With national debt now at an eye watering £2.1 trillion, tax rises are back on the agenda. Winston Churchill wrote that:

"The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing."

One would not have been surprised to see Rishi Sunak delivering his recent Budget wearing a pair of noise cancelling earphones as he starts the painful task of rebuilding the public finances.

For entrepreneurs looking to sell their businesses, Capital Gains tax (CGT) is of particular interest. Ahead of the Budget there was talk that Entrepreneurs' Relief would be abolished and that the government is set to equalise the rate of CGT levied on business sales (currently 20% for higher taxpayers) with the marginal rate of income tax (currently 45%).

The seeds were shown in November 2020 when the Office of Tax Simplification published a report concluding that the disparity in rates between Capital Gains Tax and Income Tax can distort business and family decision-making and creates an incentive for taxpayers to arrange their affairs in ways that effectively re-characterise income as capital gains.

Equalisation would mean that an entrepreneur with a strong view on how much they want for their business would have to reduce their expectations or accept the risk of holding the company for a few more years until profit growth outweighed the impact of the greater tax bill.

Whilst Entrepreneurs' Relief has been made less generous in recent years I cannot recall a time when the fear of wholesale change to CGT has dominated the M&A conversation quite so much. It ultimately drove a mini-boom in deal volumes during the first few weeks of this year as owners desperately tried to sell before the 3 March Budget.

For those who did not manage to complete a sale, it was a relief that the Chancellor decided to keep CGT unchanged.  However, on 23 March the Government is set to publish a series of tax consultation documents and if, as some expect, they confirm the direction of travel on CGT then the scramble to sell will start again.

Concerned entrepreneurs are likely to have a short window before change comes into effect.

The Autumn Statement is likely to be in late October / early  November and the next Budget in March 2022. Just enough time to plan and organise a sale effectively.

So, is the risk real – is reform coming?

If you accept that higher taxes will need to play some part in helping to restore the nation’s finances then CGT must be in the cross hairs.  However, it is a relatively small contributor to the Treasury. In 2018/19, CGT contributed £9.5bn – just 2% of the total tax take and affected round 276,000 people, which is less than 1% of the number of people who paid income tax.

So, CGT doesn’t contribute very much relatively speaking and its supporters argue that heavy handed reform may reduce the incentives for entrepreneurs to start up new businesses.

Against that background, it is perhaps surprising that the government is not focusing on the Big Three - income tax, NI and VAT - which together contribute a massive 82% of the tax take.

The Budget did see the Chancellor freeze income tax thresholds (raising an estimated £8 billion) but broader changes are politically fraught given that the Conservatives pledged not to increase the Big Three taxes in their 2019 election manifesto.

Ex-Chancellor Kenneth Clarke recently suggested that the electorate would forgive Boris Johnson for backtracking given the unforeseen nature of Covid.  However, the impact on the electoral fortunes of Nick Clegg’s Liberal Democrats following their abandonment of a 2010 pledge on tuition fees will not be lost on No 10.

CGT reform is therefore likely to be about politics as much as economics.

Indeed, there is a broader political and philosophical argument about CGT reform that dovetails with the government’s desire to level up the country and carve out a future for Britain on the world stage.  Supporters of the status quo argue low CGT rewards risk taking but others say it helps make rich people richer.  They say the government should scrap CGT reliefs and put in place generous new incentives to motivate the next generation of risk takers to invest capital into ventures that lead the UK’s response to the big issues of our time: social care, social housing, technical education, AI and climate change.

What was once anathema to a Conservative 'low tax' mindset is likely to be doctrine very soon.  CGT reform seems inevitable and if you own a business it is time to sit up and take note.

One suspects the government is prepared to put up with the hissing of the goose in the short term in the hope that the strategic plucking of feathers will eventually lead to it laying the golden egg.

The Quercus team, led by Andrew Clegg and Mark Winkler, advised the board of Marclay Associates Limited (“Marclay”) on the sale of a stake in the business to UK private equity investor, Ashridge Capital.

Headquartered in central London, Marclay is recognised as a leader in the provision of cyber-security services. The business protects the digital assets of some of the world’s most high-profile individuals and organisations. Its cyber-incident and investigations team specialises in supporting businesses  who have suffered a cyber-breach or similar security incident with industry leading methodology and forensic capability.  It has built a reputation over the last six years amongst many London law firms, where they are widely regarded as the go-to firm for expert advice in challenging cyber security related situations.

Andrew Clegg, Quercus Partner said:

“Marclay operates in a dynamic sector and I am delighted to see the business receive investment from a strong investor in Ashridge Capital. Their many years of experience helping entrepreneurial businesses to realise their potential will be invaluable as the Marclay team look to roll out their ambitious growth plans.”

James Tamblin, Marclay CEO added:

“Marclay is extremely well positioned to capitalise on the projected growth in the UK cyber-security market and we are delighted to welcome Ashridge Capital on board as we embark on the next step in our journey.  I am very grateful to Andy and Mark for introducing us to Ashridge, preparing us for the rigours of the transaction, and for their advice and commitment throughout.”

For many entrepreneurs the sale of a private business is the culmination of a lifetime’s work.

Often it will be a one-off opportunity to generate a life-changing sum of money.  A reward for the initial risk taking and years of hard work.

Given the size of the financial stakes, it is perhaps surprising that many owners expect to realise top prices without putting in the work necessary up front to help the buyer to meet or even exceed their value expectations.

Maximising value on sale starts with planning and preparation. At Quercus we talk to our clients as early as possible in order to understand their sale objectives and to ensure their businesses are fully prepared when the decision to sell is made or an attractive unsolicited offer is received.

In practice this can mean working alongside a client for a considerable period in advance of a sale process. This can be a few months but sometimes it is years.

From our experience the earlier we are engaged ahead of a process the more likely it is that we can help influence the outcome.

Over the past 25 years, we have successfully sold over 250 businesses and in every case effective planning and preparation were key to delivering successful outcomes. Whilst each process throws up unique challenges, some subjects tend to arise in almost all situations, regardless of size or sector.

Here are our top 10 areas to consider if you are preparing your business for sale.

1. Address succession issues. Many sellers would like to step away when their business is sold. However, buyers don’t generally have spare management teams available to parachute into situations to facilitate a swift exit. The best way to ensure a smooth transition of ownership without a lengthy handover period is to build a credible succession plan and devolve day to day responsibilities well ahead of a process. If you can bear giving up your desk or office and get to a position where it is credible to remove your photo from your website even better. This is not a time for ego! All of this will help give comfort to a buyer that you genuinely have a limited role and your absence will not de-stabilise customers, suppliers or staff. This is very important for buyers who will know if the reality doesn’t match up. For example, if the owner is the only employee quoted in press releases or due diligence reveals that key customers only deal with the owner and don’t know anyone else senior in the business.
2. Ensure key employees are appropriately incentivised. On the basis that point 1 above has been successfully addressed there will be a need to ensure that key employees are suitably incentivised. Key employees are the senior people who are running the business on a day to day basis – more than likely a group of three to five individuals. They will be instrumental in helping you to grow the business and are also likely to be the people who a buyer will want to keep in post going forward. Some may already be shareholders and therefore motivated by growth in the value of the business but others may not. For these, reward can take many forms including simple bonus schemes linked to performance or more complex equity-based schemes such as EMI options. One size definitely does not fit all and it is important to think about each individual’s motivation and the value they are likely to ascribe to any plan you put forward. For example, the simplicity of a bonus may be valued more than an option scheme where the size and timing of reward can be less certain. The tax treatment of schemes differs too and whilst the tax ‘tail’ should not wag the commercial ‘dog’, it is important to consider the net proceeds in the hands of the recipient to determine if the planned incentive is likely to drive the intended behaviour.
3. Reduce perceived reliance on customers or suppliers. Buyers are nervous about buying businesses where most of the revenue comes from a small handful of customers or where the business relies on a key supplier. In a buyer’s eyes, the loss of a key account can cause serious harm. A perceived reliance will impact on how much a buyer will pay for a business and may even put some buyers off completely. This is not an area that can be addressed overnight but a concerted effort to shift the tiller over a 12-18 month period can yield impressive results.
4. Know your competition. One of the reasons a buyer will pay a premium price for a business is if the target in question is an obvious market leader. A low growth, low margin business will not be as valuable as a high growth, high margin business. It is therefore important to understand where you sit in comparison to your peer group and this is where benchmarking can be a powerful tool. Regular review of KPIs (E.g. revenue growth, margins, cash conversion, working capital trends, capex spend) across a range of your competitors will identify where variances exist and enable you to investigate how you close the gap where your performance lags behind. It is always more powerful if you can articulate to a buyer why you sit where you do in your market rather than wait until a buyer identifies a variance that you cannot explain.
5. Consider the sale of under-utilised or redundant assets. Over the years we have worked with businesses which have owned racehorses, helicopters, residential houses, industrial property rented out to third parties, golf club season tickets, and other exotic assets not used in the business in question. Capital intensive businesses tend to have the odd redundant machine lying around. Buyers are generally happy to consider taking on these surplus or redundant assets (ok, perhaps not the racehorse) but are unlikely to attach much value to them. They will think they are doing you a favour and look to sell on post-sale at a profit. If you can sell or extract under-utilised or redundant assets ahead of time you will increase overall transaction value and simplify the sale process. A ‘clean’ balance sheet also subtly underscores the quality of your business.
6. Ensure management information is robust. Buyers will want to undertake detailed due diligence and a large proportion of their time will focus on your financial performance. Buyers will be looking for monthly historic P&L, balance sheet and cash flow data for 2-3 years along with KPIs relevant to your business. Your finance team are going to be very busy and it is important to be able to produce accurate and timely responses. It is easier to do this if you have access to high quality data via an up to date well supported MI system. Nothing undermines due diligence as much as financial data that does not reconcile or cannot be substantiated.
7. Review major contracts. At the heart of most businesses are a number of key relationships. Despite the importance of these relationships our experience suggests that contracts often remain unsigned or are in need of renewal. It is important to review contracts early to identify where remedial action is required as it will form a key area of focus during due diligence and can take time to fix. In particular, working through a ‘change of control’ clause can be disruptive during a sale process. For those relationships which rely on trust and the proverbial handshake and where formal contracts are not possible, you should spend time building a file of documents that you can share with a buyer to underscore the length and quality of the relationship.
8. Resolve disputes and litigation. Disputes and litigation can by their very nature take a long time to deal with. In practice, this covers a wide range of issues such as litigation, HR disputes, open tax enquiries and insurance claims. In the context of a sale such matters can be a distraction to a buyer who will need to understand the nature and size of the risks they are being asked to accept. Such issues can be difficult to quantify and a buyer is likely to take a risk adverse view when considering an adjustment to price or indemnities. The best way to minimise their impact is to clear up as many outstanding matters as possible
9. Demonstrate a maintainable earnings profile. Sale processes are much less interested in the profit figures in your statutory or management accounts and much more interested in maintainable earnings (typically EBITDA) which often forms the cornerstone of valuation. As such, it is a good idea to identify exceptional and non-recurring items on an ongoing basis – both income and expenditure – to enable you to present to buyer a detailed picture of the growth and quality of your earnings.
10. Consult a tax expert on limiting your CGT exposure. The March 2020 Budget saw cuts to entrepreneurs relief as the government shifts its focus away from rewarding current business owners and towards encouraging new entrepreneurial investment.  We think this trend will continue and a glut of deals in the run up to this year's Budget on 3 March reflected a nervousness that more CGT rises are on their way.  Now more than ever it is important that you talk to an experienced M&A tax expert to understand what planning opportunities still exist. The availability of entrepreneur’s relief is still linked to the length of time that shares are held so it is very important you address tax planning early, especially in relation to any schemes you are planning in relation to item 2 above.

Andrew Clegg, Quercus partner, summarises:

"Making a business as attractive as possible to prospective buyers is an ongoing process and every business is different. Our experience constantly reminds us that effective planning and preparation are key to enhancing value and making sale processes smoother.  Failure impacts on value at best and at worst, drives buyers away. We have over 200 years experience of helping entrepreneurs effectively plan and prepare for the sale of their businesses. If you would like to understand how we can help with yours, please get in touch."

As the exclusive UK member firm for the Terra Alliance international M&A network, Quercus Corporate Finance is pleased to announce that:

• in 2020, the Terra Alliance’s firms completed 101 transactions with a combined value of more than US$8 billion; and
• for the five years to December 2020, Terra Alliance firms completed more than 519 transactions with a combined value of more than US$48 billion.

Particular sectors of interest in 2020 included Consumer, Healthcare, Industrial and Technology.

Andrew Clegg, Quercus Partner, commented:

“Transacting during a global pandemic has been far from easy but these latest figures once again demonstrate the power of the Terra Alliance across the globe.  Indeed, much of Quercus's dealflow in 2020 had an international dimension including successful deals with counter-parties in Canada and Singapore. We expect to work with our Terra Alliance partners even closer in the year ahead, helping clients who are looking to expand globally following the UK's departure from the European Union."

The Terra Alliance (www.terra-alliance.com) is a leading international alliance of Mergers and Acquisitions (M&A) and Corporate Finance advisory firms with operations in Africa, Asia, Europe, the Middle East, North America and South America. The alliance provides member firms with a comprehensive platform for offering clients enhanced identification of, and access to, potential transaction parties around the globe.  Terra Alliance was formed in 2002 and consists of 16 member firms covering more than 40 countries worldwide.

Ed is a highly experienced corporate finance professional with a 15 year track record.  He works across all sectors but has a particular focus on the Consulting and Services sectors where his most recent clients include Access Partnership. Connection Capital-backed JCRA, Nicholas O’Dwyer, The NAV People and Dartmouth Partners.

Ed’s experience includes both private and public company M&A, advising on both the buy-side and sell-side, equity financing for growth companies from debt, venture capital, private equity and public market investors, as well as strategic and restructuring advice for clients.

Ed joins from Equiteq, where he was a Managing Director, having also previously worked for Lazard, Arbuthnot Securities and New Amsterdam Capital.

Nick Standen, Quercus Chairman, commented:

“Despite the uncertainty of recent months we remain firmly focused on the horizon and are delighted to welcome Ed to our growing team. His experience and insight represent an excellent fit and supports our ambition to be the advisor of choice for mid-market companies. I know Ed’s vast experience as an advisor will bring a fresh perspective to conversations with our clients and adds further firepower to our ability to support them in these unusual times.”

Ed added:

“Quercus has an enviable reputation in the mid-market, built around a highly experienced team, and I was attracted by the clear focus of the partners and their vision for the business.  I think that M&A is going to be an increasingly important driver of corporate growth as the world emerges from lockdown and I very much look forward to working with my new colleagues and helping clients to make the most of the market opportunity.”

The recent announcement of a proposed £760m merger between Carlsberg UK and Marston Breweries is a sign of encouragement for those concerned about the health of the M&A market in the wake of Covid-19.

By coincidence Quercus have also just completed a deal in the drinks sector; helping premium wine merchant Flint Wines acquire a major competitor, Domaine Direct. Whilst the prospect of a surge in deal activity involving drinks companies is worth reflecting on (and perhaps whether its source is the impact of the lockdown?) the more interesting question is perhaps why are deals being done at all?

The pessimist will argue that the loss of business confidence will see corporates hoarding cash and private equity investors looking inward, supporting their portfolio. The market will be short of buyers and value multiples will naturally fall. Deal activity will dry up.

In reality, markets do not stop whatever the macro backdrop and as we start to emerge from lockdown, we think there are five different types of transaction that are going to make headlines throughout 2020.

First, the orphan children. These are the processes which were at an advanced stage at the start of lockdown and which remain stuck in purgatory with due diligence nearly done and legals not far behind. One suspects the Carlsberg UK / Marston deal is in this category. Whilst some of these deals may eventually succumb to deal fatigue all parties will have invested plenty of treasure and time to get to this point and when opportunity cost is taken into account our guess is that many of these deals will still complete. This is especially so for buyers with seasoned management who have the confidence and conviction to continue pursuing their strategic imperatives, the ability to recognise the underlying value of the target and to take a pragmatic view about the impact of Covid-19.

Second, the accelerated sales. It will be no surprise that we suspect a lot of these will be in retail, travel and casual dining. Many will be high profile and arranged through administrators like the recent sale of part of the Carluccio’s empire to the Boparan Restaurant Group. The retail sector in particular has been struggling with structural change led by changing consumer behaviour, over-expansion and high fixed property costs for some time and, like many, we think Covid-19 has accelerated the necessary changes and we are going to see the sector transformed.

Third, the non-core disposals. We have seen evidence of an uptick in this type of activity for the past 12 months or so and many large groups will be revisiting strategic reviews to identify which divisions no longer fit and could be sold to raise cash to support core operations. In our experience these businesses are often well run with good quality management and so will remain attractive opportunities for the right buyer.

Fourth, the opportunistic deals. In the entrepreneurial arena, owner-managers with no succession plans are still dying, divorcing or struggling with high levels of debt and Covid-19 is unlikely to stop a regular pipeline of these businesses finding their way to the market.

Finally, the new winners. With Covid-19 in mind (healthcare, technology, transportation, logistics) or Brexit (remember that?) bright people will be looking far beyond the murky horizon and acting out Warren Buffet’s maxim ‘to be greedy only when others are fearful’. In discrete sectors there will be activity spikes as players seek to gain competitive advantage in both home and overseas markets. For us, this is a very exciting arena where we anticipate working ever closer with the other 15 member firms of the Terra Alliance M&A network on cross-border deal activity.

So what does all this mean? No one should pretend that the world is in rude health at the moment but that does not mean that M&A no longer has a role to play in seeing us through this challenging period and helping businesses to emerge stronger than before. Processes will undoubtedly adapt (fewer auctions, more bilaterals), pricing and structures will be more cautious (less debt, more contingent elements linked to performance, use of vendor loan instruments, particularly for large corporates) and in many cases timetables will lengthen to accomodate more due diligence. However, for the right asset in the right sector, a deal can still be done.

The twin swallows of Marston / Carlsberg UK and Flint Wines are unlikely to signal a new M&A Spring but equally, as Mark Twain might have said, rumours of M&A’s death are much exaggerated. I’ll drink to that.

Quercus Corporate Finance is delighted to announce the acquisition of Domaine Direct by Flint Wines.

The Quercus team was led by Andrew Clegg and Nick Standen who acted for the board of Flint Wines on the acquisition.

Headquartered in London, Domaine Direct was originally set up in 1981 by the late Hilary Gibbs, an acknowledged industry pioneer, who built her reputation on sourcing the best wines from across Burgundy and selling to top restaurants, shops and collectors.

Established in 2006, Flint Wines supplies some of the UK’s top restaurants and wine merchants. It specialises in Burgundy, North America and Italy and works directly with over 150 producers from around the world. Flint Wines sells also sells to the public through its Stannary Wines brand. Flint’s management are pursuing an ambitious growth strategy, seeking to further develop their wine range and market penetration both organically and through further acquisition.

Andrew Clegg, Quercus Partner commented:

“This is an important step in Flint Wines’ strategy to expand its presence across the UK and very good news for growers and customers alike given the shared passions of both businesses. Transacting during lockdown has not been easy but common-sense on all sides and a high degree of collaboration ensured we could meet a challenging timetable.”

Sam Clarke, Flint Wines founder added:

“We are delighted that the Domaine Direct business is now part of the Flint Wines family and look forward to building on Hilary Gibbs’ considerable achievements. I do not underestimate the challenges of doing deals in the present environment and we are very grateful to the Quercus team whose advice has been excellent. Without their insight, proactivity and support I fear we may not have reached the finishing line.”

As the exclusive UK member firm for the Terra Alliance international M&A network, Quercus Corporate Finance is pleased to announce that:

• for 2019, the Terra Alliance’s firms completed more 110 transactions with a combined value of more than US$15 billion, a 36% increase on the combined value of transactions completed for 2018; and
• for the five years to December 2019, Terra Alliance firms completed more than 480 transactions with a combined value of more than US$44 billion.

Particular sectors of interest in 2019 included Consumer Products & Services, Diversified Industrials and Energy & Mineral Products and Services.

Andrew Clegg, Quercus Partner, commented:

“We continue to work extensively with our partner firms on cross-border deal activity  and these latest figures once again demonstrate the power of the Terra Alliance across the globe.  Many of our clients remain ambitious to grow internationally and the network consistently offers global reach and scale, local market knowledge and direct access to potential buyers and sellers.”

Terra Corporate Finance Alliance (www.terra-alliance.com) is a leading international alliance of Mergers and Acquisitions (M&A) and Corporate Finance advisory firms with operations in Africa, Asia, Europe, the Middle East, North America and South America. The alliance provides member firms with a comprehensive platform for offering clients enhanced identification of, and access to, potential transaction parties around the globe.  Terra Alliance was formed in 2002 and consists of 16 member firms covering more than 40 countries worldwide.

Quercus Corporate Finance LLP is delighted to announce the sale of aviation food solutions company, Monty’s Bakehouse UK Limited to SATS Investments Pte Ltd, Asia’s leading provider of Food Solutions and Gateway Services.

The Quercus team, led by Andy Clegg, advised the Board of Monty’s Bakehouse UK Limited (“Monty’s Bakehouse”) on the sale of the company to SATS Investments Pte Ltd (“SATS”) for a purchase consideration of up to £26.7 million.

Monty’s Bakehouse is a leading innovator of high-quality packaged food solutions for travel markets across the world with offices in the United Arab Emirates and manufacturing sites across Europe, the Middle East, and Asia. The company was founded by CEO, Matt Crane, in 2003 and is headquartered in Surrey.

By combining the culinary expertise of SATS with Monty’s Bakehouse product and packaging innovation, the group intends to enhance its food solutions for aviation customers and support growth into new customer segments. Customers across Asia will benefit from the sustainably-packaged, handheld snacks that Monty's Bakehouse has been providing to a growing roster of premium airlines and other customer segments across the world.

Andrew Clegg, Quercus Partner commented:

“The combination of Monty’s Bakehouse and SATS is a very exciting development for the aviation food industry and I am delighted for Matt and the other shareholders who have built a great business.  In a post-Brexit world, this demonstrates clearly that Britain remains open for business, forging new links in non-EU markets.”

Matt Crane, CEO of Monty’s Bakehouse added:

“Joining a multibillion-dollar market leader like SATS presents an exciting opportunity to accelerate the growth of Monty’s Bakehouse as well as support the growth of SATS in Asia.  I am really pleased that we chose Quercus to help us to structure this complex cross-border deal; their creative thinking, responsiveness and attention to detail were of great value to us throughout the process.”