In one of my first discussions about the programme someone described Acquiring Business 4 Good (AB4G) as ‘more bleeding edge than cutting edge’. That was it, I was sold; dead keen to work with Social Firms Scotland to take a look underneath the bonnet of AB4G to see what makes it tick and where it might go from here.

In setting out, my experience told me that it was always going to be huge challenge for Social Firms Scotland. The entrepreneurial culture within the third sector is still developing and there can be an underlying resistance to adopting even the best strategies and business models from the private sector. In order to build a corporate acquisition market in the third sector, AB4G was going to have to both educate the sector as well as support it.

What I found was that since its launch in 2009, AB4G has steadily gathered pace, interest, and profile. It has been roundly welcomed by third sector purchasers, business sellers, professional advisors, and support bodies alike.

Despite the incredibly challenging economic climate, three acquisitions have now gone through and many more deals are in the pipeline. Most importantly, even where deals have not yet been concluded, AB4G has helped to open up a new route to growth for many third sector organisations, introduced new commercial insights, and put in place the knowledge and networks needed to take on an already established business.

For me, the effectiveness of AB4G seems to stem both from people and process in roughly equal measure. First, the determination, credibility and experience of Social Firms Scotland staff, particularly Karen who leads AB4G, and the pool of professional advisors that sit behind and support the programme. Second, the structured AB4G acquisition process, which reduces the complexity of business acquisition down into a number of manageable and guided steps.

Now more than two years into the programme, Social Firms Scotland has accumulated much learning about business acquisition by the third sector; what it takes to support successful acquisition activity, and the conditions that need to be in place for this to occur.

1. A profitable target business
2. Organisational scale and capacity
3. A position of financial strength
4. The right blend of commercial experience
5. An opportunity area or sector
6. Strategic alignment with social mission
7. Adequate industry knowledge
8. Shared values and co-operation with the business owner

It’s probably still too early to conclude with certainty whether AB4G, at its current scale, can stimulate and support a large volume of acquisition activity by the third sector. There is still a steep learning curve for the sector and those that support it before business acquisition will be routinely considered as an option for growth. That said, AB4G has developed the knowledge and tools to support acquisition activity where potential exists.

As for the future, there are a number of big challenges if AB4G is to substantially increase deal flow and impact.

1. A sharper focus and targeting
2. Raising awareness and educating the market
3. Further refinement of the support process
4. Unlocking the capital for business acquisition
5. Embedding the approach into wider support programmes
6. Securing adequate resources to ensure impact
7. Taking the approach to other parts of the UK

To find out more about the progress, impact and learning arising from the Acquiring Business 4 Good programme read the full report from the Social Value Lab here.

Contact: Jonathon Coburn, Director

E: jonathan@socialvaluelab.org.uk

T: 07786735395

DISCLAIMER

The views and opinions expressed in the blogs are independent and do not constitute endorsed advice or necessarily reflect the views or position of Social Firms Scotland or the Acquiring Business for Good Programme.

Selling a business is one of the most important decisions that an entrepreneur will have to make. There will undoubtedly be a multitude of questions, what is it worth being top of the list. While this figure is important, what is equally important is that the net payment is maximised. To do this requires the right tax structure!

Entrepreneurs’ Relief reduces the rate of capital gains tax that is paid on the first £10,000,000 of gains from 28% to 10% – but care may be needed to ensure that the relief is not jeopardised especially when a sale is envisaged. To qualify for Entrepreneurs’ Relief the gain must be made on the shares in the company or group that you are either an employee or director of. You must have held at least 5% of the ordinary share capital and at least 5% of the voting rights for a period of at least 12 months ending with the sale.

Would you qualify for Entrepreneurs’ Relief? If not, you could, with some upfront planning!

If you are one of the following:

• An option holder
• A shareholder in a company in which there are also option holders
• A shareholder in a company with different classes of shares

Review your eligibility for Entrepreneurs’ Relief Now. Waiting until the sales process starts will be too late!

Getting professional advice can help you:

• Review your position to ensure you are eligible for Entrepreneurs’ relief in the event of a sale of your business
• Put planning in place – due to the ownership period condition, it is no longer possible to wait until the advent of a sale before capital gains tax planning is considered
• Extend the scope of the relief to family members and other individuals which could result in multiple usage of the relief
• Implement planning which will help you realise your investment with minimal tax impact

Contact: Linzi Wilson – Corporate Finance Manager

E: linzi.wilson@rsmtenon.com

T: 0141 226 1800

DISCLAIMER

The views and opinions expressed in the blogs are independent and do not constitute endorsed advice or necessarily reflect the views or position of Social Firms Scotland or the Acquiring Business for Good Programme

The easy answer to “What are you buying?” is The Business. But this is not always very clear. It becomes more complicated when you need to decide how to buy this vague thing called The Business. One aspect that is always clear in buying The Business  is that you get all the staff and the delights of TUPE regardless of the deal.

The simplest method of buying a business is purchasing the shares of a company. All legal entities that do not have shares are excluded from this form of acquisition so are dealt with later. In essence the purchaser pays the shareholders for their shares and receives the entire company in return.

For shareholders, selling their shares means only pay tax once on the money received. For purchasers, historic liabilities are purchased along with the assets and income, creating additional risk which needs to be managed through due diligence and legal advice regarding the purchase agreement. An additional consideration is whether everything you, as a purchaser, expect to be included in The Business is actually owned by the company whose shares you bought. Sometimes vehicles or the domain url, are owned by private individuals not the company. These would need to be specified and acquired separately from the shares.

What about all the other types of business that do not have shares,eg: sole traders and partnerships? There are also occasions when you just do not want to buy everything in the company or business. And sometimes The Business is contained in various different entities and you do not want to buy a whole batch of new things. In these cases you would buy the elements of  The Business that you want through an Asset Purchase.

For the sellers this type of purchase often entails a double tax bill – the purchaser buys the chosen assets from the entity which owns them usually requiring tax to be paid on the profit, and then the sellers receive their money from that entity with the possibility of a second tax payment being due. For purchasers an Asset Purchase entails inheriting less liabilities and therefore it can require less rigorous due diligence, but hidden liabilities can be attached to various assets too.

In both cases the purchaser ends up owning a business, which may or may not be The Business as initially offered for sale.

Lawyers, consultants, accountants and numpties

A business acquisition requires support from many professionals, including but not limited to lawyers, accountants, consultants, tax experts, industry specialists and surveyors. One of the reasons business acquisitions fail in the private sector is due to a lack of expertise in deal teams. Our research also showed that smaller deals can cost more as a result of using the right advisers but at the wrong time.

Within the AB4G programme we have worked continuously to create a network of advisers with experience supporting sme (small and medium sized enterprises) deals in Scotland – deal savvy advisers. Of course we have an additional requirement to this, advisers on AB4G deals are expected to be sympathetic to the social enterprise business model. The network has been developed both through peer referral and on a deal by deal basis. Our Partner pages on the website and our LinkedIn group contain some of these advisers but the network is growing so rapidly that these lists cannot be comprehensive.

For me, as a South African discovering a new word – numpty - was only enhanced by the legal accuracy inferred upon it when I heard it first used by a lawyer to describe the kind of adviser one does not want on your deal team. The polite numpty flag is when a trusted adviser says: “I would not usually expect x to be part of this kind of deal.” Scotland is small and the deal savvy professionals tend to know each other.

Part of our offering in the programme is to try and help both parties to have good deal teams by introducing deal savvy professionals when requested. We usually do this by arranging beauty parade sessions at a neutral venue. However the choice of advisers is ultimately yours and key to preventing numpties joining your team is don’t be a numpty yourself . Here are 2 ways you could fall into this trap:

1. By asking the ‘wrong’ questions of an adviser and as a result you get the wrong advice; or

2. By asking the ‘right’ questions of the wrong professional, e.g

• expecting comprehensive deal tax advice from your auditor or,
• asking a property expert for legal structures guidance.

You can reduce the risk of these errors by asking lots of questions before building your teamusing resources in the AB4G programme, networking to meet relevantly experienced advisers,  and through attending our Getting ready to buy seminar, next date February 9th, Glasgow (click here to register).

DISCLAIMER

The views and opinions expressed in the blogs are independent and do not constitute endorsed advice or necessarily reflect the views or position of Social Firms Scotland or the Acquiring Business for Good Programme.

First, be sure it’s not an impulse buy. Many acquisitions fail simply because the buyer should never have been buying in the first place. Yes, the opportunistic purchase can sometimes work well and there are bargains out there, particularly in the current climate but a strategic approach usually fairs much better. Make sure you know why you are buying.

Don’t pay more than you have to. Buyers are often disappointed by their returns, simply because they paid too much. Get good advice and get your valuation of the business right. Sellers ususally have an inflated view of the value of the business – but buyers often think they can improve profitability going forward. Yes, improvements can be made but be realistic – don’t let your enthusiasm and optimism cause you to pay more than you should.

Do your homework. You wouldn’t buy a house without a survey, so undertake incisive due diligence.

Yes, be sure you know what’s in the balance sheet, but also focus on the future. Do the projections stack up and support the price? Have you raised enough money? What about working capital requirements?

Get the structure right. Should you pay in cash, shares or a combination? Should you buy assets or shares? When should you pay – up front, or with an element of deferred consideration? The right structure will make an enormous difference in terms of tax and your risk exposure.

Don’t relax when you shake hands on price – the devil is in the detail. Too many buyers forget that whilst the price is agreed today, the entry date may be months away. Items such as debtors, creditors and cash move on a daily basis. You don’t want any nasty surprises when you get the keys.
So, again, get good advice and structure the deal in a way that ensures the value will be there at completion. Get this wrong, and you could find yourself shelling out more than you thought.

Get all this right and you won’t look back.

Contact: Gareth Magee, Partner

E: gareth.magee@scott-moncrieff.com

T: 0131 473 3500 or 0141 567 4500

DISCLAIMER

The views and opinions expressed in the blogs are independent and do not constitute endorsed advice or necessarily reflect the views or position of Social Firms Scotland or the Acquiring Business for Good Programme.

As an organisation starts to investigate mergers and acquisitions as part of its growth strategy, opportunities seem to pop up everywhere. Over time and with shared insights from professionals who do deals all the time, we have started to identify some criteria for saying “No”.

The opportunity does not meet your organisation’s strategic aims

Business acquisition, partnership working and start-ups all need to be considered within the context of what your organisation is seeking to achieve. And within the context of your plans:

• Do they increase your income generation?
• Do they achieve extra social impact?

Consolidation and diversification are both valuable growth aims, ones that acquisition can meet. Often we are asked for a list of available businesses for sale, this is not a helpful place to start. We prefer to start with what organisations  are seeking to achieve through acquisition and create some target criteria. We can then look within the relevant area and ask our network of advisers if they know of a business that has these key characteristics.

This is a flexible process, however if an opportunity just does not meet your aims then saying “No” could save everyone a lot of time and money.

The deal will cost more than it delivers

There are many costs in the acquisition process:

• valuation and surveying
• business planning, feasibility studies and market research
• due diligence
• completion costs
• purchase price
• post acquisition investment.

Not all acquisitions have all these costs, some even have no purchase price. When reviewing the cost of the deal against the value created then it is important to consider all of them. And do not forget the many hours that this transaction will take from running your organisation. This is also a cost which may not even be quantified but should be factored into consideration.

Some deals may bring increase social benefit and just break even, some may generate greater income than social impact. Once again the criteria for evaluating the value of the deal to you as a purchaser should be linked to your organisational aims.

When all benefits and costs have been evaluated it would be considered wise to say “No” to a deal which costs you more than it delivers.

These are just two of the reasons we have seen for organisations to say “No” to potential deals.

DISCLAIMER
The views and opinions expressed in the blogs are independent and do not constitute endorsed advice or necessarily reflect the views or position of Social Firms Scotland or the Acquiring Business for Good Programme.

Buying a business can be a daunting prospect but an understanding of the process, sensible advisors and a healthy dose of common sense should steer you away from the rabbit holes that the unwary can fall into.  If you are buying a company you will be acquiring its shares.  This means that you are taking over all of its assets and/or liabilities that go with it, so you will want know what all of these are at an early stage of the acquisition process.  A business purchase is more straightforward as you get to cherry pick the assets you want to buy and by implication ditch the liabilities. The exception to this is that if you are acquiring an “undertaking”, then all of the employees will automatically come across to you on their existing terms and conditions.

All of this points to the need to instruct your lawyer and accountant to conduct a due diligence exercise at an early stage to evaluate what you are getting and to see that the proposed price still stands once any problems are identified.  To the extent that any potential problem is identified, there are mechanisms that can be factored into the negotiations that can be used to cover the risk, without there necessarily being an immediate hit on the price – for example a price retentions.

Once it is established that the deal stacks up, its key terms should be written up and set out in a heads of agreement document.  This establishes in outline how the deal will proceed and acts as the template for the formal legal documents to follow.  The document is non-binding other than in relation to confidentiality and exclusively (lock out).

With it being clear that the parties are on the same page and with any third party funders on board, your lawyer can draw up the acquisition agreements.

The acquisition agreement itself will contain warranties and other protections to be given by the seller which will back up the earlier due diligence exercise and the work that you have carried out at the outset should stand you in good stead for the acquisition to progress smoothly.

Contact: Alastair Dunn, Partner

E: akd@bto.co.uk

T: 0141 221 8012

DISCLAIMER

The views and opinions expressed in the blogs are independent and do not constitute endorsed advice or necessarily reflect the views or position of Social Firms Scotland or the Acquiring Business for Good Programme.

Social Enterprise and Equity Sharing the Business

Shares are seen as a cornerstone of private business. Should social enterprises be dabbling in the world of equity, shares, dividends and talking to business angels?

In addition to new starts exploiting shares, a business acquisition can leverage external investment into the new social enterprise post-acquisition, and this investment could quite easily be in the form of shares. Shares can also be useful in joint venture and partnership models.

Alongside community share issues and co-operative models, the Community Interest Company limited by shares model exists as a simple way for social enterprises to issue shares alongside accessing support and funding. (More about CICs here). This blog is not to provide a legal structures comment but rather suggest some benefits for social enterprises in using shares: Marketing, Investment, Community and Employment.

The Marketing opportunity provided by promoting a share issue is a different message from asking for donations. It is saying support what we as an enterprise are doing by being part of it and getting something back (perhaps a dividend or perhaps a social return or perhaps just ownership). Once an organisation has shareholders, what a great excuse to communicate with them regularly! This communication should ideally provide them with a reason to use and promote your products or services.

Investment is the reason most ventures create shares, to provide a possible vehicle for financing enterprise and perhaps to facilitate a tax-effective return on the sweat-equity of founders. Apart from the business angels who responded positively to our survey, here are some links to interesting social investment organisations and deals we have noticed recently:

• Big Issue Invest using preference shares to invest in My Time CIC
• ClearlySo’s launch of a Social Business Angel Network

If seeking equity investment, be sure to investigate the Enterprise Investment Scheme.

Let’s not forget – community engagement and empowerment can be activated through shares.. One of our partner organisations, Development Trusts Association Scotland has a publication on this topic. And whilst Equity for Punks is not for a social enterprise it does show how online community fund raising could work.

And finally, Employee shares are probably the most relevant share class in a social enterprise because it is extending an organisation’s social aim to include shared ownership. Employees are offered share options in many listed companies and in start-up dotcom styles ventures too. Why should social enterprise employees not be offered “sweat equity” in start-ups and have a stake in the business?

DISCLAIMER

The views and opinions expressed in the blogs are independent and do not constitute endorsed advice or necessarily reflect the views or position of Social Firms Scotland or the Acquiring Business for Good Programme.

Why would a social enterprise, or better yet a charity, buy a private business? And not just any private business but a profitable one that is ready for expansion and growth. The answer is: because they can.

The Third Sector has traditionally worked very hard historically to convert projects into social businesses or to start up social businesses from scratch or even utilise franchising and licensing to develop new social businesses. These models of growth require resources and have associated risks, business acquisition is the next step along a continuum of growth models for an organisation seeking to deliver commercial and social outcomes.

There is no risk free or cheap way to grow an organisation and business acquisition has its specific risks and costs. However, business acquisition has a place in Third Sector organisations’ strategies for growth and sustainability. We have created some cameos (very brief case studies) sharing the great ideas which various organisations have developed during the programme to use business acquisition strategically.

Many of these ideas include the sustainability. Funding for social enterprises is becoming more and more limited, organisations that want to continue to deliver their social mission need to finance it differently. Income, earned through product sales and service delivery, is not exactly free money but it does give an organisation greater freedom in how it allocates those funds. If a business needs money for a new van or a social project, it looks at how it can make more money – a project or charity usually seeks to find a grant to fill the gap. Buying a business can give an organisation a jump start on its commercialisation journey.

That of course raises a new debate about how commercial should social enterprises be and there are many views on that topic. The rationale behind encouraging Social Firms to be more commercial and earn more income through trade is that since they are businesses offering employment to those who are severely disadvantaged in the labour market – they need income to pay wages and as businesses they can earn income.

The AB4G programme is now delivering joint venture, collaboration and merger support as well as helping with specific acquisitions. All this support is focused on helping organisations to become better positioned for the future both financially and in social outcomes.

DISCLAIMER

The views and opinions expressed in the blogs are independent and do not constitute endorsed advice or necessarily reflect the views or position of Social Firms Scotland or the Acquiring Business for Good Programme.