiate with an independent third party, but determining the actual value is not an exact science and would typically use a professional valuation as a starting point for negotiations. There are a number of recognised ways to value a business. The popular methods comprise earnings yield, net assets and dividend yield bases. Discounted cashflow is also used where the earnings are expected to grow significantly. These can be used either individually or as part of a hybrid approach. The earnings (or profit) based method is most common for shareholdings with control because someone with control can direct what happens with the earnings. Conversely this basis would not normally be appropriate for a small minority shareholding. The earnings basis is not usually appropriate for businesses that are asset rich (e.g. property companies). This article focuses on earnings based valuation methods. On the earnings basis, a business is valued by multiplying the sustainable earnings by the Price Earnings ratio (P/E ratio). Sustainable earnings are not the same as the profits recorded in the Profit and Loss account. To eliminate fluctuations, a professional valuer reviews the financial results for a number of years and uses his or her judgement to establish the sustainable earnings of the business being valued. The multiplier or P/E ratio to be used will depend on a number of factors including the business type, those of listed companies are published daily in the financial press and will provide a guide. How to value and how to build value How to value and how to build value Corporate identity fraudsters target entrepreneurs Entrepreneurs’ relief and the sale of your business Going concern guidance - gone with the wind continued overleaf....... Research undertaken by Experian has revealed that entrepreneurs, particularly those on salaries above £50,000, either at director level or running their own business, are three times more likely to have their identity stolen. Directors should be aware of the dangers and take action to mitigate the risk of falling victim. There are many ways in which fraudsters can commit corporate identity theft, some of the key risk areas are as follows:  IT-related scams:  social engineering – a fraudster persuades you or an employee to reveal information which could be used to defraud the business, typically through a phone call  technical schemes – e.g. network software, often involving email interception through a forged web address  phishing – known to most people who use internet banking facilities, this is the practice of sending a false email requesting personal information  fraudulent websites – taking payments for goods that are never delivered  imposter websites – a fraudster setting up a website with an almost identical name to a high volume internet seller, in the hope of profiting from mis-typing.  Forwarding Address Fraud This is the most commonly perpetrated method involving the fraudulent redirecting of post.  Companies House Companies House has taken steps to reduce the risk of fraudsters being able to misuse its documents. Previously criminals could hijack the identities of legitimate companies by making fraudulent entries at Companies House. They then exploited the company’s good name and credit rating. Companies House has combated this in the following ways:  filing of information online (WebFiling)  submission of all documents online (PROOF)  providing an alert system notifying companies of changes to their details (Monitor). Ultimately, being a victim of corporate identity fraud can be very serious. It can take time and effort to recover financial losses and it can be difficult to rebuild credit rating and reputation for trustworthiness. The key effective way to combat this risk is increased vigilance. For more information see: www.companieshouse.gov.uk (under ‘Combat Identity Fraud’) www.businesslink.gov.uk (under ‘IT and e-commerce’) Corporate identity fraudsters target entrepreneurs The P/E ratio for an unlisted company requires professional judgement – a valuer typically starts with the P/E ratio of an equivalent listed company and applies discounts based on the profile of the unlisted company. So how can you influence the value of your business? The obvious way is to increase sustainable earnings, but this maybe tough in the current economic climate. There are ways to increase the value of a business without increasing the level of earnings; this focuses on spreading the risk of the business and helping to increase the quality of the earnings (i.e. increasing the P/E ratio).  A business that has a single customer would typically be in a riskier position than a business with a wide portfolio of clients where the risk of losing one customer should have less impact on the viability of the business.  Reliance on one or two key employees can make the business vulnerable should those employees leave; conversely many businesses are encouraging wider employee involvement by offering incentives for good business ideas. Good profit trends and the liquidity of the business are reflected in the overall value. Improving these areas should help to increase the value of a business. So do you have ideas to help increase the value of your business and can you see the dream of playing golf or relaxing on your favourite island starting to become reality? ...continued from page one So you have done it, you have finally managed to sell your business and got quite a good deal, but do you know how you will be taxed on the proceeds of sale? Any cash that you receive is taxable when received. If the business was sold before 6 April 2008 (‘April 2008’) the old rules applied, including business asset taper relief – many business owners paid capital gains tax at just 10%. From April 2008 tax is 18% unless entrepreneurs’ relief applies. This relief reduces to 10% the effective tax rate on the first £1 million of lifetime (from April 2008) capital gains. This is available on sale of trading businesses and the disposal of shares in trading companies. The individual must be an officer or employee and hold 5% of the shares and votes. The conditions must be met for the 12 months prior to sale. Proceeds may also be loan notes or shares in the acquiring company; here the tax treatment is more complex. A loan note can be a Qualifying Corporate Bond (QCB) or a non-QCB - each has different tax implications. If the sale occurred before April 2008 in exchange for QCB loan notes the capital gain is deferred until the QCBs are redeemed. Entrepreneurs’ relief should be available if the conditions were satisfied when the QCBs were issued. If the sale occurred after April 2008 for QCBs the vendor needs to ascertain on sale whether entrepreneurs’ relief is available and whether to claim. Relief must be claimed within 22 months after the end of the tax year in which the transaction occurs. If no claim is made, entrepreneurs’ relief is not available when the QCB is redeemed. If a claim is made this takes effect once the QCB is redeemed (which may be a number of years later). If other assets are sold at a capital gain before QCB redemption any claim for entrepreneurs’ relief must take into account both relief actually accumulated to date and claims for deferred relief on exchange for a QCB. A ‘paper for paper’ transaction (i.e. shares in the target company being exchanged for shares or non-QCBs in the acquiring company) will not usually trigger a disposal or capital gains liability. Instead the gain and tax liabilities calculated on sale of the replacement securities take into account the whole period of ownership. This causes problems - owner managers should be eligible for entrepreneurs’ relief on shares in the target company, but may not be eligible on their shares in the purchaser. For example they may not be directors or may not have sufficient shares in the purchaser. The individual can elect to disapply the ‘paper for paper’ rules – entrepreneurs’ relief should therefore be available on disposal of their shares in target. However this brings forward a tax liability that the vendor may not be able to pay because they have not realised any cash. If the original sale was before April 2008, the individual cannot disapply and will need to ensure they qualify for relief on sale of the replacement shares or securities. Usually they will not and entrepreneurs’ relief will be unavailable. It is clear that a careful review is required. Entrepreneurs are learning that planning the exit is key to the successful sale of a business. Without careful consideration business owners can find themselves paying too much tax too early. How did your deal measure up? Entrepreneurs’ relief and the sale of your business Autumn storms appear to be brewing both inside and out, with a serious revamp of the guidance on going concern being carried out by the Financial Reporting Council (FRC). This area of guidance has not been reviewed for 14 years, so changes are likely to be dramatic. As such the implications for business owners could be significant, as greater emphasis is placed on the issues that underpin the statement made in the financial statements. The going concern assumption is a fundamental principle in the preparation of financial statements. Under this assumption, an entity is ordinarily viewed as continuing in business for the foreseeable future with neither the intention nor the necessity of liquidation, ceasing trading or seeking protection from creditors pursuant to laws or regulations. Accordingly, assets and liabilities are recorded on the basis that the entity will be able to realise its assets and discharge its liabilities in the normal course of business. What is the reason behind this action by the FRC? The FRC is concerned that the number of corporate failures is inevitably going to rise. This is a direct result of the current ‘credit crisis’ which has led to banks becoming increasingly reticent about lending money. Banks are offering lower amounts at higher rates to fewer businesses; therefore the FRC is predicting that more businesses will fail. The revisions specifically reflect the requirements recently introduced under international financial reporting standards. Essentially, business owners will have to expand upon why they think it reasonable that they should be considered a going concern. This could include statements that liquidation or cutbacks are not required, details of any defaults on banking covenants and disclosure about the amount of headroom within cashflow. The financial risks faced by the business, and the methods adopted for mitigating these risks will also have to be detailed. The revamp of the guidance is still underway and has yet to be finalised. However, business owners should be aware that changes are afoot, and that more substantial assurance that the business is a going concern is soon to be expected. Going concern guidance - gone with the wind Associate members of Horwath Clark Whitehill UK network Hartlepool 01429 234414 Isle of Man 01624 627335 The office in the Isle of Man is Horwath Clark Whitehill LLC and the office in Hartlepool is Horwath Clark Whitehill (North East) LLP. These are both separate, independent firms and not part of Horwath Clark Whitehill LLP. Accordingly, these firms cannot be held liable for the acts or omissions of each other. Horwath Clark Whitehill LLP Cheltenham 01242 234 421 Manchester 0161 214 7500 Kent Midlands - Maidstone 01622 767 676 - Kidderminster 01562 60101 - Tunbridge Wells 01892 700 200 - Walsall 01922 725 590 London 020 7842 7100 Thames Valley 0118 959 7222 Horwath Clark Whitehill LLP is registered to carry on company audit work by the Institute of Chartered Accountants in England and Wales is authorised and regulated by the Financial Services Authority. We hope you find this newsletter of interest. If you have any questions about any of the topics covered, please call your regular Horwath Clark Whitehill contact. www.horwathcw.com This information is published without the responsibility on our part for the loss occasioned to any person acting or refraining from action as a result of any information published herein. Horwath International Association is a Swiss Verein. Each member of the association is licensed to include ‘Horwath’ in its legal name but remains a separate and independent legal entity. © November 2008 Horwath Clark Whitehill LLP. All rights reserved.

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