Neil McInnes, head of corporate finance at Grant Thornton Scotland
To many it may feel as if the world of the dealmakers is in the doldrums, but a series of recent company sales shows that this part of the market is seeing signs of increasing activity.
Edinburgh-based technology firm ShopForCloud was sold to US company Right-Scale. Screw Conveyor, which makes equipment for moving waste materials away from drilling sites in the North Sea, was sold to Azure Investments for £5 million. ASCO, the Aberdeen-based logistics company, has bought Scrabster Port Services (SPS) in what is believed to have been a six-figure deal.
The experience within Grant Thornton over the past six months is that there is considerable and growing amount of interest from overseas buyers and investors who perceive the UK to have many well run and strategically important corporates.
In terms of sectors, there is genuine interest in the technology, food and drink and energy – all industries where Scotland has a very strong focus.
At the same time, there are UK based corporates with significant cash reserves, along with well-funded private equity firms looking to make their money work.
One of their options is to buy-up market share or secure key supplies through strategic acquisitions and while the numbers may not make headlines yet, but they are beginning to make their move.
We are seeing consolidation across many markets from the legal profession through to business support services.
Significantly, it is the buyers, in increasing numbers, who are on the front foot. They are identifying their acquisition targets, making the approach and then putting in an offer regardless of whether the target company is up for sale or not.
So with many more businesses now on the look-out, anyone who has a sale in mind for the future should be optimising their position now to be ahead of the game.
For instance, understanding who the potential buyers are and what they are looking for together with an awareness of what the competition is doing can be vital for any business that wants to be ‘sale ready’.
Some businesses buy to get access to a whole new customer book, so the quality of those relationships and contracts are key; some may not operate in a particular region and acquire to obtain an increased geographical reach.
For many business owners, having worked for, perhaps, years to build up a successful company, limiting the extent to which the taxman collects the fruits of their labour when they come to sell is also understandably important.
Sorting out a company’s tax structures and shareholdings takes time and better that this is in order when a buyer comes knocking.
Tax planning can result in an effective capital gains tax (CGT) rate of 10 per cent on a company disposal.
Entrepreneurs’ relief (ER) is now worth up to £1.8 million for each individual and this can often be doubled fairly simply to £3.6 million with some advance planning.
The conditions for ER to be available need to be met for 12 months before a sale so an ER reviewneeds to be considered at an early stage.
As part of an ER review, the various types of shareholdings within a company will also be considered. As a well-established family firm, for instance, may have a diverse ownership structure.
If there are assets held within the company that aren’t attractive to a potential purchaser, such as investment properties held within a trading company, their full value may not be reflected in a deal price.
Therefore, it is sensible to consider whether to extract these assets prior to a deal and this can often be achieved with minimal or no tax cost.
Being ‘sale ready’ puts any company in a strong negotiating position. A ‘cash only’ deal is the most attractive for most sellers, but in many instances the deal will involve a deferred consideration or earn-out.
If this is the case, check the tax position carefully because there are a number to tax traps to fall into.
The rate of tax payable on these sums can be minimised and payment of this tax can be deferred until sale proceeds are received.
A company sale can be a very positive step especially when properly prepared for. While taking advantage of tax rules at the time of a sale is available to all business owners and a good guarantee of success.
Neil McInnes is Head of Corporate Finance at Grant Thornton Scotland