There are several ways of extracting the value from your business:

1)  As a bonus. You can do this whether or not you close the company down, but it is an expensive route: you have to pay income tax and possibly NIC on your drawings. 

2)  As a dividend to shareholders – here you will suffer a tax bill of 25%.  Again you can take this route whether or not you chose to close the company down, but like 1) it is still a rather expensive route. 

3)  You could take advantage of HM Revenue & Customs’ Extra Statutory Concession ESC C16 which allows a distribution to shareholders to be treated as a capital gain.  But this can only be used if the company is being closed down, then dissolved.  Until April 2008 two types of ‘deductions’, indexation and taper, could be available, reducing the effective rate of tax.  With Taper, where you have held your shares in the company for more than 2 years, one quarter of the gain is taxable;  after the annual exemption is deducted, the resultant figure is subject to CGT, at its present rate of 40%, meaning that tax is generally payable at the rate of less than 10% of the gain.  So the ESC C16 route can be a very cost effective route. 

But there is a problem with taking the ESC C16 route.   Although the Revenue are happy to allow companies to follow it, another part of the government, the Treasury Solicitor, is not so happy.  He will ask you to pay to him any distributions of share capital over £4,000!

4) By distributing assets and cash through a Members Voluntary Liquidation.  All distributions in MVLs attract CGT, not income tax.  And until April 2008, you will probably get Taper and Indexation, meaning that you pay about 10% in tax, making it an efficient exit route.  As with ESC C16, the company must be shut down/dissolved, but unlike ESC C16, the Treasury Solicitor cannot attack any share capital distributions above £4k.

And you should always take advice from a tax expert before you do anything, the devil is in the detail!  And if you have held the shares for above two years, massively so if you held them before March 2002, take advice now, do not delay as you have much to lose after March 2008!

Let’s explore this further:

• Northern Rock would have had to pay interest on the money it would have had to borrow.  Why should we, as a country, waive all interest? 
• The interested parties asking for us to waive that interest make huge profits, typically £5 billion or so, each a year.  To them it is a few months’ profit, a mere blip in the dividends they pay to shareholders, in return for a long term investment that they are getting at a knock-down price.
•  £2 billion could go an awful long way in providing services to those we neglect (remember the failure to provide drugs to breast cancer patients on cash grounds? Our armed forces are operating on a shoestring).
• Surely if anyone should be coming out of this hurting financially, it should be the shareholders of Northern Rock, not us: the price for which the eventual buyer picks up the shares must reflect the interest payment, for it not to do so would mean each of us subsidising Northern Rock shareholders.  We don’t, and shouldn’t do it for others, why should we do it for them?  

It will, in my view, be completely the wrong for the government to write off any of the £2 billion interest.  Big business must bear the cost, not us. 

Let’s put that in context.  It will build 60 of the new Olympics arenae (based on today’s estimated prices).  Or fund the entire NHS for 11 months.  Or the armed forces for two years.   And that loan has been made in the space of just 3-4 months. 

The various debates and committee enquiries have shown that nobody in the Bank of England, the FSA and government come out of this absolutely blameless (although Mervin King comes out head and shoulders a true thinking professional more than any of his counterparts) . 

The level of spend so far, and with no sure exit route for the government (it will be interesting to see what interest there is in a week’s time, when the deadline for expressions of interest closes), must surely mean that more heads must roll, other than just at NR?  And a total rethink is needed of our financial systems’ ability to cope with crises, if our credibility as a world financial centre is to be maintained?    

I believe the run on Northern Rock has highlighted some deep seated weaknesses in our systems caused by the huge levels of personal debt and our reliance on maintaining public confidence in our systems. 

Sure, Northern Rock’s business model is different to many of the other banks: they are more reliant than others on borrowing money from the markets and they do an awful lot of lending, at low margins, to the sub-prime or near sub-prime market.  But they have been around for a long time and in the eyes of Joe and Joanne Public have a reasonable reputation.  Yet over the course of just a few days, despite repeated assurances from NR management, the Bank of England and the government, investors queued up to take out an estimated £2 billion of savings, in what was near hysteria. 

This highlighted to me just how reliant the UK’s banking system is on the confidence of the public, how easily that confidence can be dented, and that despite assurances from our lords and masters, once confidence has started to deteriorate, just how quickly that can accelerate across a wide front.  Surely all the banks must be worried that there for the grace of God go they and will be holding talks with the Bank of England over how such a situation can be avoided n the future. 

It was only a few months ago that the Bank of England produced a lengthy paper assessing the risks faced by the UK banking industry.  Then the Bank of England concluded that while personal debt, now £1.4 trillion and growing at three times the rate of inflation, was an issue, on balance they did not foresee any major issues which would cause difficulties or a near collapse of the UK banking sector.  Yet they failed to pick up on the exposure that became so evident here in the Northern Rock run.  And if they can fail to pick up on this, what else have they missed, and just how robust are the conclusions they have drawn in that report?  After all, in that report they concluded that the level of personal debt could bring about huge losses to the banking sector, on a worst case basis ten times the sum the Bank of England appears to have plugged into NR.   

It makes you wonder, doesn’t it, whether the experts truly understand the full extent of the risks the UK financial institutions are facing as a result of both their UK or global dealings.

Tix are trying to impose on Insolvency Practitioners and their clients some fairly onerous terms for what they consider to be standard IVAs, which are effectively run of the mill 5 year income only IVAs for waged employee debtors.  In essence they want 100% of the debtor’s free income (calculated by their figures which do not necessarily agree with the debtor’s view) over 5 years.  With annual adjustments, if necessary. 

And Tix are trying to impose limits on IPs’ fees.  In essence Tix are looking for IPs to supervise IVAs for little more than the monthly pay of a paperboy.  They are are arguing that there are huge inefficiencies in how IPs do things which need to be squeezed out.  The IPs are up in arms, arguing that Tix are looking for a Rolls Royce service for a Reliant Robin price. 

IPs firms outside of the factories are acutely aware of the huge gulf that has developed between what a debtor pays across to the Official Receiver in a bankruptcy (50% of free income over three years) and the 100% over 5 years required by creditors in IVAs.  Once the relative certainty and speed of bankruptcy is also factored into the IVA/bankruptcy decision, this means IVAs are not the solution for 95% of people. 

IPs are also arguing that if more people take the bankruptcy rather than IVA option, in the end the banks, who are already losing billions of pounds in bad debts (which bad debts surely arose out of the banks’ poor lending policies rather than the debtors’ choise of process to deal with debts which they cannot pay), will surely lose more.  

IPs believe Tix’s efforts are counter productive and that there is in reality another agenda being followed by the banks here: namely to make IVAs less attractive to the normal Jo and Joanne in the street and the IPs who are willing to supervise them, so as to force people not to address their problems, deferring the day when the banks have to write off their bad debts.

At the moment, many firms of IPs are refusing to do income only IVAs where Tix clients are the creditors: IPs simply cannot afford to run them at the price that Tix is willing to pay.  This either closes off the IVA route (not always a bad thing) at least at this time until the spat is resolved, or debtors are going to the IVA factories, who at the moment are better able to supervise IVAs for something approaching the Tix rates, at least in the short term. 

Put another way, debtors are being forced into a corner by a band of (arguably) over zealous creditors who are eiher following their own  agenda or, so the IPs claim, possibly breaching UK Competition laws and the banking code.  Real people are being hurt, and unnecessarily.  But for how long will this be the case?

The unfortunate answer is, there is no end in sight: the sides are a country mile apart.  IPs will not back down, they feel that their services are being undervalued.  They cannot afford to back down as they have an overhead structure to support which will not enable them to ever do such low cost work.  The banks have made their decisions, only a court order ruling that their actions are unlawful (which is questionable) will get them to change their minds. 

At the moment, debtors have the option of going to IVA factories for their IVAs.  Or to hold the creditors at bay with the £1 per month payment option, in the hope that the spat ends soon. 

But the real problem for debtors will come some time down the line, when the IVA factories have taken on too many of these loss-making cases to make a profit.  With it often costing an IVA factory on average £1k in advertising costs to attracting the IVA in, £60 per month for overseeing an IVA does not go very far.  And the banks expect the factory to carry out annual income/expenditure reviews, circulate annual reports, and pay regular dividends, all costly work.  This coupled with the huge failure rate of income based IVAs, surely must mean that the factories’ business model cannot work in the longer term based on what the Tix creditors are willing to pay?: the factories do what they do to make money, not to provide a service for the good of the community.  Surely they must start making losses soon, with some going out of business (with a major impact on the debtors whose IVAs they supervise)?  And this loss making / factory closure scenario ignores the potential for such factories’ peddling of IVAs to become the early 21st century equivalent of endowmment mis-selling, with the huge claims that may bring against them.  

It’s difficult to see at the moment where this will all end.  What is sure is that the effects will not be pleasant, particularly for debtors.  And that the future of the IVA factories, which after all have not been around for long unlike the greater IP community, is far from certain.    

If your IVA is in danger of failing, either because you were missold the IVA solution, your circumstances have changed or the IVA factory’s own problems are causing you difficulties, what do you do?  This blog aims to give you some guidance.

Firstly, let’s go back to some basic principles.  An IVA is a contract between you (‘the debtor’) and your creditors.  As with any contract, the wording is absolutely key:  It is essential that you know the fine detail of that contract, how it all fits together, and what you and the Supervisor has to do and not do and what you both have the options of doing.  If you have put it away in a drawer, you now have to take it out, dust it off, read it (at least three times).  There is no excuse for not fully understanding it, it is one of the most important documents in your life.  And that even applies to us blokes who avoid ‘instructions’ etc!   

Under that contract the debtor is obliged to do what he said he would do so in the IVA, the creditors too are bound, they have to write off part of their debt.  You have both done something to put in place a contract.  Sure, that contract can often be ‘varied’, provided the agreed IVA Proposal enables that to happen.  If it does not contain any ability to vary the contract, you cant without the consent of all of the creditors.  What does your IVA say?  Indeed do you want to vary it?  Or do you just want to tear it up and go bankrupt?

Let’s now look at ‘defaults’.  A default is where you as the debtor have failed to do something required of you.  More often than not the default will be your failure to make income payments because the IVA was far too harshly written, your creditors pushed far too hard a bargain.  Often the IVA Proposal provides that a failure to make any 2 or 3 monthly payments will be a default.  

You need to read the Proposal, and any modifications, to ascertain precisely what constitutes a default, what the Supervisor has to do in the event of a default and what he has the option of doing.  It is essential that you draw the distinction between the Supervisor’s obligations and options.  He will not spend money he will otherwise take as fees in making you bankrupt unless the Proposal or mods forces him to do so.  That is to say, if you want to go bankrupt to put an end to all this, he will not petition for you if he does not have to do so.  It will be down to you to spend the £500 necessary for a debtor’s bankruptcy petition.

Do you have a right of action against the IP who advised you to go into IVA in the first place?  So far I have seen no instances of legal action being taken against IPs for sending people down the wrong route.  Some of the IPs’ governing bodies seem, in my view, to be toothless.  I have seen no instances of people losing their insolvency licence for what I believe to be blatantly bad advice.  And I have seen numerous instances of bad advice.  Such IPs do my profession no good at all and frankly shold be hounded out of it.  I would encourage everyone who believes they have been missold an IVA solution to make a formal complaint to the IP’s governing body.  Obtaining compensation is probably more difficult: the figures involved will probably be quite low.  And frankly, most debtors will want to consign the whole sorry episode to history, and quickly.  Those who feel strongly about pursuing the IP for cash should go to an Insolvency lawyer: but beware, do not throw good money after bad. 

I feel the whole IVA debacle has been a sorry indictment on a range of predators – the IPs, banks, and salesmen do no one any credit.  The sooner everyone comes to their senses the better.  IVAs are only appropriate for people who want to protect income or assets: bankruptcy is far better an option for everyone else.  So IVAs work for professionals such as lawyers, accountants, FSA members etc who lose their livelihood if they are made bankrupt, or directors of reasonably profitable businesses.  They are not the panacea for Joe Public’s financial problems.  The sooner that is recognised the better for all concerned.  It may be too late to turn back the clock, but it is not to late for you, if you have been missold an IVA, to now take the proper course.       

Many thanks to all at WBMC for their support during the various training sessions and the trip itself: without you I would not have attempted it, let alone done it.  And many thanks to everyone who sponsored me, raising muc needed cash for Willen Hospice.  I expect the final total raised to be around £1,000.      

Let’s look at the principles in the decision both as regards what the judges said and what they did not say, that way we will get a much better understanding of its impact on landlords. 

Firstly, landlords although they would very much like to, do not enjoy a ‘super creditor status’.  Their debts can be compromised in a CVA like any other creditor. 

Secondly, but the CVA must not be unfairly prejudicial to them or the CVA will be upset. 

Some commentators have decided that just because the judges found on the side of the landlords, CVAs which attempt to compromise landlords’ claims are unlikely to succeed.  This is patently not so, all that Insolvency Practitioners have to do is be an awful lot more careful about the structure and drafting of the CVA in order to make a CVA binding on a landlord.   So the lesson to IPs is ‘take more care  and CVAs will work’. 

Remember, even though they would like to be, landlords are not exempt from the UK’s business rescue culture! 

First off, you have to come to terms with yourself: you will obviously have to compromise your own personal goals if you take the merger route.   Getting over this first hurdle can be as simple as comparing the benefits and drawbacks of merger against the potentially unacceptable high level of risk to you and your family of not doing it.  But merger as with any major deal is a risky business: bringing any two organisations together, in any form, is not easy.  Bringing two underperforming businesses together produces not twice but four times the headache. You have to have the right merger partner. 

Some other forms of allegiance are easier to put in place, are less permanent and leave you with more control of your business.  But whichever route you should chose, the negotiations will be long and arduous and at times it will seem as if they can only fail.  Making the decision what to do is only the start of things, there will be had times ahead.

But the greater resources brought about through a merger or other allegiance could significantly improve the results of your business, your family’s finances and your work/life balance and make it all worthwhile.  

Set ou below are those circumstances where it may be worthwhile you considering taking the merger route, and summarise some of the other routes that may be available to you.  

To understand whether you would benefit from merging, you first need to understand what a meregr is and what are the other options open to you.

What is a merger?

A merger is a full joining together of two or more previously separate businesses.  A true merger in the legal sense occurs when both businesses move their assets and liabilities into a newly created business.  Other alternatives exist, such as where one of the merger partners continue in existence, and through which all subsequent trading is conducted.  A merger is a permanent restructuring of the business with your interest in the existing business being replaced by a share in a combined organisation, in whatever form that may be.  

Sale

This is where you sell out to another business.   This can be done through a share sale (where you trade through a limited company) or an asset sale (either for limited companies, sole traders or partnerships).  Your old business entity may or may not continue to exist and you may or may not be left with the job of getting your money out of the old business, depending on the type of sale involved. 

A joint venture is where ………

Two or more businesses work together on a specific project under a legally binding agreement, with both parties sharing profits and losses. The venture is for one particular project only, such as on a specific product or area, rather than for a continuing business relationship as in a strategic alliance.

A strategic alliance ………..

Is a partnership with another business in which you combine your efforts involving anything from getting a better price for goods by buying in bulk together to seeking business together with each of you providing part of the product.

The basic idea behind strategic alliances and joint ventures is to minimise risk while maximising your leverage.  Such alliances are typically formed for marketing, sales or distribution, production, design collaboration, technology licensing, and research and development efforts.  Relationships can be vertical between a vendor and a customer, horizontal between vendors, local, or global.  Both strategic alliances and joint ventures are becoming a more and more common tool for expanding the reach of your business without committing yourself to expensive expansions beyond your core business model. 

So is merger the best option for me?

A merger could be the right option for you if you are looking for a long term, permanent, solution to your difficulties.  But you do need the time necessary to implement it.   And like everything in life, it takes longer to happen than you could ever envisage in your wildest dreams!  More often then not, the participants in a merger hope for benefits that are immediate and quantifiable.  However, this is not usually the case, at least immediately.   It costs money to merge (lawyers, consultants, moving and other start up costs) and any savings in a merged organisation will quickly be used up by other, largely one-off needs.  Do you have the money to see you through until the benefits are felt?  If not, merger is not an option.  And the merger has to be attractive to the other side: look at things from the other side’s position: ask yourself how ugly is your ‘baby’ of a business?  But beware, no mother really sees her own baby as ugly, be clinical in your assessment by putting your emotions aside.  Would you ‘buy’ this business if you were in their shoes?  If you wouldn’t, then forget merger as an option.  

You need to start the merger process when time is not against you.  If you already have huge financial problems you will either not have enough time to complete it or the other side will push you into another form of deal other than merger.  And if you do have huge financial problems, your negotiating power with the other side will be weak, they will exploit it.   Merger partners, like investors or buyers, are only interested in seeing the cash they put into investments be used positively, to drive the business forward.  They will not spend their hard earned cash sorting out your historic debt problems.  Be realistic, if you were them, would you view the other person’s debt problems differently than you do your own?  What would you do if you were them?  For example, would you wait for the business to go belly up and cherry pick the pieces you want, leaving the debts behind?  

The primary motivation for most mergers is to increase the value of the combined business by increasing the cash flow of one or both merger partners.  Mergers typically work best where there are opportunities to:

·         Eliminate surplus capacity (production level or in fixed costs);

·         Increase revenue by cross-selling a broader product line;

·         Achieve operating economies (from economies of scale in management, marketing, production, or distribution);

·         Achieving financial economies (including lower transaction costs & better fund raising);

·         Finance investment in new technology in order to maintain competitive advantage;

·         Increase management efficiency (ensuring that the firm’s assets will be more productive after the merger);

·         Increase market power (due to reduced competition);

·         Diversify into other lines of business that promise to stabilise the firms’ earnings;

·         Reduce their involvement in the business.

If any of these situations should apply, then merging could be an option for you.  But, if none apply or are hardly persuasive (and it has to be for both of you), then don’t waste your time trying to merge.  

Finally, my own personal observations.  Over the last 20 years I have seen very few mergers of small businesses that are doing badly financially.  The ones that are able to merge have a ‘Unique Selling Point’,  something that really causes them on a trading level to stand out from the rest.  So if you are a small ‘metoo’ business (and in that I mean that you only do the same thing as several others) that is struggling, you can probably forget it as a realistic option.   If this is you, move on quickly and look at other options.

One option that you have is to sell up. But is it a good time to sell up now, when the business is not doing well?  Possibly.  Possibly not. You may or may not have the skills or resources to turn the business around.  But assuming that you have, there may not be a ready buyer for the business once you have restored it to its former glory, and a turnaround often requires you to invest more of your own money into the business.  The risk may be too great.

Selling the business now to someone who is in a better position to turn it around, without you risking your hard earned cash, is an option. Sure, there will be a price to pay, in terms of a reduced price you may get for the business, but few things in life are certain and if we all knew next week’s Lottery numbers…..!

Having decided that selling now could be an option what else do you have to consider? And how do you get the best deal? Again being in the right place at the right time is important, or more appropriately, you need to ensure that you put the right package before the right people at the right time. Consider the following:

The right time

Timing is crucial. Your business may not be attractive to a wide audience now because of its difficulties. But it may be attractive to a handful of potential purchasers, up, down or across the chain in your sector, or in complementary sectors, given what is happening in their business and in and around the sector generally. Deferring the sale until you have finalised a turnaround may mean you missing the opportunity: they may no longer need your business at that time; they may have taken other steps, organically or through another acquisition, and committed the cash elsewhere; the market may have moved on.

The  right  people

So who are the right people? The days of diversification are gone. Businesses ‘stick to the knitting’: they stick closely to what they know best, so the first inclination is to talk to competitors, or near competitors.  Nowadays, many businesses are struggling in terms of sales volume or margins.  Pride and fear are often the only reasons stopping such businesses merging or selling up.    If your business is struggling, you can be sure that others in and around your sector will be too. They too will be assessing their options: there is nothing to be lost, yet much to be gained, from having exploratory talks with other parties.  In addition to the obvious candidates, there is emerging a raft of entrepreneurs, who have often come out of bigger businesses with significant pay-offs, who want to acquire, and merge, smaller businesses.  Potential vendors have difficulties accessing such people.  

You are, quite naturally, worried about confidentiality. You do not want it known generally that you are looking for a suitor. Nor do you want to give away your trade secrets to potential suitors.  Consider employing an intermediary to help you: he can do much to retain confidentiality and  access the emerging raft of entrepreneurs.  He can make the initial introduction to competitors and entrepreneurs on an anonymous basis, put in place confidentiality agreements, and control the exchange of information.

The right package

Deals can be structured in a number of ways. The one that is best for you will not suit the purchaser. And vice versa. Some deal structures are better than others, for either you or one purchaser. One or more may appeal to both of you.

You probably do not have to sell at this time, so you will not sign up to a deal that does not suit you and your circumstances. But the same can be said for the purchaser: no one is forcing them to buy or merge with you. It is important that the deal fits both parties, and it is here that an intermediary can help when the going gets tough: he can bring objectivity to the situation, ensuring that the focus remains on the ‘must-haves’ each party have, and that the ‘would-likes’ are included in the deal, where possible, for your benefit. Examples of ‘must-haves’ often include eliminating your personal guarantees for any business debts, ‘would-likes’ often include the retention of certain staff.

Summary

Selling up will at any time under good or bad trading conditions involves some compromise on your part.  It is a judgment call whether you sell sooner or later.  Selling sooner brings some certainty to what may be a draining situation, for you and the business, and while you may have to compromise in terms of price or deal structure,  you may find the increased certainty more attractive than continuing to soldier on the hope that things pick up.