EDITOR'S NOTE
By Guy Rigby
With a freshly squeezed coalition government, a fiscal deficit as deep as Loch Ness, a monster sized public sector and a still unfolding Greek tragedy, it is hard to anticipate an entirely rosy future.
Reality is dawning and the chickens that were hiding just around the corner are coming home to roost. We can only hope that a strong and responsibly administered dose of unpleasant medicine, driven by public sector cuts and efficiencies rather than penal and destructive tax increases, will tempt them out again. We have had quite enough of recessions and sovereign defaults and would now like normal service to resume. Thank you!
With that off my chest, there are plenty of opportunities out there. Well run businesses will be using these still difficult times to improve their systems and processes, increase their efficiencies and work out how they will out-market and outsell their competitors, as and when circumstances permit. They will be looking at acquisitions and other strategies to increase their market share and may also be considering how our weak pound can increase their international opportunities. Above all they will be carefully managing their working capital and making sure they don't run out of cash. Are you one of these businesses that will be ready to take advantage of the real recovery, when it finally arrives? It's worth thinking about...
This issue of Enterprise includes a number of client contributions on critical business issues. Neal Gandhi advises businesses to "get over the distance" and take advantage of international opportunities, while Wayne Mitchell of specialist currency exchange broker Baydonhillfx explains how to get the best deal on making or receiving international payments. Graham Cooke of Qubit Digital looks at the changing nature of the internet and the need to overhaul out of date websites. We thank them for their contributions.
Elsewhere, we publish our entrepreneurs' toolkit on offshoring, while our people management and incentives teams look at reward structures, incentive schemes and flexible benefits. Last but not least, Brian Livingston reports on the all important issue of the equity gap and raising finance for the nation's SMEs.
RAISING FINANCE -IS THE DEBT AND EQUITY GAP HERE TO
STAY?
By Brian Livingston
Brian Livingston examines the new realities of raising finance.
Raising finance remains extremely challenging, especially for small to medium-sized enterprises (SMEs) looking to raise smaller sums. Banks are lending less to smaller companies, and when they do, they are charging increased margins. Once interest rates return to higher levels it will become noticeably more painful to borrow.
At the same time, equity funding has become disproportionately expensive at the lower end of the market, as investment committees remain cautious and due diligence requirements increase.
Recent research carried out by Smith & Williamson indicates that the availability of funding for SMEs is likely to remain in short supply as the banks continue to be unwilling to either lend directly or to finance private equity transactions.
The private equity dilemma
For private equity, generating the required returns without the 'turbo charging' of debt must involve a long-term move to lower pricing for vendors, unless the private equity market is willing to accept lower returns.
As a result the private equity industry is being forced to reinvent itself, or at least return to fundamentals, with returns based on quality businesses, with strong management, in attractive sectors.
The private equity industry that emerges is likely to be smaller. The new, stricter quality requirements will result in fewer investment opportunities and funds that are unable to raise new money or invest their existing funds will simply disappear.
Government assistance?
The Rowlands Review, released in November 2009, confirmed the existence of a permanent equity gap for companies looking to raise between £2m and £10m of growth capital. The review concluded that Government intervention is required to attract institutional capital and investment management talent, and that a mezzanine product may be required for this part of the market.
In response, Alistair Darling made a number of announcements around SME financing in his final Budget. These include targets for lending to SMEs by the stateaided banks, Lloyds and RBS. He also introduced a new company, UK Finance for Growth, which will bring together all of the Government's existing and future finance schemes for SMEs, overseeing around £3.5bn of funding, and ranging from £25,000 to £10m in debt, equity and mezzanine funding for suitable businesses.
Whether the new Government will do more to help bridge the £2m to £10m gap identified by Rowland remains to be seen. In current circumstances there could be some assistance from Government but existing tax breaks such as deductibility of interest on loans will probably come under greater scrutiny.
Is there a third way?
There is increasing scope for funding beyond banks and private equity and we expect to see more use of alternative funding mechanisms, perhaps through investment clubs, angel investment, grants, technology and regional funds.
What will the future hold?
Some things don't change. Businesses still need clear strategies, supportable business plans, good management and a strong track record to secure funding, regardless of the source. Well-presented financial data and realistic forecasts are as important as ever. Relationships with funders and investors may have suffered, but can be rebuilt over time. Businesses that have shown resilience and maturity will be able to borrow more easily and seize the opportunities that exist.
But entrepreneurs will remain highly cautious. They may abandon new projects for fear of over-extending themselves. Banks will continue to lend in this uncertain trading environment but will be highly selective. Start-ups, early stage businesses and those with high levels of imports and reliance on foreign currency will find it particularly difficult to borrow. This selectivity may help rebuild bank balance sheets but comes at a dangerous point in the business cycle – many businesses have run out of sources of finance and have used up reserves that would ordinarily fund the next growth phase. Those that start to overtrade now will quickly run out of cash.
So, raising debt will remain challenging. Private equity will continue to play a central role in supporting entrepreneurial companies and will probably flourish in the longer term – but not as we have known it. Alternative sources of finance will take up some of the slack, but the equity gap will still cause difficulties for many of the nation's SMEs.
PROFILE: NEAL GANDHI, QUICKSTART GLOBAL - GOING
INTERNATIONAL
By Elspeth Levi
In the 'global village' in which UK businesses operate, many entrepreneurs will be considering setting up overseas to gain access to new markets, reduce costs or improve operational efficiency. But which offshore trading model should you choose? Selecting the right one will depend on your strategic goals and the business you want to create, as well as its location. The right structure can help you increase efficiency and profitability, but it's important to understand the pros and cons before signing on the dotted line. We spoke to Neal Gandhi of Quickstart Global about doing business in a global marketplace
A chance encounter with Robert Maxwell was the trigger for an entrepreneurial career, which has literally taken Neal Gandhi, co-founder of Quickstart Global, around the world.
In 1986 Neal Gandhi was studying business information and technology and needed to organise a year-long placement as part of his course. While waiting for a relative at Heathrow Airport, he spotted Robert Maxwell.
"I went up and spoke to him and asked him for a job. He said, 'Write to me'. I wrote to the Mirror because that was the only place I knew. I then got a letter from his company BPCC telling me to call them to arrange an interview. I went along and after about five minutes the guy said to me, 'Is it true, did you really ask him for a job?'
That was that and he offered me a job."
Neal worked in a new PC-enabling division of the company. "It was cutting edge at the time. I was lucky because at just 19 I got exposure to all sorts of businesses – more than I could ever have hoped for."
Over the next 20 years Neal went on to work for, and then founded, several successful service-based companies. In January 2006 he co-founded Quickstart Global, a business which claims to provide "the lowest risk and fastest way for companies to expand internationally". It now employs 650 people across ten countries in four continents and is growing at an average rate of 240% a year. The goal is to be in 30 to 40 countries as quickly as possible.
The world is one big marketplace
"We have hit the market at exactly the right time. There are enormous opportunities in international markets, which along with the internet make it possible for smaller, entrepreneurial businesses to take advantage. Twenty years ago, going international was only really achievable for bigger companies. We are moving to a time where smaller businesses can take more control and be proactive."
Neal explains that a lot of companies who trade internationally often do so accidentally, with a recent UK Trade & Investment (UKTI) survey finding that 70% of UK exports are serendipitous. He says that companies want to go international for three main reasons: to sell their products and services in another country; to manage their supply chain more efficiently; or to lower their costs and make the business more scaleable. Quickstart Global's aims are to make it straightforward and to minimise risk, which it does with its In-House Anywhere" and Subsidiary Anywhere" offerings
"In the main, businesses want to avoid having legal entities across the world. With In-House Anywhere, they can choose their own people and we employ them on their behalf. We also provide serviced office space and everything else they might need, including back office and finance functions, without the hassle and risks of going it alone in an unfamiliar country." But from time to time businesses will need a legal entity in the country. This is where Subsidiary Anywhere comes in. It can assist with company incorporation, recruitment, HR management, accounts, billing, taxation, and many other elements of setting up in another country.
"The traditional way of doing this would be to send out a business development person who would do all the research – basically spending time on non-profit making activities. We will organise local suppliers, recruitment, legal work, back office and even the finance function. It means a business can go into a market knowing exactly how much it will cost. We have commoditised international expansion."
It's all in the mind
In his book Born Global, Neal explains that if you treat the world as one market, you can go where the market for your product or service is. "Why bother fighting around for scraps in your local or UK market?" says Neal. "Take India as an example. Everything is in English and there is a market for everything. If there's a market for it in the UK then there will be a market for it there. You just need the expertise on the ground." "My advice to entrepreneurs is to get over the distance. It doesn't matter whether you are here or there any more. If you get in the mindset of thinking international from day one, your opportunities will be significantly greater.
A FAIR DEAL ON FOREX
By Adrian Walton
Wayne Mitchell of specialist currency exchange broker Baydonhillfx explains how the business helps SMEs.
In the modern global economy, more and more businesses are sourcing or selling goods and services overseas. This means that many companies are finding they need to make or receive international payments and exchange currencies.
Many business owners rely on and trust their banks to offer them the best rates of foreign exchange, but in reality this is not always the case. This is particularly pertinent in the current economic environment, where value for money is at the forefront of most peoples' minds. There are also obvious limitations in the level of personal service that the major banks are able to offer – a 'one size fits all' service might not be what you're looking for to meet your business needs. So what's the alternative?
SMEs are increasingly turning to specialist currency exchange brokers for a wide range of money and time saving services such as online currency transaction systems and a personal service from a currency dealer.
As a specialist broker, we have visited over a thousand SME owners over the last 12 months and found that around 75% were unaware that they could get better rates of exchange than those quoted by their bank. One business owner saved over £100,000 by using a personal currency dealer to monitor the rate of exchange on the US dollar. Specialist brokers also offer products such as forward contracts, which enable you to secure exchange rates at an agreed level for up to 12 months, minimising your exposure should the market take a downward turn.
Industry knowledge and understanding of currency market fluctuations are obvious benefits of using a specialist broker. We share this knowledge with our customers via daily and weekly market reports (see extract) that provide an overview of the economic outlook as well as highlighting opportunities for currency hedging.
Regardless of the economic outlook, choosing a specialist to help with foreign currency exchange can play a big part in the success and long-term prosperity of SMEs doing business overseas.
Forex market report extract (Courtesy of Baydonhillfx)
Budget deficits for many developed countries stand at record levels due to demand factors during the 'boom' years and the unprecedented support provided to the financial industry. Greece has recently brought the issue of government debt into focus as an example of the risks faced by most of the developed world. The impact on the euro region and the euro as a currency has been quite obvious; the single currency has depreciated significantly versus the US dollar in 2010. The pressure on Greece and other governments to bring their sovereign debt to more manageable levels has intensified. As a significant trading partner to Britain the crisis in Europe has had a knock-on effect on the value of sterling. Risk aversion amongst institutional investors has seen the US dollar appreciate against the pound in a similar fashion to the euro.
Read free daily and weekly market reports on www.baydonhillfx.com/news
MAKING THE MOST OF YOUR WEBSITE
By Adrian Walton
Graham Cooke of QuBit Digital says many websites need a major overhaul to be truly effective business tools.
We are about to go through another internet revolution as people increasingly realise that the internet is not just a fun tool, but an essential utility. Websites have of course become a serious business tool, but the next ten years will see them becoming the essential way to sell and communicate with customers for an everwider range of businesses.
Broadly speaking, websites are in need of quite an overhaul. Most businesses are fully aware of this, but there has been a reluctance to address this for two reasons. Firstly, it hasn't been particularly necessary to make a change to your site. As the internet has grown, there have been many places to buy very affordable traffic (potential customers) – anywhere from Google AdWords, which drives tremendous opportunities to businesses, to ad networks.
As more businesses start to use these systems, traffic is becoming more expensive. Costs are based on an auction – an increase in demand from businesses means higher prices.
The second big factor is not knowing where or what to start with when it comes to fixing your website. At the heart of the potential solution is something called website analytics. It includes products like Google Analytics, but without the right people or the right insight it's difficult to know where to start.
We founded QuBit Digital at the start of this year. We're currently a team of five ex 'Googlers' who over the last five years have worked across product management, marketing, business intelligence and strategy. Our aim is to help businesses better understand their data and improve their websites in order to drive online profits.
QuBit Digital is building a set of technology and advisory solutions that aim to solve these problems. By applying the right algorithms to a set of website data you can quite quickly start to understand why people are leaving your site. When you combine this insight with revenue data you can start to create a blueprint of what needs to be fixed. Starting with the areas that will drive the most revenue helps you not only optimise your business, but motivate your teams, as the fruits of your labour are felt much quicker.
REBUILDING REWARD
In this special feature, we look at the relationships between
businesses and employees and examine ways to motivate and reward
them.
By Ian Luck
The six stages of reward
Up-to-date and flexible people practices are vital to support business objectives, but many businesses forget to review their reward approach as their business grows and changes. Here's our six-stage model to check that your reward systems are still up to the job.
1. Job roles
As organisations develop, the boundaries of many job roles are likely to blur. Effective job design and evaluation techniques will help you re-value them fairly.
2. Pay and grading
Check whether your pay structure is suited to your business structure. What is the impact of change on grades or levels? How has pay and career progression been affected?
3. Market data
As the economy starts to recover, keep your eye on market trends to reduce the risk of losing good people when the job market eases.
4. Benefits and incentive schemes
Are you getting the best rates for benefits? Now is the time to make sure you're getting real value for money – including re-broking benefits and re-negotiating bonus schemes.
5. Total reward package
Many staff don't know how much their benefits are worth. Tell them the total value of their reward package in clear and effective ways.
6. Equal pay compliance
If you change roles and reward structures, check that they will be applied fairly. For larger businesses, equal pay analysis will help you to test and benchmark the effectiveness of any changes.
The benefits of flexibility
The recession has demonstrated to businesses of all sizes the importance of flexibility in employee benefits – both in their costs and effectiveness.
A well designed flex plan enables staff to build benefits packages that are meaningful to them, resulting in a more motivated and loyal team to help your business succeed. In the annual Employee Benefits magazine survey of flexible benefits arrangements, over a third of respondents said that their flexible benefits plan reinforced the corporate culture and business objectives within the firm. Research repeatedly shows that greater staff engagement has a positive impact on competitiveness and performance, irrespective of the state of the wider economy.
Of course, cost is also a critical factor, particularly for younger businessses, so it's encouraging to hear that 55% of companies in the Employee Benefits survey said that their plan had been effective in reducing or containing their costs.
While childcare vouchers, dental and other insurances and the ability to buy and sell annual holiday remain the most common benefits offered through a flex plan, it is interesting to note that some 48 different benefits were outlined in the survey. These ranged from bicycle loans and gym membership to wine club membership and discounted bus travel.
An exciting new development is the growing use of concierge services. These were previously the preserve of exclusive card membership schemes but can now be made available to all staff, helping them to manage many of their needs, from shopping and insurance to arranging a child's birthday party or finding an emergency nanny.
Are you ready for the new 'fit notes'?
The Government has introduced a new Statement of Fitness for Work, known as a 'fit note', to replace GP sick notes. The new system gives more responsibility to the employer to make the final decision on fitness and what changes can be made to facilitate the employee's return to work. A guide for employers is available on the Department for Work & Pensions website www.dwp.gov.uk
Checklist : Managing Sickness Absence
Practical advice on handling long and short-term sickness absence to stop it damaging your business.
- Review your sickness policy to ensure it follows the rules requiring employees to report all absences and provide appropriate certification – enforce this rigorously.
- Ensure you have processes to maintain regular contact with employees during absence.
- Review your procedures for supporting employees back to work – ensure line managers carry out return-to-work interviews after every period of absence.
- Keep clear records of all absences and the reasons. Set levels of absence that will trigger a formal review.
- Examine alternative work you can offer employees.
- Train and support line managers so they can comply with your sickness policy, carry out risk assessments and develop return to work programmes.
- Consider a referral to an occupational health specialist, if the new fit notes don't provide sufficient information to enable you to make decisions about an employee's fitness to return to work, particularly if dismissal is a possibility.
INFO – A NEWS ROUND-UP FOR BUSY
ENTREPRENEURS
By Inez Anderson
Rewarding your Key Employees – A Brief Guide
With the new 50% income tax rate and restrictions on tax relief for pension contributions, businesses should be reviewing their pension and reward structures to ensure they are offering competitive packages.
There are executive bonus schemes, performance-related pay and profit sharing arrangements, but employers should also look to make the most of HMRC-approved arrangements such as approved employee share option schemes, as these can provide the maximum tax and NIC advantages Here's a brief guide to help demystify some of the reward schemes available.
Cash-based reward schemes
EFRBS – employer-financed retirement benefits scheme
An unregistered pension scheme that can be used to provide retirement benefits to employees and former employees. EFRBS can invest in any asset class and provide a range of benefits to employees - both UK and non-UK domiciled. They are not subject to the annual and lifetime pension allowance limits and may have the added benefit of tax-planning opportunities, but must be genuinely established to provide retirement benefits. They may be suitable for owner-managers of close companies or employers who pay large discretionary bonuses.
EBT – employee benefit trust
A discretionary settlement, generally established offshore, for the benefit of employees and their families. Funds are managed by an independent trustee. EBTs can provide a flexible range of benefits to employees, while deferring income tax and NICs. Employees will not generally suffer an income tax charge unless, and until, a payment is made, or benefit is provided to them. The trustee can allocate settled funds for the specific benefit of Rewarding your key employees A brief guide a particular employee(s), which does not create an income tax charge. EBTs may be suitable for a company paying large discretionary bonuses, wanting to incentivise a broad range of employees or looking to provide employees with a market for their shares.
Note that, as announced in the April 2010 Budget, legislation may be introduced to prevent the use of EFRBS and EBTs where the purpose is to avoid, defer or reduce tax liabilities or avoid restrictions on pensions tax relief.
Share-based reward schemes
JSOP – joint share ownership plan
An employee incentive arrangement where the employee jointly acquires shares with a third party, usually an EBT. Gains on employees' shares are subject to capital gains tax (CGT) at 18%, as opposed to income tax at 50% (although this may change following the Emergency Budget on 22 June). JSOPs are very flexible, can be used on a one-off or regular basis and can help to align the employee's interests with those of the company in the medium term.
MSP – matching share plan
Smith & Williamson offers an MSP – an employee share incentive arrangement designed to encourage employees to own shares in the company. It can be used as a 'buy one, get one free' arrangement. MSPs fix the amount of income tax and NICs payable by the individual at the start of the plan. Any increase in share value is then taxed under the current 18% CGT regime. MSPs can provide shares to employees without the need for a large up front payment.
VAT pay-back for some Royal Mail users
Thousands of mail-order businesses, internet retailers and other business users of some Royal Mail services, including Parcelforce, are potentially eligible for a VAT reclaim going back four years. The pay-back, which results from a recent European Court ruling, applies to organisations with individually negotiated Royal Mail contracts and all Parcelforce contracts. They may now be able to recover up to 7/47ths of the gross cost of these services. Those involved in largescale mailings potentially have most to gain and should lodge their claims as soon as possible. Retrospective VAT claims are capped at four years, so delays may be costly.
UKFG
A new company, UK Finance for Growth Ltd (UKFG), has been established to manage and coordinate the delivery of finance to SMEs. The range of funding will be from £25,000 to £10m and funding will be in the form of debt, equity or mezzanine funding. Over time, it will bring together all of the existing SME finance schemes including the Enterprise Finance Guarantee and the newly announced Growth Capital Fund – a total of around £3.5bn. This is a welcome simplification.
New penalties for late tax payments
Since the start of the new tax year in April, there has been a new regime of penalties for late payment of income tax and NICs. Penalties will be a percentage of the amounts paid late and the rate will increase according to the number of times a deadline is missed during a tax year and, in some circumstances, the time taken to pay. Rates could be as high as 5% of the amount outstanding and then a further 5% if more than 12 months late. The new rules also cover Construction Industry Scheme deductions and student loans.
Expenses clean-up not just for politicians
As we wonder whether the new Government will live up to its promise to clean up MPs expenses, Smith & Williamson's tax experts say that businesses too should have a clear written policy setting out the types and amounts of expenses that can be reclaimed by their staff. Expect the taxman to get increasingly hot on compliance as the Government tries to plug the hole in public finances. Be particularly wary of company credit cards, as claims always lag well behind the event, possibly leaving excesses and abuses undetected for long periods. If in any doubt, speak to your professional adviser.
OFFSHORING – THE CHALLENGE: YOU WANT TO SET UP
AN OVERSEAS OPERATION, BUT WHAT IS THE RIGHT STRUCTURE FOR YOUR
BUSINESS?
By Guy Rigby
The solutions
Offshore outsourcing
This is popular for IT development and other services using India and other lower cost countries. An external supplier is selected and given complete responsibility for a project. This can work well for both short and long-term projects for small businesses, but if intellectual property rights are a concern, this approach can sometimes be high risk.
Joint venture
Setting up a joint venture with a local company overseas allows you to take advantage of their local knowledge and experience and reduces the risks of working in unfamiliar territory. The trick is finding the right partner and building trust. Be aware that it is normally far easier to start a relationship than end it.
Build-operate-transfer
Similar to a joint venture, this business model typically involves an offshore supplier operating a dedicated centre for your business. Once successfully established and certain conditions have been met, you can have the option to take over ownership and run it yourself.
Offshore captive
Increasingly common among companies looking to cut costs by setting up their own operations, 'captives' are usually a long-term option best suited to larger companies. But captives can also work for small companies if they meet both long and short-term strategic objectives and there is sufficient funding and management expertise to set up offshore.
Assisted in-house
Finally, there are specialist service providers, such as Quickstart Global (see the article featuring Neal Gandhi earlier in this newsletter) that help businesses set up their operations offshore. Often appropriate for smaller, growing businesses, the service provider can help with many aspects of working in another country, such as recruitment, premises, infrastructure, IT and dealing with the local authorities.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
