A rushed business sale is not the only option
One of the inevitable consequences of the Coronavirus pandemic will be a need for the Government to increase the UK tax take, with the likelihood of increases across both business and personal tax regimes.
Many business owners have much, or almost all, of their wealth tied up in their businesses. Is there a way for them to use alternative finance to benefit from some of that value before tax rates go up?
In conversations we are having with shareholders of private companies, many are understandably concerned about the potential changes in Capital Gains Tax which have been considered in a recent report by the OTS (Office for Tax Simplification).
One of the suggestions is a “closer alignment” of CGT rates with income tax rates, meaning that the current 20-25% beneficial differential between CGT and income tax rates would reduce or disappear over time. Combined with the recent reduction in Entrepreneur’s Relief (now Business Asset Disposal Relief) this has increased the focus that many shareholders have on how best to realise some of the value they have created in their businesses.
There are differing views on the extent and timing of any increases to CGT rates, but for those who are concerned that the Spring 2021 budget will introduce changes with just a short notice period they will be considering what actions they can take now.
Anyone wanting to sell a business at full value is normally looking at a 6 to 12-month timeframe which is, therefore, going to be very difficult to achieve before any potential 2021 budget changes. Other options available include a full or partial Management Buyout, a sale to an Employee Ownership Trust, or a share buyback. These options could be deliverable in a shorter timeframe and would enable some value to be distributed under the current tax framework.
The scale of the impact of any CGT rate changes clearly depends on the size of the business but could be a tax increase of up to £2.5m for every £10m of value received under either a sale or capital distribution (assuming any increase over time could be up to 25% to bring CGT rates in line with income tax rates for an Additional rate income taxpayer). Therefore, it could be in a shareholder’s interest to consider options such as share buybacks, which can be executed relatively quickly, subject of course to the requisite tax clearances.
Debt funded recapitalisations are commonly used in businesses owned by private equity, and banks and other lenders are very used to considering these types of transactions. We often see these transactions being more acceptable to lenders if they are combined with a wider refinancing or shareholder restructuring. Undertaken with care, these transactions should allow shareholders to treat value realised from the business as a capital gain rather than as income.
Given the pandemic and current severe economic uncertainty, is there still funding appetite for these types of transactions?
Our view is that, for the right businesses, there is. But businesses may need to look beyond mainstream banks for this funding. The huge demand on many banks for CBILS or BBLS lending means these banks are largely focusing on providing additional liquidity to the banks’ existing customers, rather than funding more strategic transactions such as these. Our view is that there is presently only limited appetite within the mainstream banks to finance this type of funding requirement.
However, the alternative lenders, which include credit funds, unitranche funds and private debt funds, will have more appetite. Alternative lenders have raised c$98.4bn* in Europe over the last 3 years, and whilst 2020’s new fundraising has been more subdued, there remains a significant amount of available debt capital, that has already been raised from investors, ready to be deployed.
These lenders generally welcome a market dislocation such as we have seen from the Coronavirus impact and the number of funds, capital available and lending strategies has continued to grow. Therefore, for the right businesses, there remain funders willing and able to lend to facilitate a business recapitalisation.
In addition to the necessary tax advice needed to structure such a transaction, businesses should consider using the support from a specialist debt advisor, who will be able to guide you to the right level of debt, the right lenders to approach, and the most appropriate debt structure for your business. An advisor will also support you through the credit, due diligence and negotiation of debt terms processes to ensure that the debt being put in place is appropriate for the business and still enables it to operate and grow going forwards.
At Altenburg Advisory, we have strong working relationships with lenders and can help you determine which funding options are most suitable for your business. Altenburg Advisory is part of ACP, a debt advisory led corporate finance association between Altenburg Advisory and Cadence Advisory which provides whole of market coverage and will ensure you receive best -in-class advice and support.
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* Source; Deloitte UK Alternative Lender Deal Tracker, Autumn 2020