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Why more SME owners are looking to unlock capital from their businesses

7 January 2019

Increasing numbers of SME owners are turning to “private capital” to help them unlock value from their businesses - without selling them. While the use of private capital to fund an MBO or to facilitate growth is well-established, this trend is not quite as common. Why is this happening now and what are business owners hoping to gain by taking this course of action? Claire Madden, Managing Partner, takes a look.

At first glance the answer to the “why now” question may seem obvious – with Brexit uncertainty still hanging over us, our imminent departure from the EU is often cited as the catch-all reason for most business decisions (or indecision) today. But the real reason, though indirectly related to Brexit, is more complex. Uncertainty over the future is the prevailing concern – but it’s the risk of mid-to-long term government policy changes that’s really rattling business owners. 

Crystallising gains

The message we’re hearing is that concerns over any future election of a strongly left-wing Labour government is the predominant motivating factor here. The possibility of significant Capital Gains Tax (CGT) increases and doubts over the future of Entrepreneurs’ Relief, as well as uncertainty over how broader economic conditions might impact business performance, are cited as key issues.

Given the current Conservative government’s lack of majority and the on-going challenges of negotiating a suitable Brexit deal, the possibility of an early election before the end of the traditional five-year term cannot be ruled out. If that happens, Labour is likely to have higher earners and capital gains in its sights.

It’s perhaps little surprise then that we are seeing growing demand from business owners to crystallise some of the value they’ve built up without selling up entirely, while the economy is robust and the tax regime remains relatively favourable.

Keeping skin in the game

Then there’s the issue of: how? Bank lending options remain limited, so there’s a clear role for private capital providers to step in here, whether that involves making an equity investment or providing a mezzanine finance arrangement, to enable SME owners to realise some of the fruits of their labours. However, both options generally involve some dilution of the shareholder’s equity stake.

We are very happy to consider both of these kinds of transactions, having launched our innovative specialist debt capital solution last year to complement our private equity offering. It’s important to note however, that any deal must still leave SME owners with enough “skin in the game” to ensure they are incentivised to continue growing the business and are maximising its potential. Investors will be glad to hear that, structured appropriately, these transactions can be a win-win for all involved.

A trend to watch

There is no certainty as to whether a General Election will take place before 2022, nor to what the outcome will be, but concerns loom large that radical policy changes lie ahead, with major implications for tax bills and economic performance. For those who do not want to relinquish their businesses, private capital can be an attractive option to realise some of the capital gains now at current rates, whilst still retaining control of their company. As a way to future-proof the value entrepreneurs have created, it makes a lot of sense, and this can open up some very attractive opportunities for investors too. Definitely a growing trend to watch in the coming months ahead.

 Russell O'Connor
07760 282 586 or Email

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