NatWest Business Builder: Cost structure

Starting a business is no small feat, and in the first year every penny matters. We look at practical economies SMEs can make to keep their budgets in check and survive that challenging first year.

It costs an average of £27,520 to set up a business in the UK, according to a recent survey of 850 new companies. Nearly half of these entrepreneurs used their own savings, and almost a quarter had help from friends and family. That’s quite a financial – and personal – investment.

But with careful planning and thinking outside the box, business leaders can slash those costs dramatically.

Here are a few ways you can save cash in that all-important first 12 months.

Choose your location carefully

Much of your spend on premises, staff and suppliers depends where in the UK you are. The average London business spends around £30,000 just on admin during its first year, but head to Wales and you could pay just a quarter of that. The cheapest place to launch a business in England is Yorkshire, where average first year costs for start-ups are £11,454.

Refurb’s the word

It might be tempting to kit all your team out with the latest tech but refurbished computers, tablets and phones can give you the same quality for a fraction of the price. “Technology moves so fast that it can be hugely expensive to invest in new kit that could be outdated in six months,” says Geoff Wightwick of accountant RSM UK. “But cheaper alternatives are out there. Look for those low-cost options in everything you do. It’s not just tech – keep a lookout for businesses moving premises, which will often be offering unwanted office furniture cheaply, or even free.”

“People tend to note down utilities as a fixed cost. But [you’d] be amazed at how much you could save by paying a little attention”

Jason Smith, founder, Business Electricity Prices

Conserve your energy

“People tend to note down utilities as a fixed cost,” says Jason Smith, founder of advice website Business Electricity Prices. “But [you’d] be amazed at how much you could save by paying a little attention.”

This is particularly true if you’re taking over a premises. “New tenants get put on ‘deemed rates’, which is the second highest tariff out there,” says Smith, “and many businesses don’t even notice. But you can change it immediately by calling the provider. Also, make sure you shop around at renewal time – some ‘automatic, take-no-action’ renewals put you on a 30% higher tariff than you were paying before.”

Share your space

Finding premises is costly – so why not join a co-working hub? Britain’s increasingly flexible working culture means new businesses that previously might have had to commit to a year’s rent for a space they could never hope to fill can now hire space one desk at a time, on an ad hoc basis. “It’s brilliant,” says Jane Porter, who set up her bespoke uniform fashion-design company Studio 104 at Shoreditch co-working hub The Brew. “We started with two of us, and a tiny space to match, and we now have 10 staff and just expanded on the site, and without the tie of a fixed-rent contract. This allows companies to grow and shrink, and pay only for the space they use, when they use it.”

And it’s not just office space that can be shared. Many universities now have business incubation centres/enterprise hubs, which let units, including industrial spaces, to start-ups at affordable rents – and often offer free mentoring and business advice.

Exchange

If you need to buy something, you don’t necessarily have to pay cash for it. If your product or service is of use to, say, the local printer, you could do a deal offering your product in return for producing your promotional materials.

And this can scale up, too. “This is a fantastic way to buy, especially if you’re struggling for cash flow,” says Chris Kirby, who with business partner Greg Harrand runs the British arm of Australian firm Bartercard. “We have 54,000 global ‘Barter cardholders’ who sell their services to fellow members for so-called ‘trade pounds’, which they can then spend on a product from another member. It’s a brilliant way of reducing expenditure.” The UK franchise only opened up in April, but already has 2,000 members and is aiming for 10 times that by 2020.

Moving to hire ground

Staff are a costly expense – essential in the longer term, but freelancers might suit you better to begin with. “It could be a flexible, cheaper option than staff when you’re starting out,” says Bobby Lane, start-up consultant at London-based accountants Blick Rothenberg. “You hire them when you need them and, as they’re self-employed, you don’t need to provide the employee benefits you would for those on permanent contracts. Freelancers are particularly good for short-term, specific projects, but even employing them for more general tasks you avoid long-term fixed costs.”

Head in the cloud

There’s no longer a need to buy expensive servers and office software – cloud-based software will save you money on hardware and installation, or upgrading in the future.

“It’s an obvious money-saver for start-ups and SMEs because it’s so much cheaper than setting up a network,” says Robert Davies, who runs technology consultancy business Kashiko. “Most providers will offer word processing, spreadsheets, calendars, while cloud-based accounting is secure and can give your accountant real-time access to your figures, which will save you money too. You don’t need an email server, you just buy as many addresses as you need, with your own domain name. And the biggest advantage is that if you suffered a fire or a theft, you don’t lose any of your files.”

But, Lane warns, however you save money, it should not be shorthand for cutting corners. “Every start-up has necessary expenses, and it’s foolhardy and short-sighted to cut these out for the sake of saving a few pounds. The key is to plan, evaluate where you need to spend the money and then work out the most cost-effective way to do it.”

Further Reading

• SME growth: when to spend
• SME Tools: eight ways to rein in business costs
• Managing cash flow: procurement

We have a thriving and diverse community of thousands of entrepreneurs from multiple sectors, backgrounds and skill sets helping you to connect with the right people at the right time. No matter whether you’re looking to upskill, get feedback, engage with new people or simply observe, there’s something for everyone.

‘Want to learn more? Register for NatWest Business Builder to view all of their business development tools. Click HERE‘

NatWest Business Builder: Self Awareness

If you really want to know what your team think of you and your business, these questions will help create a clear image.

1. What frustrates you about your role at the moment?

This question is a great one for SME owners to ask, says Peter English, a management development consultant and author of Tackling Difficult Conversations, because about 40% of people focus primarily on resolving problems in their lives. “These are people who are more aware of problems and get more annoyed by them,” he says. For the other 60%, it’s still a good question because it can unearth all kinds of issues.

English says many owners have a natural aversion to this line of questioning because they’ve been tutored in the ‘think positive’ school of thought. “They also fear that they won’t be able to address the issue that’s frustrating employees, or that the answer might be about their management style,” he says.

Why it’s worth asking: It should give owners a true snapshot of what their staff are thinking about their daily grind. “Owners won’t always be able to solve the problem, but they can often do something about it – maybe meeting staff halfway,” says English, who adds that bosses should try not to act defensively to employees’ suggestions.

2. What can I do better as the owner of the business?

This question – unthinkable to some bosses – turns the spotlight 180 degrees. Nelson Phillips, professor at Imperial College Business School in London says that feedback could be transformational if the owner is brave enough to listen.

“Owners often think that employees will feel free to speak up and tell them their ideas, observations, and suggestions, but this is very often not true,” he says. “Hierarchy always looks much more distant looking up than looking down.”

Why it’s worth asking: The team may well be holding back – especially true, says Phillips, if the founder is charismatic and full of self-belief. “Asking this question is, ironically, most useful for owners who are least likely to ask it,” says Phillips. “This is a version of the feedback paradox: the people who desperately need to receive feedback will do everything they can to avoid it.”

3. What do you think of the service we currently provide to our customers?

If the customer is king and your team’s on the frontline when it comes to dealing with them, getting staff to open up about their thoughts on the customer experience can be a valuable exercise. Caroline Dunk, owner of business consultancy the CDA Organisation, says this question often helps identify opportunities to improve customer service by making changes to key processes.

“I’m the only person in this business who can make blanket changes quite easily, so I tell the team that if something can be better, they should let me know”

Adam Greenwood, CEO, Greenwood Campbell

“We carried out some work for a mobile phone retailer to improve the service in their high-street stores; many of the changes that we made were based on ideas that came from their store staff when we asked them this question,” she says.

Why it’s worth asking: As well as unearthing new suggestions to improve the customer experience, Dunk says this question will help you to identify which members of the team really care. “Even if you don’t agree with every detail, a considered, passionate response will tell you that the individual is engaged with the goals of your organisation and wants to deliver an outstanding customer experience,” she says.

4. What can we as a company do better?

It seems such a blindingly obvious thing to ask the team, but Laura Jackman, assistant professor in entrepreneurship at Edinburgh Business School, says many owners simply never get round to it.

“The ‘we’ aspect of this is important because staff need to feel that it’s safe to be honest and not just say what they feel the boss wants to hear,” says Jackman, who cautions against asking this purely as a box-ticking exercise with nothing happening as a result. “When that happens it’s hugely de-motivating and staff quickly realise that their opinion isn’t valued,” she says.

Why it’s worth asking: “It’s open-ended, and in my experience frequently brings out both problems and opportunities,” says Jackman, who reiterates the importance of acting on at least some of the feedback. “I think you can ask staff as many questions as you like but if they really don’t feel ‘safe’ to answer honestly, it’s utterly pointless,” she says.

5. How can we improve working here?

Happy staff and a work culture in which they thrive are much-sought prizes for many owners, and Adam Greenwood, CEO and co-founder of digital agency Greenwood Campbell, says the best way to get there is to ask the team what they want.

“I’m the only person in this business who can make blanket changes quite easily,” he says, “so I tell the team that if something can be better, they should let me know.”

Why it’s worth asking: Staff are the lifeblood of any enterprise, and the happier they are, the more likely they are to propel a business forward. Don’t ask, and resentment and grievances may simmer. “Last year we took two members of the team away to a big digital conference in the US,” says Greenwood, “and some of those who didn’t get to go questioned why I only took those two. So this year I said: ‘OK, we’re going to take everyone.’”

6. Are you clear on the wider business objectives and your role in achieving them?

“A lot of business leaders make the assumption that employees know the business goals and the part they play – and that everyone is pulling in the same direction,” says business coach Rebecca Morley. Unfortunately, this isn’t always the case – as Morley discovered when she recently put this question to a senior leadership team. “In a number of cases there was some ambiguity around the goals and their role, and it can lead to inefficiency,” she says.

Why it is worth asking: “Sometimes the simplest questions can make the biggest difference,” says Morley. “Business is a machine, and everyone needs to be playing their individual role in making it move forward effectively. If someone is misaligned, it creates an issue not just for them but for the business and the people around them.”

Further Reading

• Leadership lessons: how to be a good boss
• Management strategies: why mentoring matters
• Five flaws that could be your biggest strength in business

We have a thriving and diverse community of thousands of entrepreneurs from multiple sectors, backgrounds and skill sets helping you to connect with the right people at the right time. No matter whether you’re looking to upskill, get feedback, engage with new people or simply observe, there’s something for everyone.

‘Want to learn more? Register for NatWest Business Builder to view all of their business development tools. Click HERE‘

NatWest Business Builder: Self Awareness

The ability to develop, understand and regulate your mindset and behaviours is central to becoming an effective entrepreneurial leader, so throughout this module we’re going to give you some key tools and techniques to help you develop your self-awareness further.

In this module you’ll explore:

• What is self-awareness?
• Why is self-awareness important for an entrepreneur?
• How to develop your self-awareness

Start by downloading and saving the workbook to your computer, to use throughout the module, capturing any key takeaways and completing the exercises at the end of each chapter.

What is self-awareness?

Self-awareness is the ‘keystone’ of emotional intelligence. But what does that actually mean?

In this chapter we’ll understand what self-awareness actually is and why it’s important to you as a business leader, and start to look at some key tools to develop your self-awareness.

Test your self-awareness

In this chapter we’ll continue to explore your self-awareness by looking at different reflection techniques and how these can help you, as well as completing a simple psychometric test to give you a greater understanding of your social styles.

Developing self-awareness

Feedback is the final tool we are going to explore within this module and it is central to identifying, understanding and revealing elements of yourself that you were perhaps not aware of.

Further Reading

• Management strategies: the six questions you need to ask your staff
• Leadership lessons: how to be a good boss
• Management strategies: why mentoring matters
• Five flaws that could be your biggest strength in business

We have a thriving and diverse community of thousands of entrepreneurs from multiple sectors, backgrounds and skill sets helping you to connect with the right people at the right time. No matter whether you’re looking to upskill, get feedback, engage with new people or simply observe, there’s something for everyone.

‘Want to learn more? Register for NatWest Business Builder to view all of their business development tools. Click HERE‘

NatWest Business Builder: Customer Discovery

Five successful start-ups talk about the highs and lows of running their own business and offer their hard-earned insights.

All around Britain, thousands of people are starting their own businesses every week. In fact, entrepreneurs are setting up new companies at a record pace of 80 an hour, according to data collected this year by StartUp Britain, a government-backed national enterprise campaign. Its analysis of data from Companies House found that more than 608,000 new businesses were registered in 2015.

Many of these companies start small – from spare rooms or kitchen tables, inspired by a passion that someone wants to pursue. Five entrepreneurs share what they’ve learned from the process of setting up their own company.

Be prepared to spend time and money on your brand

Chantal Teal started her chocolate brownie-making business Love Brownies in 2009 in the kitchen of her Yorkshire home, before expanding into the garage, later into a converted barn, and then to a shop and bakery which now employs 10 people.

She came to baking after five years of studying catering and management and then working as a chef in Europe, Australia and the UK.

She and her husband Lee have now invested £25,000 in the business with the help of a bank loan in order to take it to the next level and provide their award-winning gluten-free brownies to supermarkets, and potentially to Selfridges and Fortnum & Mason.

“I underestimated how much it would cost to get the branding right,” she explains. “I had a clear idea about what I wanted the brand to represent, but to create the logo, brand, values and vision and make them coherent and appealing cost me £10,000. That’s the minimum you are likely to spend.”

Don’t expect immediate riches

Neely Reyes is the founder and director of Sapphires Model Management – a boutique model agency based in central London. She started the agency in 2005 with a £3,000 loan and has provided models for some of the biggest names in the industry. Her client list includes brands such as Vivienne Westwood, Victoria Beckham, Topshop, Chloé and ASOS.

“I was scouted as a model at the Clothes Show on a school trip when I was 16. Although I liked the idea of it then, my mum was not so keen on the idea while I was still at school. A couple of years later I did regional modelling. I didn’t really enjoy it but my sister did. She was doing more modelling than me and I was getting her castings and marketing her, so I decided that was where my strengths lay.”

“It’s really important to listen to what your customer wants and provide them with that. It’s how we’ve survived the hard times”

Mark Hide, MD, Tangram Training

Reyes says a successful entrepreneur needs to “be prepared to work hard, to be determined and ambitious. You also need staying power and a bit of luck.

“It is a great way to make a living if you are prepared to work long hours and face a fair amount of rejection. No one told me how poor I would be at first. Make sure you do your research and that you understand the industry you’re getting into.”

Know and understand your customer

Mark Hide started Tangram Training on a shoestring after he was made redundant and wanted to work for himself rather than go back to being an employee.

He built the Oxfordshire-based business by spotting a gap in the market for corporate and executive training. “Rather than provide an off-the-shelf solution, we focus on helping companies fix long-standing, intractable problems which hurt productivity and morale, but which they have been unable to solve,” he says.

This involved understanding how blockages and problems arose in teams, and being able to understand a company well enough to help staff open up and share difficult issues.

“Our customers know that they can come to us now with any problem, and we will find a way to sort it. Over the course of a few days we can uncover the real reason why a team is not working together – it sometimes comes as a surprise to those who are part of the team, and we’ve had participants in tears when their work colleagues suddenly understand and appreciate them for the first time in years.

“It’s really important to listen to what your customer wants and provide them with that. It’s how we’ve survived the hard times.”

Have a flexible business plan

Simon Jayham set up Gower Surfing School 16 years ago in the Gower, South Wales. He invested £40,000 of his own money and initially concentrated on providing surfing lessons and development.

As the business expanded he offered a Junior Surfing Academy and Stag and Hen parties. He now sells a lot of family-friendly surfing packages, and has seen his customer profile change.

He says: “Things are always changing in business and you have to be able to adapt. I started a surf school with coaching for youngsters who wanted to compete, but the business has evolved and now many of my customers are from outside the UK or are families coming for a week or two in the summertime, rather than just for the weekend.”

He says outside factors like the weather, the economy, the value of the pound and the increasing demands for ‘staycations’ have also affected turnover. “There’s no opportunity to stand still – you have to change and be flexible,” he explains.

Let your passion drive you

Hannah Corne is director of the Mini Mermaid Running Club UK, a national after-school club which aims to raise girls’ self-esteem, self-confidence and love of movement through a six-week training programme culminating in training for a 5km run. Thanks to a link-up with the ParkRun scheme, her young graduates can continue their love of running with weekly 5km events.

“What keeps me going is my strong sense of achievement when I see these girls grow and develop over the weeks of the course. Many of them wouldn’t necessarily join a running club at school but they learn how movement can help them in so many ways.”

She is so committed to the business succeeding that she doesn’t yet draw a wage. “Right now I’m what you’d call a social entrepreneur. My drive is to help these girls grow and learn and love to run. It’s not about race times, but about the joy of movement.”

Further Reading

• Management strategies: staying solvent in the early years
• Seven ways to make your customers feel valued

We have a thriving and diverse community of thousands of entrepreneurs from multiple sectors, backgrounds and skill sets helping you to connect with the right people at the right time. No matter whether you’re looking to upskill, get feedback, engage with new people or simply observe, there’s something for everyone.

‘Want to learn more? Register for NatWest Business Builder to view all of their business development tools. Click HERE‘

NatWest Business Builder: Customer Discovery

Around half of all UK start-ups fail in the first five years, while 64% are hit with unexpected costs in the first year alone. We look at ways that businesses can survive the early years and carefully manage surprise costs.

When Andy Carr launched his performance bike business, Spoon Customs, from the French Alps in 2016, he was quietly confident in his three-pronged approach to trading.

He knew his customer bases were in New York, Milan and London, so by targeting all three markets at once, and by setting up near his Italian suppliers, he felt sure to make a splash. And then the Brexit vote happened, the pound crashed, and his operating costs rose dramatically.

“As time went on, we realised that the extra costs were associated with trying to access those three markets simultaneously; despite giving us the cosmetically impactful launch for the brand we wanted, it would have stretched us too far,” says Carr.

The solution? Keep production and development in the Alps, but return to the UK and relaunch the firm a year later in Covent Garden.

“Thinking smaller and more locally helped us play to our strengths in our home market, and generate more for less,” says Carr. “It’s that willingness – which was reluctance at first – to change direction as situations change.”

Use accountancy services to budget

As Carr demonstrates, monitoring outgoings and remaining flexible are essential principles that all early-stage businesses should follow.

“What gets measured gets done,” says Richard Tidswell, an SME growth consultant for the Business Doctors network. This includes disciplined 12-month budgeting and “spending time to properly consider what the operating expenses of the business should be, and then monitoring actuals on a regular basis, and investigating and resolving any variances.”

Tidswell recommends opting for cloud-based accounting services that make it easier to track and monitor expenses and profitability. “Get away from spreadsheets,” he says.

Monitor regularly and shop around

Processing customer payments may seem straightforward, but can hide nasty surprises. “While we knew the online web development costs would be high, I was most surprised at the high costs of processing customer payments, such as Visa processing charges,” says Andy Baxter, managing director and founder of Internet Gardener, now a multimillion-pound turnover business.

After monitoring the payments, Baxter shopped around until eventually choosing an independent website payment system, and using a merchant account separately from different banks.

“Thinking smaller and more locally helped us play to our strengths in our home market, and generate more for less”

Andy Carr, founder, Spoon Customs

“This allowed us to change merchant accounts as rates increased so we could obtain the best possible card-payment processing charges,” says Baxter. “Initially, these rates were around 2% of turnover; however, we’ve now managed to get this below 1%, which is a big difference.”

Negotiate and invoice early

Like Baxter, Emily Bain is used to shopping around, and recommends negotiating everything with suppliers precisely because you’re a new business. “Don’t be shy, be brutal and use the fact that you’re a start-up and will give them loyalty as you grow,” says Bain, who co-founded Bain and Gray in 2009 with very little finance.

Meanwhile, on the delivery side, Bain and her business partner focused on invoicing promptly and keeping payment terms ‘strict’ with clients from day one. “You cannot underestimate how key this is to keeping the business running,” says Bain. “On our first deal, we asked the client to pay within 24 hours to help with cash flow.”

The firm also used invoice finance, which, despite having costs attached, enabled it to scale up much faster: “It meant we could move to the next level in our turnover and that was vital.”

Remember the ‘ordinary’ costs

Many seemingly ordinary start-up costs still come as a shock to first-time entrepreneurs. For the founders of Bain and Gray, this included registering the company and the domain name – outlays that are essential, but which neither founder had anticipated.

Failing to budget for rudimentary costs is commonplace among businesspeople, according to Dr Harveen Chugh, who teaches entrepreneurship at the Imperial College Business School.

“This could be things like VAT, permits and licences, or insurance – things you probably know at the back of your mind you might have to pay, but then you see the final figure and think ‘How much?”’ says Chugh.

Invest in a good accountant

And while these costs may be unavoidable, they can be better managed by ensuring you invest in a good accountant, says Michelle Wright, founder and CEO of Cause4, which advises organisations on fundraising strategies.

“Invest in a good accountant quickly to advise you on how to grow the business and to manage your finances cost-effectively. We still work with the same accountant we had from day one, and his knowledge of how we have grown as a business has proved invaluable.”

Top tips

1. Network: You already have a network, so leverage it. Could friends or family members provide you with low-cost (or free) legal advice and marketing know-how? Now’s the time to ask.

2. Build your own website: Squarespace, WordPress, Wix – there are plenty of free or inexpensive website-builders out there. Start by building free dummy sites until you find one you’re comfortable with using and then sign up. The larger builders also have fantastic customer service agents on hand to help.

3. Negotiate: When it comes to quotes, three is the magic number – and don’t be afraid to let contractors know you’re asking around, either. It can feel awkward, but explain you’re a new business and ask for a discount. The worst that can happen is they say no.

Further Reading

• Top tips for would-be entrepreneurs
• Seven ways to make your customers feel valued

We have a thriving and diverse community of thousands of entrepreneurs from multiple sectors, backgrounds and skill sets helping you to connect with the right people at the right time. No matter whether you’re looking to upskill, get feedback, engage with new people or simply observe, there’s something for everyone.

‘Want to learn more? Register for NatWest Business Builder to view all of their business development tools. Click HERE‘

NatWest Business Builder: Customer Discovery

In this module we’ll explore the common pitfalls of customer discovery and techniques to gain insights into the behaviours of your potential customers so you can test and validate any assumptions that you have made.

In this module you’ll explore:

• What is customer discovery and why is it important?
• Common pitfalls of customer discovery
• Customer discovery techniques
• Effective questioning

Start by downloading and saving the workbook and use it throughout the module to write notes, reflect on the key points and take time to answer the questions for your own business.

What is Customer Discovery?

In the first chapter we’re going to start by setting the scene and understanding what customer discovery actually is, and why it’s important for you business; using the customer/ client development model to demonstrate the different steps of building a repeatable, scalable business model.

Understanding your customer

In the second chapter we’re going to explore some key methods used to capture valuable insights from your customers. Throughout this chapter, continue to use your workbook to capture any important takeaways and consider what insights you need to gather from your customer segments, how you might do this and who you need to speak to.

Pitfalls of customer discovery

In the final chapter, we’re going to highlight some of the common pitfalls of customer discovery and explore some effective questioning techniques, to help you gain honest and accurate insights from your customers, to drive your business forward in the right direction.

Further Reading

• Management strategies: staying solvent in the early years
• Top tips for would-be entrepreneurs
• Seven ways to make your customers feel valued

We have a thriving and diverse community of thousands of entrepreneurs from multiple sectors, backgrounds and skill sets helping you to connect with the right people at the right time. No matter whether you’re looking to upskill, get feedback, engage with new people or simply observe, there’s something for everyone.

‘Want to learn more? Register for NatWest Business Builder to view all of their business development tools. Click HERE‘

Price Bailey Case Study

After 20 years of building and running a successful chemical distribution company, brother and sister team Bharat and Rashmi decided it was the right time to take a step back.

As a long-standing client of Price Bailey, our team had seen the pair build Noahs Ark Chemicals to be a £60m turnover business operating across Europe through entities based in the UK, Belgium and Switzerland.

Once the decision to sell had been made, the pair were keen to move the transaction as quickly as possible against a very clear timetable. Price Bailey was engaged as the lead advisors and tasked to negotiate agreeable terms, provide tax advice, and project manage the transaction through to completion within a short timescale. Three companies, not within a group structure, were being sold that were based in three different countries and using three different currencies.

Our team worked quickly to start negotiating the most material terms, including a potentially complex convertible loan. Price Bailey also provided in-depth international tax advice. After discussing the offer for several weeks, verbal Heads of Terms were agreed in late December and then signed in the first week of January.

The Price Bailey team had been preparing and advising on the due diligence process and preparing a proforma of the completion accounts. As expected, the due diligence process was thorough and coordinating stakeholder response across the three countries was a key hurdle to transact within the timeframe. Using our experience within the sector and of the company, Price Bailey were able to provide assurance throughout the due diligence process, maintaining value.

Completion took place in early March and according to the planned timeline, and just 56 days after signing Heads of Terms.

The transaction was successful, enjoyable and moved at pace. Success came down to strong and clear negotiation from both sides, constant communication, diligent work and strong project management.

Commenting on the transaction, Bharat, the vendor, said:

“We are very pleased to have completed on the transaction and are confident we leave the company in safe hands. The Price Bailey corporate finance team were a great support to us throughout the transaction. They worked within our tight timescales and were on hand at every stage; we felt like they were as vested in it as us. It was important to have an advisor that we can trust and who didn’t just treat us like their next deal.”

Chand Chudasama, Partner, Price Bailey:

“It has been a pleasure working with the family over a number of years and seeing what they have built. We are proud to have supported the sale of Noahs Ark and enjoyed working on each of the stages. As the economy moves out of the pandemic, businesses in resilient sectors that have an international reach will become attractive targets, and this transaction just shows that it is possible to move at pace and deliver successfully.”

You can view this original Price Bailey article here

Price Bailey Case Study

About Boulder Food Group (BFG Partners)

BFG Partners is a venture capital firm that seeks partnerships with early-stage consumer product companies whose products do better for people and the planet. BFG aims to work alongside exceptional entrepreneurs to foster sustainable growth and outperformance in categories across food, beverage and consumer products. In addition to providing portfolio companies with capital, BFG provides teams with the advice needed to make critical decisions and maximize opportunities. This advice spans operational strategy, tactical marketing, channel development, organizational design and capital planning. BFG Partners is based in Boulder, CO and Los Angeles, CA. www.bfgpartners.com/

About Curlsmith

Curlsmith manufactures and supplies premium haircare products. It’s premium product lines include Moisture, Scalp Care, Strength and Hair Makeup recipes, each offering complete regimes from shampoos and conditioners to masks, styling products and hair supplements. While targeted at the textured and curly hair care market, the brand now makes products to benefit all hair types.

Launched in 2018, Curlsmith began as an online community, offering haircare content on YouTube and Instagram, providing a space for sharing tips, tricks, and tutorials for managing curls and waves. Fuelled by outreach from their growing following, the founders set out to co-create the next generation of curl care recipes, collaborating closely with their community, influencers and experts to develop everything from the recipes in the initial line-up to the brand name. Today, the brand is synonymous with clean, curly haircare globally.

How our services helped

Our due diligence work’s key focus was to gain comfort that the historic quality of earnings was robust and that the strong future projected growth was sustainable as the company planned to explore multiple new sales channels. Given the relatively short trading history and the rapid growth enjoyed to date, our approach meant we could provide support and guidance where necessary. We worked collaboratively with Curlsmith’s management team to obtain sufficient information to satisfy our client and make suitable suggestions to support the future sustainability of Curlsmith.

One of the key areas of focus was understanding the impact of COVID-19 on the sales figures compared to previously projected sales and the effect this had on the margins obtained from both retail and direct end-user customers.

We were able to corroborate the assumptions underpinning the forecast projections, gain an in-depth understanding of the required steps to achieve the next milestone and deliver our key findings in a clear, concise, opinion based report.

We had regular calls with our client to keep them fully informed on a near real-time basis as items came to our attention. This meant that the project timelines could be co-ordinated alongside other advisers and lawyers to reach the desired outcome.

Commenting on the deal, Boulder Food Group (BFG Partners) said:

“We thoroughly enjoyed working with Price Bailey on this project. The due diligence report, which focussed on Quality of Earnings and Working Capital, was terrific, being insightful while giving a different perspective on a number of the key areas of focus. Thank you, Price Bailey, for your support and great service helping us to complete this investment.”

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The Enterprise Management Incentive (EMI) scheme is a tax-beneficial options arrangement used for attracting and retaining key employees, while protecting owner-managers from over dilution. EMI is a popular option for business owners because of the generous tax reliefs available and the limited upfront cost to the business. Here we provide our top tips for employers considering EMI.

Rationale

Business owners and/or shareholders should have a clear personnel and commercial rationale for putting the scheme in place and to understand what the right mechanism is for achieving those aims. For example, an EMI scheme works best in circumstances when the value of the business is set to increase notably so option holders can see that there is or will be sufficient value available to them at some point in the future. If this isn’t the case, then the lack of perceived benefits and the tax reliefs may not prove effective and there may be another way to attract or incentivise them in a way that make more commercial sense for the business e.g., bonuses.

Eligibility

EMI is one of the more flexible incentive schemes but there are a number of criteria that must be understood and met in order for the company and its employees to be eligible to benefit. If a clear, commercial rationale for the scheme exists, then the next step is to ensure that the criteria are properly understood and that the company can meet them. Generally speaking, EMI is available to most businesses except those that HMRC deems as ‘excluded trades’ and those exceeding the size requirement i.e., businesses with more than 250 employees. Some capital and ownership structures e.g., venture-backed businesses and joint ventures, require closer consideration to ensure they don’t impact on your ability to qualify. If you are unsure of whether your business meets the criteria, consider speaking with your tax advisor or contact us.

Time and seeking advice

Planning, designing and implementing an EMI scheme can take considerable time, particularly if clearance is being sought with HMRC to ensure the company will qualify. Therefore, allowing for sufficient time to agree the beneficiaries, terms, valuation, pricing and granting of options is vital. Having quality tax and corporate finance advisors can be extremely valuable in both saving management’s time and ensuring that the scheme is designed appropriately and in-keeping with the business’ wider growth strategy. It can also be useful to involve an employment lawyer in the design of an EMI scheme, particularly when implementing them for key members of the team, as they can ensure that the scheme does not interfere with any other parts of their employment contract and/or director’s service agreement (if applicable).

Valuation

In order to appropriately price the share options, a valuation will need to be conducted, calculating both the Unrestricted Market Value (the capital gains tax value at the time of grant ignoring restrictions) and the Actual Market Value (the capital gains tax value at the time of grant taking account of restrictions) of the share options to be granted. Share valuations have to be agreed with HMRC in advance of EMI options being granted, this can typically take between 2-4 weeks. Again, the timing of the valuation is important because once agreed with HMRC, they will usually set a 90-day granting period, during which the agreed valuation remains valid.

An EMI scheme can be an extremely valuable mechanism for employers to use in order to incentivise their employees, giving them a stake in the growth upside and access to very generous tax reliefs, without management over compromising on dilution. Its popularity is understandable yet the detail for each situation still needs to be understood and appropriately planned for.

The EMI scheme is currently under review by the Chancellor, following a ‘call for evidence’ in the March 2021 budget which will take place over the next few months. The deadline for responses is 26 May 2021 and is to consider whether the scheme should be expanded to include more companies. Therefore, we do not expect that the scheme will change in any way that would have a detrimental impact on those currently qualifying.

If you are in the process of designing the right package to attract a key member(s) of your team or considering the best way to incentivise your existing employees but you are not sure what the best option is for you, your business and your team. Please contact our Strategic Corporate Finance team on the form below.

We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.

Price Bailey

There has been a recent surge in demand for business owners wanting to sell their companies to their own staff through tax-efficient Employee Ownership Trusts (EOT). In this article, we provide a recap of the benefits of EOTs, the conditions that must be met and considerations for funding an EOT, before explaining both the importance of and the things business owners need to consider when applying for HMRC clearance for their EOT.

Benefits of an EOT

Firstly, a recap of EOT benefits and conditions. EOTs have strong tax benefits to offer:

1. Capital Gains Tax (CGT) – the most substantial tax benefit of an EOT is a complete exemption from CGT for the owner selling shares to the EOT. To put that into perspective, at today’s tax rates (February 2021) if the owner sold the business to a third party then the owner would be charged 10% on the first million of capital gain and 20% on anything above that. Thus, with an EOT, the shareholder could be saving up to 20% capital gains tax.
2. Income-tax-free bonuses – where the EOT is in place, employees can be paid up to £3,600 income-tax-free bonuses per annum (National Insurance would still apply).

However, as with any tax relief, the EOT rules set out specific conditions that must be met for the tax benefits covered above to be available. Here are some of the main conditions:

1. Shareholders must sell at least 50.1% of the company’s issued share capital to the EOT – that is, the controlling interest must be transferred to the EOT. They must be ordinary shares, i.e., they have to have rights to dividends which are not at a fixed rate and assets on a winding up in proportion to the shareholding transferred to the EOT. The EOT must also hold the majority of the voting rights.
2. The business must be a trading company – i.e., it must carry on a trade that is not investment activity. Thus, it applies to a variety of companies, including professional service companies. In fact, quite a few professional firms such as lawyers, accountants, architects find an EOT a suitable option for employee engagement. Although, please note it has to be a limited company, not a partnership.
3. Beneficiaries of the EOT needs to include all employees and ensure equal treatment. The income tax-free £3,600 bonus has to be distributed on an equal basis. Some conditions are allowed if, for example, an employee works on a part-time bases or hasn’t been with the company for a specific period of time.
4. A shareholder with >5% cannot be a beneficiary of the EOT. Anyone who in the last 12 months, or is connected to the person, in the last 12 months had >5% would not be able to be a beneficiary.
5. 2/5th rule – this states that an EOT cannot be set up where the shareholders/directors exceed 40% of the workforce. For example, if you have five staff of which two are also shareholders/directors that is fine, but if you have four staff of which two are shareholders/directors, and two are employees, that would be in breach of this condition. Only shareholders with more than 5% are counted for this purpose. This highlights that an EOT may not be suitable for very small companies.

Crucially, a condition that is often forgotten is the need to demonstrate a commercial motivation for the transaction that is of genuine benefit to both the company and its employees. This doesn’t sound like a tax matter, but this might be the most important tax question the company will need to answer.

Funding an EOT

Typically, an EOT transaction is similar to a leveraged Management Buy-Out (MBO) when financing it via debt. However, the majority of EOT transactions rely on vendor loans rather than third party commercial loans. That is not necessarily a bad thing, vendor loans tend to be more flexible and tax-deductible, but it needs to be structured in the right way, i.e., striking the right balance between repaying vendors in a timely manner and not unduly pressurising the business by trying to repay too quickly.

Three key elements to this are:

1. Interest – Depending on the loan agreement, the interest rate can be set as low as 0% or as high as feasible. Several things need to be considered when determining loan size and interest levels such as cash available, required investments for future growth, financing of projects etc.
2. Timeframe of repayments – The time required to pay debt tends to be more generous than with a commercial loan, and repayment can range from around 5 to 10 years. Setting a timeline should be well considered and will depend on the objectives of the stakeholders. This might mean higher interest after five years, in doing so, encouraging the EOT to refinance with corporate debt and speed up value realisation for the shareholders, or trigger a sunset clause to release the EOT from the liability, if the company is not able to pay the loan in 10 years.
3. Tax – Finally, any contributions/expenses made to an EOT is tax-deductible.

Critical planning before tax clearance application

From a tax perspective, the EOT process of tax clearance is very important, but relatively straight forward once the structure and EOT objective is clear. In our experience, HMRC typically approves these in 4-6 weeks with clearance subject to the conditions being met.

The more complicated and lengthy process is the discussions with employees and the setup of an EOT structure, which needs to take place well in advance of HMRC clearance application.

Key things to agree on before the tax clearance application:

• What is the commercial purpose of an EOT?
• Who will be in charge of the company? Will EOT have 51% or 100% controlling interest?
• Who will be managing the EOT?
• What is the value of shares to be sold?
• What is the market value of the company?
• How will the share purchase be funded?
• If the company is going to fund the trust to make the share purchase, then how many years will it take to repay?

When thinking about these questions, don’t forget:

• An independent valuation report will help to establish the market value and avoid any tax complications on the sale of the shares for the shareholder.
• A robust financial model – to have comfort that the business will be able to finance the purchase obligations entered into by the EOT.
• The EOT structure is crucial to avoid any personal liabilities falling on the trustees of the EOT.

For a tax clearance, the most important question is what the primary motivation for an EOT is. This is something the owners of the company and the advisors need to be clear about. The lawyers and the accountants will be on hand to help with an independent valuation of the company, financial models, legal documentation and other supporting documentation. Still, the business owner needs to decide why they are doing this and how involved they would like to be in the business once the controlling interest is sold to an EOT. The driving reason for the EOT establishment will make or break an HMRC tax clearance application.

What is the anti-avoidance provision that clearance is sought for, and why is it so important for an EOT?

The anti-avoidance provision that applies here is called ‘transaction in securities’, and it potentially applies as the share sale by the shareholder(s) can be seen as “disguised distribution”. Thus, getting clearance for an EOT transaction is important to ensure the provision doesn’t apply.

Why is it important?

To avoid the argument over the profit and loss account reserves, which could otherwise have been paid as a dividend. For example, if a company with small retail shops has recently sold 9 out of 10 shops, and then with one remaining trading shop applied for clearance to sell shares to an EOT, it would probably not get clearance because the profit made on the sale of the shops could have been distributed as dividends rather than to finance an EOT with an objective to get 0% CGT. HMRC could see this as an example of tax avoidance that has no main benefit for the company or its employees.

The government encourages companies and their shareholders to consider setting up an EOT through the application of significant tax benefits. Still, with the risk of future CGT increase in rates, this will certainly attract speculative applications. That is why an advance clearance is recommended before setting up an EOT to ensure the success of the scheme and benefits of the tax reliefs.

This blog was written by Simon Blake, a partner in the Strategic Corporate Finance team at Price Bailey If you would like to talk to Simon about structuring a deal, or our tax advisors, then please contact us using the form below.

We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.

You can view this original Price Bailey article here

Price Bailey

As the pandemic continues to play out and impacts the UK economy far more significantly than we ever expected, many fall on hard times; pushing some to commit a crime they would not typically have done.

This article covers some of the main risks to businesses and individuals and provides some of the key, easier to implement, preventative measures. For further information, the Action Fraud website is a library of support for businesses and individuals and allows you to report a fraud both as a victim and witness.

Unfortunately, the main reason for the increase in fraud on UK businesses is the large number of individuals who will use change and uncertain times to exploit people and organisations.

Fraud is more prevalent around key dates and holidays. Fraudsters are more likely to attack when they think the individual or business will be most open; busy bank holidays, busy seasonal periods or simply Friday afternoons when people try to leave the office. Currently, nothing is very normal, businesses are trading at reduced capacity, staff are on and off furlough, and many are completing different roles than they would have previously; all these factors open businesses up to fraud.

There are two main ways to categorise fraud types, authorised and unauthorised. Authorised is where the fraudster tricks the individual into authorising a release of funds into an account controlled by the fraudster. Unauthorised is where funds are taken from an individual or company without their permission and, often, their knowledge.

The first line of defence is knowledge; this article goes some way to explore the most common types of fraud that UK businesses are subjected to.

What are the most common types? And how can you protect yourself, your employees and your business?

Authorised fraud types

We can stop many of these types of fraud with training, process and consideration.

Invoice redirection fraud

This fraud is committed by a fraudster impersonating a company’s supplier, reporting to have amended their bank account details, and asking that all further payments are sent to a new fraudulent account. The account details are that of an account opened fraudulently, the business is often only made aware once the real supplier contacts them requesting payment.

The fraudulent request can be received in many forms; email, phone call or letter. The fraudster will often have done their research and found the named company is a genuine supplier, what they supply, and an individual’s name at the company. They will often make the request via email with a spoof email address or via letter on headed paper.

Prevention

• Educate all staff; letters are often sent to staff not in the finance team, hoping that the letter is left on someone’s desk in the finance team to amend without question,
• Have dual authorisation activated on online banking. That way when a payee’s details are amended, it requires a sign off from another member of staff who can question the validity,
• Implement a process to always complete a call back to a known member of staff at the supplier, making sure not to use a number from the fraudulent email/ letter but one from a readily available source (internet) or preferably a known regular contact number,
• Using technology to automate invoice receipt and processing can be an easy way to prevent this fraud. The systems flag inconsistencies in invoices received which can prevent payments from being made to new account details without prior authorisation,
• The supplier needs to be confirmed as a genuine supplier for the scam to work, so keep invoices safe, out of sight and internet security up to date.

Bogus Boss/ Director/ CEO fraud

This fraud is a regular occurrence, which often preys on the more junior members of the team. There are two reasons fraudsters may use this type of fraud; firstly to get a member of staff to click on a link so that malware may be installed on their system, secondly to request payment be sent to a fraudulent account.

The fraud is committed by impersonating a director/ manager / authoritative figure within a firm; easily found on most websites. The fraudster emails a member of staff, most commonly requesting a payment be made to an account. The email is often sent in an urgent nature confirming the payment needs to be made quickly and for reasons such as; it is for a new client win, the boss is stuck somewhere, or there will be recompense for the individual’s colleagues if not made quickly. This urgency is designed to make people think quickly and not clearly.

The email will often come from a spoof email very much like the directors; these are easily guessed or again found on the website. The fraudster will have often intercepted emails from the director and will mimic the email wording and tone so as not to alert the individual.

Prevention

• Educate all staff, not just the finance team. Emails are often received to random email addresses within the firm. Some will unwittingly forward the email to the finance department; if this comes from another director, it carries even further weight. It also covers instances where staff are covering sickness, mat/paternity leave and secondments,
• Have two-stage authorisation set up on online banking so that another member of staff is required to authorise all payments before release,
• Have policies and procedures; if the company has a stance that no payment request will be accepted via email or telephone, then when one is, they can politely decline and tell it is a fraudulent request,
• Contact your bank as soon as you are made aware funds have been sent. The banks have a duty of care to work together to stop and recover funds for individuals that are subject to fraud.

Internal fraud

All businesses put trust into their staff to do the right thing by the company; if owners don’t, they restrict their opportunities and often get bogged down in tasks they could delegate.

Most individuals are not calculated fraudsters, but some are opportunistic. It is often easy to hide your fraudulent ways if you are the only person working, or with authority, in your department. Internal fraud, fraud committed by the company’s staff, can be the hardest to spot and the most devastating. It often leaves the feeling of betrayal for the businesses owner and the feeling of guilt for the remaining staff due to not spotting the issue. There are too many ways of committing fraud, but there are some key characteristics to watch out for.

Prevention

• Educating all staff that it is not always the colleagues they would expect to commit fraud that do. They should keep an eye out for:
• • Changes in their colleague’s behaviour; seeming quiet or secretive,
• • A change in a colleague’s personal circumstances, which may cause them to require cash or feel desperate,
• • Changes in their colleague’s buying patterns or them living a lifestyle you would deem to be outside of their means,
• • Changes in their colleague’s pastimes, i.e. gambling, drinking or drugs.
• Make sure that not only one person has access to sensitive data or access to monies, and that dual authentication as a minimum is implemented,
• Make sure that both security and monitoring are in place. Employing a suitable IT consultancy can be a worthwhile investment,
• Create a culture where staff can ask for support and guidance when they have life events that may require work support; this may be the difference between them reaching out and them stealing from you.
• Also, create an environment where staff can speak up about their colleagues in an anonymous fashion.

Impersonation scams

Where a fraudster impersonates a professional body such as a bank, the police, IT security firm or a utility provider and dupes the employee into transferring cash, entering sensitive information or downloading malicious software.

This type of scam can be devastating for the individual involved. The fraudsters are often very good at what they do, will pick their timing impeccably, often meaning the company only realises once it is too late.

A common approach is the fraudsters call confirming that the companies systems are at risk of attack, and they need to move funds to a safe account. They will often call from a supposed known number and have done their research to know which organisation to call from (bank details and accountant details are usually easily found at companies house) and contact the correct employee to deal with the issue.

Prevention

• Make sure that dual authorisation is set up for all outward payments, meaning another colleague will need to question the reason and sign off the payment,
• Educate staff, often just taking some time to consider their situation, will make them think something doesn’t feel right. Making staff aware impersonation scams are a thing is the first step; the second step is to empower them to challenge if they feel something is not right. Empower your team to request the caller calls a director or hangs up and calls the company back on a number, and to an individual, they know.

Unauthorised fraud types

Malware

Malware, ‘malicious software,’ is the term given to any software designed to harm or exploit. Fraudsters will aim to gain access to your system via many different methods, but the two main ways are:

• Phishing emails/ texts – emails with an embedded link or attachment that contains a virus.
• Using an external drive, like a USB stick. These can be plugged in, and unknowingly to the member of staff, contain a virus. Fraudsters are innovative in their approach and have been known to drop USB sticks next to a director’s car; a supportive colleague picks it up on their way into work, plugs in the device to confirm it is the directors and infects the computer system. But it can be as simple as a member of staff plugging in their personal device that doesn’t have the same security level as your internal system.

Malware comes in many forms (see ransomware below), but it is always embedded in the system to cause harm or exploit. Malware can provide false screens, mirror websites and many other things. The fraudster may not act straight away, and some malware will lay dormant in the computer system for some time. Unwittingly the staff member continues about their standard processes while the fraudster can watch and read everything they do. This is particularly dangerous if the staff member has bank access and sole authorisation to amend payees or send payments.

Fraudsters can gather all the login information required to access online banking, create a new payee with their fraudulent account details and send themselves money. If the individual that has been compromised, only has the ability to amend payee details, then the fraudster may lay and wait for the day before the company’s monthly payment run, amend all the payee details to theirs and when the payments are made the business is unaware until their suppliers make contact requesting payment.

Prevention

• Implement good quality IT security, and restrict the ability to download software to only those who need it,
• Create a culture that asks staff to think twice before they take action and consider risk,
• Educate and test staff; some organisations send test emails with links imbedded to educate staff on how easy it can be to open the business up to attack.

Ransomware

A type of malware particularly devastating for businesses. The ransomware is delivered into a system in any of the ways noted above; it then sets about freezing the system or locking the files/ data held on it. The company/ individual is then contacted requesting a ransom; usually, money, to release the system/ data. Ransomware, being a type of malware can spread through a company’s system and, with the reliance on technology to run most businesses these days, make many inoperable.

The fraudster can often take some time to make contact, so the business starts to feel the true impact. The sums requested as ransom can be significant as well as the loss of income throughout the process.

Prevention

• Back up all files and data to a remote server so that systems can be wiped, cleaned and reloaded,
• Insure against the risks; insurance companies will have negotiators that will deal with the fraudsters on your behalf, hoping to gain a better deal,
• Make sure firewalls and procedures are robust, preventing the malware breach.

Summary

With all these types of frauds education, robust systems and processes and an open culture can reduce the risk. Educate staff to be vigilant and suspect all transactions until confirmed genuine. The police and banks are backing the Take 5 Campaign, suggesting that taking time to think before taking action can help you clarify your situation.

Fraudsters are very good at what they do. Prevention is the best method of protection, but quality insurance can be the difference between a company surviving an attack and continuing to trade after.

Care for individuals

Outside of the business community, it is important to consider the vulnerable when thinking about fraud. As technology and security continue to improve, fraudsters are turning to scams and deception to dupe people into handing over their cash. Educating family and friends is the easiest way to limit the impact.

Frauds to make more vulnerable family members aware of:

Investment Fraud

A fraudster calls pretending to be from an investment company, often with an investment too good to be true. The individual is tricked into sending monies, they think will be invested, to the fraudster. Often only when the investment is due to mature or the welcome pack the individual was expecting doesn’t arrive do they realise what has happened.

Online purchasing fraud

Often through an online auction or from an unknown seller or website, goods are purchased which never arrive. Always ensure purchases are made from reputable sources and paid for in a way which provides protection against such frauds.

Deception fraud

As above, the individual is called by someone pretending to be from a professional organisation, i.e. a bank or the police and suggests their money is at risk and they should move it immediately. The individual then transfers funds to the fraudsters account and is told to leave it there until they make contact again.

Romance/ friendship fraud

Individuals are befriended by fraudsters who build romantic relationships or friendships over an extended period. Once the bond is strong, they request cash support, this can be to live and get by, or it can be as extravagant as they are stuck in a foreign prison and require bail money, or are flying over to see them and need money for flights. These types of frauds are not uncommon and can be devastating for families that see life savings disappear.

This article was produced by Matt Hector, Business Development Manager at Price Bailey. To contact Matt about any of the points raised in this article, please get in touch using the form below.

We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.

 You can view this original Price Bailey article here