Business planning tips you can tap into

Jo Tye of my own firm, Nottinghamshire-based accountants and tax advisers, Barnett & Turner offers her five top recommendations for businesses looking to capitalise on the economic upturn. As we’ve moved out of recession over the past year or two and new opportunities are now presenting themselves for many businesses, it’s a good time to take stock of how your company is shaping up. Here are some suggestions for issues you might want to address, although it’s often good to seek out the advice of your accountants and discuss your plans together:

Rate your business as it is today

An obvious starting point is to examine the strength of your balance sheet and your level of profitability.

Look at your client relationships

Are your clients ‘blue chip’ in terms of their calibre? What’s the depth of your relationship with them? Another critical point is to consider whether they are providing you with a recurring income, or whether you’re often forced to seek out new customers.

Examine your supplier relationships too

It’s worth thinking about how far you’re able to control the supply and price of any goods or services you need to conduct your business. It may not always be possible to pass price increases on to your customers.

Manage your cash flow

What is your situation in relation to cash flow and working capital? Do you have sufficient headroom? It’s very difficult to make long-term decisions if you’re struggling on a daily basis to manage cash. Make sure you don’t have too much of it tied up in debtors and stock.

Write that business plan

This is about looking ahead and thinking about where you want to be and when. Are you hoping to exit? To pave the way for a successor? Or simply to grow the business over the coming five years? This is the time to get anything unnecessary off the balance sheet and ensure that your ownership structure is appropriate to your aims. While you might be able to produce a plan yourself based on, say, your turnover, gross profit margin, net profitability and the amount of money you hold in the bank, anything more complex will need the involvement of your professional adviser.

The real skill of running a business is dealing with these issues over a sustained period – challenging yourself, where necessary, as the journey unfolds. So do schedule regular meetings with your accountant to check on progress. In the meantime, a few hours of thinking time now could prove invaluable in the years ahead.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

There’s great value to a proper valuation

Although valuation isn’t always an exact science, writes Barnett & Turner’s Jono Wilson, it can be an essential part of your long-term business planning. In my experience, clients can have any number of reasons to look for a valuation of their business. Sometimes it can be a personal matter – they’re going through a divorce, for instance, and need help with litigation. On the other hand, they may be thinking about changing the ownership or structure. We may, of course, need to value a business after death. And then there’s perhaps the most obvious reason of all: a valuation with a view to a sale and exit from the business.

It’s possible for a valuation to be conducted on an open-market basis, but you also get valuations for fair value and fiscal valuations too. It’s also important to consider the very particular issues presented by quite different types of business.

It’s actually quite usual for businesses to be valued in a number of different ways and it may well depend on the type of business we’re talking about. If I were valuing, say, the business of an Independent Financial Adviser or looking at an accountancy practice, I’d be calculating a multiple of recurring fees. With something like a pub or nightclub, on the other hand, it’s different. There, you’d be looking at the annual turnover and applying a multiple, while also taking into account whether the client had a freehold or leasehold.

As well as trade-specific bases, there are various other options. The most common is multiples of profit, but there is also dividend yield or a calculation based on net assets. No single valuation approach will fit all businesses and the rationale for valuing a business is not always the same. Each valuation presents different factors that need to be taken into account.

Ultimately, of course, a business is only worth what someone is prepared to pay for it. Sometimes, a business might be wholly dependent on the expertise or hard work of one person and actually there’s little intrinsic value once that person is taken out of the equation. With larger businesses, there might be brand value in a name – although that can be difficult to quantify – or perhaps a stream of revenue from intellectual property.

One thing I always stress to my clients is that it’s really worth investing in the due diligence that goes with a proper valuation. If you’re planning on using the figures to pave the way for an exit strategy in, say, five years time, they need to be as accurate as you can make them.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

Key Person Insurance

A player hits the floor and they’re not faking. Is your business ready for the consequences? Jono Wilson of Barnett & Turner explores the world of key person insurance. With the new football season under way, we’re bound to be treated to some spectacular dives from players claiming injury. Amazingly, most will manage to dust themselves down and be back in action within a few minutes after their temporary histrionics.

But sometimes the player isn’t faking. Career-changing injuries really do happen. Players can find themselves out of action for six months or a whole season.

The same is true in any business, of course. That’s why it’s worth thinking about whether you’re prepared for a situation in which one of your key members of staff is seriously injured or signed off sick with a long-term illness.

Key person insurance is designed to compensate your business for financial loss if an important employee dies or becomes critically ill. Of course, at a moral and ethical level, all your staff are equally important, but some may be fee-earners, providers of loan finance or have some specialist knowledge that the company needs in order to survive.

Imagine if a partner died or became too ill to work, for instance. The insurance policy might provide the money to buy out his or her share of the business, allowing the other partners to retain control. In the event of the partner’s death, the full value of his or her share would be paid to their beneficiaries.

Thinking about the next level down within the business, a policy for an identified key individual will pay out the estimated financial loss to your company. Here are a couple of the common pay-out options available in this particular insurance market:

Multiple of salary – a straightforward calculation, but does it reflect the true value of the individual to your business?

Proportion of profits – taking into account annual salary, annual profit and the amount of time it would take to replace a key individual.

It’s also worth thinking about personal guarantors of a business loan. In the event of their death – or a serious illness – the lenders might be in a position to call in a loan, so insurance can be a useful way of providing peace of mind to both you and the guarantor’s family. You may also want to consider insuring against the loss of a key shareholder, although this is a particularly technical area, so it’s important to consult your accountant or financial adviser.

Terms of the policy can vary, but are normally based on five years’ cover. There isn’t any specific legislation that covers this type of insurance, but it’s worth bearing in mind that if the premiums qualify for tax relief, any benefits will be treated as a trading receipt. If the key person has a shareholding of 5% or more, tax relief is unlikely to be granted on the premium, as the policy is partly for the assured person’s own benefit.

The best advice is always to talk to your accountant before committing to any particular type of insurance cover.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

Thinking of becoming a limited company? Time to go goodwill hunting...

It’s a conversation that many sole traders periodically have with their accountants. Is it a good idea for me to incorporate as a limited company? Although the answer isn’t always clear cut and can depend very much on individual circumstances, there are clearly a number of potential advantages. The rate of corporation tax for small companies is attractive, of course. There are savings on national insurance. And by finding the optimum balance between salary payments and dividends, you can manage your tax affairs more efficiently.

Often accountants will present the transition as being very straightforward, which at many levels is exactly right. The paperwork is fairly minimal and you can simply transfer the assets of your sole proprietor business and move on. But this might turn out to be a missed opportunity.

Forward-thinking advisers will take advantage of the change in status to undertake a tax planning exercise. By making use of existing rules, it’s sometimes possible to save substantial sums in personal tax by capitalising the future earnings of the business. This idea of accounting for ‘goodwill’ on incorporation can often be missed, but it’s a simple idea. Your business is actually worth more than its tangible assets and this should be taken into account in any valuation.

You should always feel confident your accountant has a good, current understanding of the tax regime and recognises the opportunities that potentially exist. With the correct adjuster clause in a legal agreement, you’re protected even in the unlikely event of there being a dispute over the figures. The valuation can simply be readjusted and reflected in the records of the business.

So although it’s important not to let the tax tail wag the commercial dog, if you decide that incorporation is the right route for your business, make sure you look at all the possibilities. We even managed to save one client enough money to help him invest in a new house. It’s just a question of thinking that little bit bigger.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

In a partnership or LLP? New tax rules have big implications.

Partnerships have long been an attractive structure for people running small businesses. They’ve been particularly favoured by owners of professional practices – from solicitors and accountants through to architects and dentists. The fluidity of the arrangement allows partners to change with few tax implications – something that becomes more problematic within the confines of the traditional limited company. From 6th April 2014, new legislation came into  effect which has led many businesses to think again about their partnership status.

The first issue concerns the use of ‘corporate’ partners as a way of managing the tax affairs of the partnership. Given that the corporation tax rate is significantly lower than higher-rate income tax, it made sense to have a company around the boardroom table – helping to manage cashflow and allowing some profit to be taxed at 20%, until such time as it was taken by the individual partners. HMRC perceived this to be a loophole and it’s now no longer an option for either partnerships or LLPs.

The second new regulation applies to LLPs specifically and it concerns the status of the partners themselves. Since the LLP vehicle was first introduced back at the turn of the century, partners have tended to classify themselves as self-employed. Now, this is much more difficult for those with a fixed share of profit. The Revenue expects them to go on the payroll and account for tax under PAYE.

Unless you’re able to demonstrate clearly that you have sizeable influence in the business, have invested capital or there’s a significant variable element to your remuneration based on the overall profitability of the business, then it’s no longer possible to claim self-employment. Although the motives of HMRC are clear enough – to clamp down on more extreme cases of tax avoidance – many observers feel that a sledgehammer is being used to crack the proverbial nut.

The ‘double whammy’ of these two changes is serious enough to prompt a number of LLPs to consider whether they’d, in fact, be better placed as a limited company. If it’s an issue that’s concerning you right now, the first port of call should be your professional accountancy advisers. They’ll be able to give you more detailed advice, assess your options and come up with the solution that’s most appropriate to your particular circumstance.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk