OHA

1
Valuing and SuccessionPlanning for Business
Owners Tuesday 3rd October 2006
2
Andrew Bourg A.C.A.

• Corporate Services Senior Manager
• Investigations Business Reviews
• Restructuring Workouts
• Business Sale (MBOs etc)
• Insolvency
• Company Valuations
• Due Diligence Assignments
• Public Sector Consulting

E-mail abourg_at_oha.ie
2
3
Baker Tilly OHare Who Are We

• IN IRELAND
• Medium sized firm - in top 20 Accounting / Tax
  advisory firms in Ireland
• We employ c.50 located in Dublin city centre
• GLOBAL
• Baker Tilly International is a network
• of high quality, independent
• accountancy and business services
• firms. It is the 8th largest network in
• the world by fee income and
• represented by
• Firms 128 Countries 85
• Staff 20,100 Fee IncomeUS2.12bn
• Baker Tilly International has its headquarters in
  London.
• www.bakertillyohare.ie and www.bakertillyinter
  national.com

3
4
Current Trends in Irish Family Businesses

• Source ICAI Survey 2006, 150 Irish family
• businesses participated in the survey.
• 1. 50 (75) of all family businesses in Ireland
  are anticipating a change of ownership. Of
  these-
• Nearly half believe that ownership will pass to
  the next generation.
• 23 (35) believe that their business will be sold
  to another Company and
• 19 (29) anticipate a sale of their business to
  their management team.

4
5
Current Trends in Irish Family Businesses

• (a) Two thirds (67) of family business owners
  plan to retire in the
• next 10 years, 22 (33) within the next 5
  years.
• (b) 50 (75) of Managing Directors of Irish
  Family Business are
• over the age of 50.
• 69 (104) want to keep the business in the
  family, however only 37 (56) say that the
  successor is likely to be a family member.
• Our experience and this research shows that
  recognising that a family
• Member is not always the best choice to lead the
  business can be
• difficult.

5
6
Current Trends in Irish Family Businesses

• Of the 50 (75) anticipating a change, only 61
  (45) had a business valuation performed to
  determine.a) An approximate valuation of their
  business.b) Their exposure to Income and
  Capital taxes arising on succession or
  sale.
• Only 29 of 45 (above) have a plan in place for
  the future ownership and management of their
  family business.

6
7
Succession Planning for Irish Family Businesses

• Conclusion
• Succession planning is not an event, its an
  ongoing process.
• As with business strategies/plans that reflect a
  5-10 year vision, so too should succession
  strategies.
• IT IS NEVER TOO EARLY TO GET STARTED

7
8
Valuing Your Business Company

• Reasons for Valuation
• Sale/ Purchase of Business
• Sale/Purchase of Shareholdings
• Reorganisation, Merger or Joint Venture
  
• Litigation or Arbitration
• Revenue and Statutory
• Curiosity or Vanity

8
9
Valuation Methods

• Earnings
• Net Assets
• Dividends
• Discounted Cash Flow
• Prior Sale
• Hybrid

9
10
1. Earnings Method

• Underlying Earnings of the Company
• Earnings are the Adjusted Profits
• Maintainable Earnings (M.E.)
• Apply a Multiple to the M.E.
• Apply Discounts (Dependant)
• Arrive at a Valuation

10
11
Earnings Method contd.

• How to Establish the Maintainable Earnings of a
  Company?
• Profit After Tax
• Examine fluctuations in T/O and performance
• Have regard to the economic environment
• Other factors Competition, Dependence, etc.
• Add Back/Adjust for Non Recurring Items
• Exceptional Profits Expenses
• Accounting Treatments and Policies
• Property Costs
• Directors Remuneration (Realistic?)

11
12
Earnings Method contd.

• Applying a Multiple
• What Multiple to Apply? (Art Not a Science)
• 1. Irish and UK Stock Exchange Indices
• 2. Comparable Transactions/Companies
• 3. Special Circumstances
• Give a Multiple Range
• Discounts to Multiples
• Public vs Private Companies
• Usually 30-40
• Ireland vs UK
• Irish Plcs up to 25 less due to Marketability

12
13
Earnings Method contd.

• Voting Control/Type of Shares Varies
• Size of Shareholding being purchased.
• The size of the holding will affect the amount of
  power/influence a shareholder will have.
• This will, in turn, affect the valuation of the
  holding.
• Indicative discounts for the valuation depending
  on the holding (based on subjective experience)
  are as follows
• Shareholding Discount
• lt10 80
• 10 75
• 10-25 50
• 25.1 - 49.9 40
• 50 - 75 5
• gt75 0

13
14
2. Net Assets Method

• NBV in the Balance Sheet
• Realisable Value
• Open Market Value
• Break Up/Distress Value
• Value to the Holder
• Goodwill and Revaluations
• Discount 15-20 for Non Marketability
• Look at each Assets Category
• Asset Base Underpins the Earning Capacity of the
  Company

14
15
3. Dividend Method

• Not Commonly Used but Often Overlooked
• Establish a Maintainable Dividend
• - What can reasonably be expected to be received
  in the future
• - Look at the historic
• - Unusual or non-recurring events
• Gross up the Dividend
• Maintainable Gross Dividend

15
16
Dividend Method contd.

• Determine Dividend Yield
• Dividend Yield Dividend/Share Price
• For major industries dividend yield information
  from the Irish UK S.E.
• May not be relevant for some industries
• Alternative is to use the gross redemption yield
  on medium term (3-5 year) government bonds
• Valuation
• MAINTAINABLE GROSS DIVIDEND
• DIVIDEND YIELD

16
17
4. DCF Method

• Discounted Cash Flow Present Value
• Rising and Falling Popularity
• - Popular in mainland Europe/USA
• Difficult to Get Right
• Greater No. of Uncertainties
• Depends on the Quality of Information
• Projections (Accurate)
• Discounting

17
18
DCF Method contd.

• Use 5-10 Years Cash Flow
• Typically 1 YR. Historical Present Future
• Establish Discount Rate to be Used
• Very Difficult for Private Company
• Minimum of Return on Long Term Govt. Bonds
• Return of Equity Employed P.A.T./Equity
• Inflation, Market Growth, etc.
• Range Typically 12-15
• Discount to give the Present Value of a Future
  Stream of Income

18
19
5. Prior Sales Methods

• Examine Recent Transactions
• - Arms Length?
• - Commercial Basis?
• - Internal or External?
• Can be a Good Guideline
• - Be aware of the Circumstances at the Time
• Used in Difficult Cases
• - Start Ups or RD
• - Loss Making Operations

19
20
Industry Specific

• Unique to Particular Businesses
• Publicans, for on Turnover
• Supermarkets, 2 times Net Profit plus Y per Sq.
  Ft.
• Insurance Brokers, 0.75 4 times Brokerage
• Most Common among Service Industry

20
21
6. Hybrid Method

• Combination of Above Methods
• - Usually earnings and net assets
• Weighted average of each method
• Skill in deciding the ratios

21
22
Suzanne Fogarty A.C.A. A.I.T.I

• Tax Manager
• Income Tax
• Corporation Tax
• Succession Planning
• Company Restructuring
• Tax Efficient Termination Packages
• VAT on Property Advice
• Tax Compliance Health Checks
• Revenue Audit Assistance

E-mail sfogarty_at_oha.ie
22
23
Succession Planning for Family Business

• Tax issues to be addressed in order to minimise
  the exposure to tax bills.
• In reality, the tax issues rank a poor second but
  should never be ignored!

23
24
Succession Planning for Family Business

• Its never too early to consider the ultimate
  objectives for yourself and the business good
  tax planning revolves around your objectives!
• Planning well ahead will increase the possibility
  of claiming the various tax reliefs available and
  help you to maximise wealth from the succession
  process.

24
25
Succession Planning for Family Business

• The range of tax exposures to be considered
  include the following
• Capital Gains Tax
• Capital Acquisitions Tax
• Stamp Duty
• VAT
• Corporation Tax

25
26
Succession Planning for Family Business

• Potential Tax Reliefs Available include
• Retirement Relief (CGT)
• Business Property Relief (CAT)
• CGT/CAT Offset (CAT)
• Consanguinity Relief (Stamp Duty)
• Transfer of a Trade (VAT)
• Reorganisations/Restructuring Relief

26
27
Retirement Relief (CGT)

• Main Conditions for Retirement Relief
• The disposal must be made by an individual.
• The individual must be 55 years of age or
• over at the date of the disposal.
• The disposal must be of qualifying business
  assets.
• The qualifying assets must have been owned for
  the qualifying period.

27
28
Retirement Relief (CGT)

• Qualifying business assets include premises owned
  by the individual but from which the family
  company is carrying on its business.
• Retirement relief will only apply in the above
  situation where the premises are transferred at
  the same time as the shares in the family company.

28
29
Retirement Relief (CGT)

• Amount of Relief Available
• Full relief is available, irrespective of the
  proceeds or valuation of the assets, if the
  disposal is to a child of the individual, where
  certain conditions are met.
• The relief will however be clawed back if the
  child disposes of the assets within six years.

29
30
Retirement Relief (CGT)

• Amount of Relief Available
• If the disposal is to a third party, full relief
  is available if the sales proceeds/ valuation of
  the assets do not exceed the prescribed limit,
  currently 500K.
• If the proceeds exceed this amount then marginal
  relief may apply restricting the maximum tax to
  50 of the excess of the sales proceeds over the
  limit of 500K.

30
31
Business Property Relief (CAT)

• The effect of this relief is to reduce the
  taxable value of a gift or inheritance to the
  extent that the gift or inheritance comprises
  relevant business property by 90 for CAT
  purposes.
• This effectively equates to a net 2 tax
  liability on such assets.
• The relief will be clawed back where the relevant
  business property is disposed of within a period
  of six years without being replaced by other
  relevant business property.

31
32
Succession Planning for Family Business

• Example
• Mr Mrs Jones have successfully operated a
  supermarket business through a trading company
  for the last 35 years.
• The shares in the company are owned 50/50 between
  them and both have been actively involved in the
  business since incorporation.
• Mr Mrs Jones are now 59 and 57 respectively and
  plan to exit the business during the next couple
  of years.

32
33
Succession Planning for Family Business

• The Jones own the supermarket premises
  personally and rent it to the company.
• The Jones have one daughter, Martina, who is
  actively involved in the business and would be
  interested in taking it over.
• The business is valued at approximately 400K and
  the premises at circa 350K.

33
34
Succession Planning for Family Business

• Martina will take over both the business and the
  premises from her parents for a consideration of
  400K.
• This essentially means that Martina has received
  a gift from her parents of 350K.

34
35
Succession Planning for Family Business

• As both Mr Mrs Jones satisfy the conditions for
  retirement relief and as the transfer is to their
  daughter they are entitled to full relief and
  will not suffer a CGT liability on either the
  consideration received from Martina or the
  transfer by way of gift.
• As Martina satisfies the conditions for Business
  Property Relief she will be entitled to a
  reduction in the value of the gifted business
  assets of 90 for CAT purposes.

35
36
Succession Planning for Family Business

• As this gift constitutes relevant business
  property its value for CAT purposes will be
  reduced by 90 to 35K on which Martina will be
  liable to tax at the rate of 20, assuming that
  she has no entitlement to any further relief.

36
37
Succession Planning for Family Business

• Assume that no VAT arises on the transfer of the
  property.
• Stamp duty on the property will be reduced to 3
  by virtue of consanguinity relief.
• Stamp duty at the rate of 0.5 will be chargeable
  on the transfer of the shares in the trading
  company by virtue of the same relief.

37
38
Succession Planning for Family Business

• Other issues for consideration
• Possibility of increased pension contributions by
  the company on behalf of Mr Mrs Jones coming up
  to retirement.
• Maximising ex-gratia payments from the company to
  Mr Mrs Jones on retirement.

38
39
Succession Planning for Family Business

• In more complex scenarios where the family
  company may carry on more than one trade and the
  parents may wish to transfer separate trades to
  separate children it will often be necessary to
  carry out a reorganisation of the company
  structure.

39
40
Succession Planning for Family Business

• In certain schemes of reorganisation it will be
  necessary for certain minimum periods of share
  ownership to apply.
• For this reason it is advisable to take
  appropriate advice well in advance of the
  proposed retirement/ succession date.

40
41
Contact

• Andrew Bourg
• or
• Suzanne Fogarty
• E-mail abourg_at_oha.ie
• sfogarty_at_oha.ie
• www.oha.ie
• Any Questions????

41