The bigger picture – selling your business.

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Ok, so it’s great that you’ve got your own business and that you’re doing so well. BUT, the question is do you want to be doing this forever? I don’t think so. If your business isn’t getting passed on to another generation then you’re probably looking to, one day, sell it and make a hefty profit! This post is a heads up about the things you need to be doing NOW, in order to build a product (yes, your business is your product) that sells quickly and at the best price possible. Here are my top tips!

Keep it clean – Your business must not have skeletons in its closet. I’ve said this before. Either you eradicate those skeletons or you confess to them, preferably the former. If you have unpaid bills, taxes or ongoing litigation, your business will not sell or it may sell BUT at a DISCOUNTED price. This is because instead of purchasing a nice shiny product, the buyer is purchasing a whole lot of risk. Risk is financial uncertainty and in business we despise financial uncertainty. We are constantly mitigating against it. So, clean up your business and keep it clean. Carry out your due diligence REGULARLY. Do not neglect complaints from clients or scary regulatory letters. The buyer of your business will carry out its own due diligence and it will be thorough. Would you buy a car without a test drive or seeing under the bonnet? Nope, I didn’t think so.

Show them the money – If you want to sell your business you have to be super transparent with your numbers. Start planning now to make sure that your business has a financial record to attract a good buyer. Maintain a healthy working capital, renegotiate supply contracts and make sure that you are getting the best deals for your business. Also, get on top of your debt. Pay off as many of your loans as possible. Think about what is actually costing your business money. If your business requires a lot of machinery, are you using all of that machinery? Can you sell some of it? Don’t forget your forecasts – get them ready and back them up with evidence.

Create and implement a business manual – It is amazing how many of my clients do not have systems and procedures for the simplest of things to do with the day to day operation of their business. If you sell products worldwide, you should not be selling those products on ad hoc procedures. You should have a clear process that the buyer of your business can step into tomorrow and operate. You should have systems in place for every aspect of your business. You should have formalised documents. Get your lawyer to draft standard form employee contracts, terms and conditions, disclaimers, policies etc. Also, is the structure and ownership of the company clear? Make the ownership as clear and as transparent as possible.

Show them your A team – Behind every great business is a strong and passionate management team. Your management team is a big part of your business’ valuation. It is therefore crucial that you consider if your business can retain good employees – this may require considered incentives. The buyer of your business will want all your key people to be a part of the sale. It will also want the assurance that your business is not a DIY job; show off your professional support. Your lawyer, your accountant, your consultant all make an impression. Those relationships matter because they instil confidence in the buyer that everything to do with your business has been done properly. Also seek advice from your A team. What do they think? Get your lawyer to review your business structure and advise you as to whether you need to change it in order for it to be an attractive purchase. Your lawyer will take you through the whole process and organise all of the legal paperwork to ensure that there are no unnecessary complications before and after the sale. You really need everyone on board advising. I have worked on an international acquisition where the whole deal was restructured because of tax. It was cheaper to do it another way! Three days before closing we had to change everything!

You may be far off from selling your business at this point in time, but if you want a big pay out someday, you should start doing all of the above now!

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Show me the MONEY!

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When you are starting a business, you need MONEY. When you are growing a business you need MONEY. Most businesses do not make it off the ground because of cash flow issues. They have no money to invest in their product/service. NOW, I know that financially smart people avoid debt and credit cards etc BUT when it comes to business, debt is your FRIEND.

Debt is cheaper than equity because the lender faces less risk than a shareholder would, and also because the debt interest is tax deductible in the UK (and most other countries too). Debt gives you the means to make a profit. Your profit pays off the debt AND reinvests in your business producing more profit. So, hopefully you can see how you should not be afraid of debt when it comes to your business. Let’s look at some different types of lending.

Line-of-credit loans: These are short-term loans. They allow you to access a specified amount of money that is deposited into your business  account on an as-needed basis. You will only pay interest on the amount that is actually loaned to you. Line-of-credit loans can be used to buy inventory and pay operating costs for working capital, among other things, but usually not to buy real estate or equipment. For example, you have a line-of-credit loan of £3,000. You want to draw down £1,500 to purchase some fresh lobster for your restaurant. So, you provide your bank with evidence of the cost for the lobster and your bank, satisfied with your evidence, approves the the draw down of £1,500. You only pay interest on £1,500.

Overdrafts: Overdrafts are very flexible. They are easy to set up with your bank and you can usually pay back the overdraft, quickly and informally if your company can afford to do so. However, overdrafts are so informal that a bank can usually withdraw an overdraft facility at any time, which could leave a company in financial trouble. Overdrafts are good safety nets for if you come across unexpected liabilities. Every business should have one…in my opinion.

Revolving lines of credit: This loan offers you a certain amount of money in a specified period of time, and allows that certain amount of money to be borrowed again upon repayment within that specified period of time. For example, say you take out a one year loan of £50,000 on 1 January. You draw down the full amount of the loan on 2 January and subsequently pay off the full amount in May. You can then, if you wish, draw down the full amount of £50,000 again, at any time within the life of the loan. You can keep repaying and drawing down up to £50,000 until the end of the loan. This type of loan is great if you want to draw down monies on an as needed basis BUT you also want security that such monies will be available to you unlike with an overdraft or a line-of-credit. You will usually have to pay a commitment fee for the unused part of the loan. The commitment fee is generally specified as a fixed percentage of the unused loan amount.

Bullet loan: A bullet loan is a loan where a payment of the entire principal  (fancy way of saying the “amount”) of the loan, is due at the end of the loan term. For example, if you take out a one year bullet loan of £50,000, the loan repayment is due at the end of that one year term, in one swift BULLET payment. Under these loans, you usually have to draw down the full amount of the loan immediately and you do not have the option of repaying it and drawing it down again. Interest can be paid periodically within the term of the loan OR it can be paid with the principal, in a bullet payment at the end of the term of the loan.

Angel investment:  There is also the option of getting a loan from an angel investor. These investors are usually experienced entrepreneurs looking for the next big thing; they’re in it to win it. Therefore, angel investors typically demand three things: a) equity, b) a high return on investment and c) a well-defined five-year plan in return. If you want a better idea of angel investors, watch the BBC’s The Dragon’s Den.

So these are the ways in which you can assist cash flow for your business. These are very, very BASIC definitions and as always, lawyers are key in looking over the detail so that you are protected. Also, debt has its draw backs too, for example it shows up on your accounting books as a liability and it comes with unavoidable interest charges. There may also be restrictions imposed on your business whilst it is a borrower of a bank. For example, most banks will require a right to possess and sell your business property if you fail to pay back the loan, or to seize your inventory. Again, this is why you need a lawyer. Think about what type of debt your business needs at the moment and then ask your lawyer to look at your bank’s paper work.

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HOW TO…reduce your legal bill!

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A legally smart business woman asked me to write a post about how to reduce her legal bill. As a City lawyer, here are my best tips on how to get the most out of your lawyer for less!

  1. Give legally smart instructions – Of course I would start with this one! The smarter your instructions the sooner your lawyer can get to work; they don’t have to waste billable time trying to figure out what you want. For example compare “Hey Cara please can you draft us a contract to buy apples from Fruit Ltd on a weekly basis” to “Hey Cara please can you draft us a contract to buy apples from Fruit Ltd on a weekly basis for X amount per box. In each box there will be X apples. We want the contract to last for a year with a right of renewal and we want it to be governed by English law and the English courts have jurisdiction. We also need a clause that states we have a right to terminate if the apples are Y. Delivery should be on Y of each week….” The former encourages a huge bill, the latter demands an efficient bill.
  2. Ask a junior lawyer to do it – Unless you are giving a complex instruction there is no reason why a junior lawyer should not be doing the bulk of the work. A senior lawyer only needs to give it a once over to make sure there are no glaring mistakes. When you give a standard instruction request for a junior lawyer to do the work in the first instance, if the law firm insists that a more senior lawyer is needed ask WHY and make them JUSTIFY the senior lawyer’s input BEFORE any work is carried out. You may just find that they back down.
  3. Request to see the narratives – Lawyers bill by an hourly rate. As part of that billing structure we are required to write narratives. If your lawyer has spent 7 hours reviewing a contract, ask to see the narratives. They should be detailed enough for you to say “fair enough” BUT if the narratives do not convince you, challenge the bill! This will either a) get you a discount on that very same bill or b) get you a fairer bill next time because that lawyer, terrified, will work as efficiently as possible for you. Most lawyers get annoyed when a client asks to see the narratives BUT its YOUR money and when you’re a growing business every penny counts!
  4. Agree a fixed fee structure – If you prefer predictability, agree a fixed fee arrangement! This means that, unless something unexpected pops up in the process, you know exactly how much you are paying each time. For example, if you have a standard sale contract that your lawyer reviews every time you engage with a new customer, agree a fixed fee for this repeat review i.e £50 per contract. You can also agree a fixed fee for a one off instruction. For example, if you need a lawyer to attend a negotiation with you, ask them to do it for X amount and not by an hourly rate. Hint to the lawyer that if they agree to this, you will send other work their way and watch your proposal be snapped up! Lawyers care more about a longterm business relationship in which they receive frequent work than being able to bill full rates on a single occasion.

Now go read “5 ways to spot a bad lawyer” and “3 ways to get the most out of your lawyer” to learn how to get even more out of your lawyer!

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HOW TO … chase debts!

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The most important thing when you own your own business is ensuring that you get PAID. Late payments and outstanding debts disrupt cash flow which can literally kill a business. This post is all about a) preventing late payment and b) chasing up late payment. The goal should always be to never have clients owing you BUT if they do, as they occasionally will, it’s all about getting that debt settled as amicably as possible.

Prevention

Ideally you do not want to be chasing up a late payment therefore prevention is better than cure. You can protect your cash flow by making it extremely difficult for a client to make a late payment. You basically need to be honest and upfront at the outset, so that there can be no doubt as to what you are expecting to be paid and by when.  Take note of the following tips:

  1. Make sure that your clients know and understand your payment terms. Display your terms clearly in every invoice and explain how (“payment can be made by BACS transfer/SWIFT/Paypal etc”) and when (“payment is due by X date”) payment should be made. The idea is to make it as EASY as possible for your clients to pay you. You should also include information as to any late payment penalties i.e. “if your payment is more than one day late we will charge interest at a daily rate of X%”. If I know you are going to charge me interest at a daily rate of X%, I’m most likely to pay you on time. The invoice should be a one stop shop of how and when to pay, and the consequences for late payment. This is the basic starting point to getting paid and preventing client debt. If your invoices do not do this, REVISE them.
  2. Double check the details.  Your invoice details should be perfect, quoting all the information the customer needs to identify it. Include your reference code and THEIR reference code. Give a good description of the work/product that the invoice relates to. You do not want a late payment to be YOUR fault so just make sure that all the details are correct.
  3. Send your invoices out promptly. If you want your clients to pay you on time, you better invoice them on time. If you invoice me a day or week late, I’ll take that to mean that I can pay you a day or week late and then some!
  4. Do some credit checks. You should credit check all new significant clients as part of your due diligence (due what? read this), but proceed with caution. A client may be new and have no credit history, or they might have done really well in the past five years but are now on the verge of going bust. Carry out your general due diligence and use your judgment – is it likely that this company/person can afford my services/product?
  5. Make them pay a deposit. The deposit method of payment is great for damage limitation with late paying clients. If you are going to ask for deposits, make the booking of your product or services conditional upon receipt of the deposit payment up front. No deposit, no deal. After a certain point in time make that deposit non-refundable too.  The deposit provisions should be stated in the actual contractual agreement between the parties as the deposit happens at the start BEFORE the invoice which is issued after the provision of the services or product.

Chasing for payment

No business is perfect. Even your best clients can let invoices become overdue. Chasing and securing payment of an overdue invoice is a fine art in the world of business as you never want to offend a client. However, your company is entitled to the money, so don’t shy away from collecting what is due to you. Even charities hound their loyal supporters for donations!  At this point, it is all about having a uniform procedure based on a series of gradually more urgent reminders, followed by putting the matter in the hands of a debt-collector or solicitor if all else fails (absolute last resort). Here are some tips:

  1. Know when your invoices are overdue and act immediately. In some industries it is easier and more acceptable to just pick up the phone and ask “hey where’s my money?”. However if you are dealing with a new client or are operating within a more formal industry, you should write a letter of reminder stating (politely but firmly) that your invoice is now overdue and please make immediate payment. You should send this letter by email or fax followed by a hard copy in the post. This way you get the reminder to the forgetful client asap whilst providing them with a hard copy for their records. I would recommend a  letter of reminder regardless of industry norms because I’m a cautious lawyer and I believe in leaving paper trails in instances like this. In order for your reminder to have an impact, it needs to be prompt so keep a calendar of all invoice due dates and keep an eye on them. Send your reminder the day after late payment or your company’s grace period. Allow seven days for a reply.
  2. If there is no reply within seven days, send the invoice again. Send it by recorded delivery to ensure it has been received and keep your receipt as evidence that you sent it.
  3. If you still do not receive a response, make a phone call to find out what the problem is. Your client may have accounting issues or queries that it needs help with. Find out the reason for the non-payment and help them out. Negotiate if you have to and try to extract a promise of payment.  ALSO use this phone call to find out if the customer has a regular weekly or monthly pay run and find out the day on which this is done. Keep calling until you receive payment, especially two or three days before the pay run. This is where chasing payment becomes a fine art. You need to tread a fine line between harassing the client too much and keeping the pressure up. It’s best to keep up a persistent chase! “Hey Bob How are you? Pay me please”, “Hey Sheila, I’m great thanks. Spoke to Bob the other day…pay me please”.
  4. If the pay run date passes and you still do not receive payment, consider turning up in person to collect it. Of course this is not desirable and it is not even possible in some instances. This is the last resort before the ABSOLUTE last resort.
  5. If you have tried all of the above steps and you have still not received payment, you need to consult your lawyer. There is nothing like a letter from a lawyer to scare the crap out of a client. The letter should threaten to take legal action to recover the debt or to start bankruptcy or winding-up proceedings (depending on how much you are owed, in the UK, you can end a company if they haven’t paid you – read this). The letter could also threaten to use a debt collection agency. Keep a copy of all correspondence and accept that if you are at this stage, you have lost that client forever. Not so bad as a client is only worth it if they value you and they show that they value you when they PAY you.

The legal/debt collector route is your absolute last resort, but don’t be afraid to use it. However if you get to this stage, ask your solicitor’s advice and evaluate how far you should sensibly go to collect the debt before cutting your losses.

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HOW TO… pay yourself!

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When you are the owner of your own business, it is all about ensuring that you are paying yourself in the most tax efficient way. There are a few options and you should go through them with your ACCOUNTANT (yes you should have one of these). It will also depend on your legal set up (sole traders and partnerships, read no further but limited companies this is for you). Set out below is a basic guide of how you can pay yourself effectively in your limited company in the UK.

A The Elements

  1. Employee

As a director of a limited liability company, you are an employee for tax purposes. You will be paid a SALARY. This means that, as with all employees, you need to register with HMRC to use PAYE to pay your salary – full details can be found on the HMRC website HERE.

Your company (remember that it is a separate legal identity even if it is literally YOU) will need to deduct income tax and National Insurance Contributions (“NICs”), from your salary and pay these deductions to HMRC, on a monthly (or possibly quarterly if the amounts are low enough) basis.  The aim is to keep these outgoings as low as possible in order to fall within a low tax bracket, effectively reducing the amount of income tax and NICs that you pay.

  1. Dividend

A dividend is a distribution of a portion of a company’s earnings, decided by the board of directors, to a class of its shareholders. Dividends can be issued as cash payments, as shares of stock or other property.

A company’s net profits can be allocated to shareholders via a dividend, or kept within the company as retained earnings. Dividends attract corporation tax payable by the company and may also raise a personal tax liability in the way of income tax. The corporation tax liability is calculated and paid to HMRC at the end of the company’s financial year and takes into account the overall profit of the company and any dividends that have been made over the period. In this respect it is difficult to estimate the amount of corporation tax payable when the dividend is issued so BEWARE that you must ensure that the company has the available profit to make the net dividend payment AND the additional tax liability. If a company pays a dividend that cannot be supported by its profits then it is technically insolvent (AAAAARGH!).

The good news is that currently only higher or additional rate taxpayers pay tax on dividends (with a 10% reduction which represents a 10% tax credit).

  1. Corporation Tax

Corporation Tax is a corporate tax levied in the United Kingdom on the profits made by companies and on the profits of any foreign company with a UK branch or office.

Taxable profits for Corporation Tax include the money your company or association makes from:

  • doing business (‘trading profits’)
  • investments
  • selling assets for more than they cost (‘chargeable gains’)

If your company is based in the UK, it pays Corporation Tax on all its profits from the UK and abroad.

If your company isn’t based in the UK but has an office or branch here, it only pays Corporation Tax on profits from its UK activities.

B The Solution

The popular solution is to pay yourself using a mixture of salary and dividends. Dividends are National Insurance exempt so you do NOT pay NICs on them. They thus represent an attractive method for taking funds out of a business.

Sounds pretty simple HOWEVER the ever changing beast that is tax is never simple. The level of salary you draw is dictated by other factors too, such as pension requirements, if you draw too low a salary you may not be able to make the level of pension contributions you would like even if your overall pay is pretty high. Also, you can only take dividends out of your post-Corporation Tax profits, i.e. from the money that you have actually earned, whereas a salary can be paid out of future earnings (e.g. by borrowing money from your bank) – if you pay yourself too small a salary, relying on a monthly dividend to cover your living expenses, then a lean month could leave you short of cash. Therefore as previously mentioned, you need an ACCOUNTANT.

C How do I issue a Dividend?
Here are the basic procedures for issuing a dividend.

  • Ensure that there are sufficient profits in the company to allow for the dividend. Print a balance sheet and profit and loss account for the period to remove any doubt.
  • Call a meeting of the directors to minute the decision and details of the dividend.
  • Generate a tax voucher for each shareholder. A tax voucher is a simple statement showing the company and shareholder details along with the individual’s shareholding net dividend amount and tax credit.
  • Issue the dividend payments along with the tax vouchers and file the board minutes and accounts at the registered office.

You can guess what I’m going to say though, you should (if you really want to be good) at the VERY LEAST, do this with a lawyer for the FIRST time. Then once you’ve got the hang of it, you’re good to go!

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