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December 9: Readers’ Questions

Q. I am a British national, currently living in France. After three years of huge tax and social bills, I cannot see the benefits of continuing my business operations through my French-registered company. Can I set up and operate a limited company in the UK, even though my current home address is in France? Would I have to move my family to the UK before I am able to do this?

My French company is currently classed as a sole trader. As a specialised IT consultant, my work is normally carried out on various client sites throughout the UK and Europe.

Name withheld

A. The good news is that British companies can be bought “off the shelf”. There is no requirement that the directors are resident here, so it will not be necessary for you to relocate your family.

With this in mind, it might be preferable to set up a UK company and trade that company alongside the French one. Alex Burri, tax partner of BCW & Associés, Paris, warns that switching clients to the new company is undoubtedly likely to attract suspicion among the French tax authorities.

A UK limited company will be subject to French tax law if the company is actually managed and controlled in France, so board meetings and shareholder meetings should be held outside of France. Liability to French income tax will also arise if the company is regarded as having a “permanent establishment” in France. Monsieur Burri states that there are two main indicators that point to a “permanent establishment”.

The first relates to the physical and logistical aspects of the business. Therefore, you need to make sure that the English company does not have a fixed place of business, such as offices, in France.

The second relates more to the jurisdiction of the business negotiations and contractual documentation. In order to show that the new company does not have a “permanent establishment” in France, it is also important to ensure that both the negotiations and the contracts are transacted outside of France.

This still leaves the question of how you will be remunerated. This is a subject in itself but there are various options to consider, all with different tax consequences. In terms of the British company, some profit could be distributed to shareholders via dividends. It may also be worth considering entering into dual employment contracts with the British and French companies, with a view over time to more of your remuneration being by way of the British company.

Andrea Nicholls, partner and head of the employment department at law firm Howard Kennedy

Q. I’ve run a textiles company for the past 30 years but would like to leave the business this year. I would like to keep the business in the family and have a 28-year-old son as a director. However, I don’t think he’s ready to start just yet. What measures could I take until he is ready or do I have
to make an external appointment?

Name withheld

A. The passing of control from one generation to the next can be a precarious process and careful succession planning is key to a smooth transition and to help develop the commercial success of the business.

It is important for the future success of the business that your son demonstrates leadership and the other skills necessary to drive the business forward, including development of the business strategy. He must also be able to manage the day-to-day operations effectively and have the support of existing employees.

As a general rule, family members should come into the business with between two and five years of outside experience. This ensures they are independent and are able to add value by bringing fresh skills and ideas to the business. It also helps establish their credibility with existing employees. If your son does not yet possess the necessary skills, then it is important to design a training programme that may include both on-the-job training and more formal external training.

This will allow your son the opportunity to gain knowledge of all aspects of your business and to develop his business and leadership skills.

You then need to determine a date at which you intend to step down so that your son will be allowed to assume his role freely. If he can’t, he is likely to become frustrated and feel that you are undermining his credibility. It can sometimes be difficult not to interfere in the business if you are still financially dependent on its success. You may find it easier to step down if you are financially independent. One way of achieving this is with a family management buy- out, where your son will buy your shareholding.

In the meantime, you may consider the option of hiring an interim managing director to work alongside your son. This has the advantage of ensuring that the business continues to be run by a professional manager. It will also minimise the impact on staff morale and provide a mentor for your son.

Jim Rogers, head of growth and strategic services at accountancy Grant Thornton

December 2: Readers’ Questions

Q. I started Bigger Feet, an online footwear retailer for people with large feet, at the age of 16, winning the Enterprising Young Brit award last month for my efforts. Demand has been increasing and I am looking to expand the company. Because I am web-based I am able to work remotely from home, but I need more space. Please could you explain the legal consequences of extending my house to accommodate my business?

Oliver Bridge, Bigger Feet

www.biggerfeet.co.uk

A. Bigger Feet is not alone in wanting to maintain its company base at home, with the home now being the most popular location for new business start-ups. When expanding your home to accommodate a growing business, there are a number of legal issues to consider.

Do you require planning permission? Your local authority can give you the answer, which will depend on whether the planners feel that your home will no longer be used mainly as a private residence. This is determined by factors such as an increase in traffic to your home and whether you will be disturbing neighbours by intrusive levels of commercial activity.

For most internet-based businesses this should not be an issue as customers are not coming direct to your door and you are not manufacturing on your own premises. But you would be well advised to contact your local authority and seek assurances that you have the required planning permission to start building.

Your tax position will also be affected. The rooms that you use for work may be charged business rates rather than council tax. Again, you should contact the local authority to agree its position on this.

If you have a dedicated working space, this part of the house will also be liable for capital gains tax when the property is sold. On the upside, you are saving costs by operating from home rather than taking on the overheads of a second property and if you are VAT registered you can claim back this tax on items that you buy for business use. You can also claim tax relief on domestic bills that relate to the parts of the house in which you work.

If you are thinking of employing people in your newly expanded home, be aware of the relevant health & safety regulations. In a useful online guide* the Health & Safety Executive recommends home business owners carry out a five step assessment to identify and guard against risks in the workplace. And finally, be sure to let your insurance provider know that you are expanding into a new area of the house as this may have an impact on your home insurance policy.

*The HSE guide is available at http://www.hse.gov.uk/pubns/indg226.pdf

Emma Jones, managing director of consultancy
Redbrick Enterprises

Q. I’ve run a textiles company for the past 30 years but would like to leave the business this year. I would like to keep the business in the family and have a 28-year-old son as a director. However, I don’t think he’s ready to start just yet. What measures could I take until he is ready or do I have
to make an external appointment?

Name withheld

A. The passing of control from one generation to the next can be a precarious process and careful succession planning is key to a smooth transition and to help develop the commercial success of the business.

It is important for the future success of the business that your son demonstrates leadership and the other skills necessary to drive the business forward, including development of the business strategy. He must also be able to manage the day-to-day operations effectively and have the support of existing employees.

As a general rule, family members should come into the business with between two and five years of outside experience. This ensures they are independent and are able to add value by bringing fresh skills and ideas to the business. It also helps establish their credibility with existing employees. If your son does not yet possess the necessary skills, then it is important to design a training programme that may include both on-the-job training and more formal external training.

This will allow your son the opportunity to gain knowledge of all aspects of your business and to develop his business and leadership skills.

You then need to determine a date at which you intend to step down so that your son will be allowed to assume his role freely. If he can’t, he is likely to become frustrated and feel that you are undermining his credibility. It can sometimes be difficult not to interfere in the business if you are still financially dependent on its success. You may find it easier to step down if you are financially independent. One way of achieving this is with a family management buy- out, where your son will buy your shareholding.

In the meantime, you may consider the option of hiring an interim managing director to work alongside your son. This has the advantage of ensuring that the business continues to be run by a professional manager. It will also minimise the impact on staff morale and provide a mentor for your son.

Jim Rogers, head of growth and strategic services at accountancy Grant Thornton

Q. I have designed a new safety accessory for ladders and I am looking for a company to manufacture it for me. What would you advise me to do?

Duncan Pulsford, via e-mail

A. The first thing you should do is explore the commercial viability of the design. Is there a demand for the product and, if so, what is the potential of that demand? In other words, how many units can you expect to sell? At a minimum I would recommend you talk to builders, DIY stores and ladder manufacturers to establish likely demand. Discussions can be limited to generic questions to avoid the design becoming known.

You will also need to verify that your design is original. If it is not, and you carry on regardless, your actions could provoke legal action from an unhappy patent owner. A classic mistake made by inventors is to assume an idea is original simply because they have never seen or heard of anything like it before. You should conduct a patent search for anything already known and recorded that is close enough to your idea to prevent it being original.

The next consideration is to protect your design by applying for a patent. A patent can be a valuable asset, however they cost money and are territorial, so a UK patent will only give protection in the UK. If you intend to export you will need to consider the cost of patents in each country.

You must also consider how to take your product to the market. You can either licence the product or produce and sell it yourself. Licensing will involve selling the rights to a company who will pay you royalties based on the amount they sell. This will allow your product to benefit from an existing company’s manufacturing and marketing expertise and make use of its established distribution. A potential licensee could be a manufacturer of ladders who might be interested in enhancing its product range. The advantages of licensing will allow you to receive income without investing resource and time in producing and marketing.

The second option is to produce the product yourself, but this is likely to be expensive and may require significant investment. You can attract funding from investors and/or government grants but you will need to demonstrate you have carried out market research to determine the commercial potential for the product supported by a viable business plan. The advantages, however, are that you will have control of the venture and larger rewards if you prove to be successful.
Alysoun Stewart, director of growth and strategic services at accountancy Grant
Thornton

November 26: Readers’ Questions

Q. The field sales force of my IT business operates a profit-related pay scheme. It motivates each sales person individually but I have found it an obstacle in getting them to work as a unit. There have been occasions when leads have not been passed on because it is not on a particular person’s “patch”, for example. How can I implement a pay scheme that motivates staff to work hard not only for themselves but for the business as a whole?

Name withheld

A. Appropriate pay and reward structures play a central role in any company. Getting it right can mean having a workforce that is motivated to achieve corporate objectives and is rewarded for good performance in a way that is perceived as valuable and creates job satisfaction. Getting it wrong can tear businesses apart.

The starting point for any remuneration and reward structure must be a clear statement of strategic objectives, measured by the achievement of clear aims. This will help identify the indicators against which performance should be monitored. The role of each department and each employee, including board members, in meeting these key performance indicators (KPIs) then needs to be developed and communicated throughout the business. The vital element is to ensure the KPIs for the whole business remain the primary focus and that contributions to their overall achievement are measured.

The next stage is to identify types of remuneration and reward structures that could be introduced. It is vital to know what employees actually value, as there is little point providing a reward package that does not deliver perceived value.

There is a huge variety of possibilities, from flexible benefit schemes to cash and bonus plans, and even equity participation mechanisms. The final structure will need to incentivise performance in line with business strategy and reward employees with real benefits.

In this case, it would appear that the profit-related pay scheme for your sales force is failing to deliver these benefits. While it may be motivating individuals, they have no incentive to act in ways that contribute to the overall business.

An approach that ensures the company’s reward philosophy is aligned with business objectives will deliver a remuneration and reward structure that motivates every employee. This will help them perform to their best ability in the achievement of company objectives and reward each for the contribution they make. The result will be a motivated workforce, better staff retention and company success.

Jim Rogers, head of growth and strategic services at accountant Grant Thornton

Q. AngelNews is a free website service for companies funded by business angels and venture capitalists to post press releases and other relevant news about their achievements. It is a simple way to let investors, the press and the wider public know what developments are taking place in these entrepreneurial companies. While it has successfully attracted more than 100 companies and in excess of 1,500 readers, as a free service it is important marketing efforts are cost-effective. What steps could we take to build scale?

Modwenna Rees-Mogg, AngelNews

www.angelnews.co.uk

A. Inevitably, word of mouth remains a very effective means of building scale – ensuring existing users recommend the site is fundamental to future success and growth. Analysing new visitors to establish how they are using the site is also a highly cost-effective means of scale building.

By analysing existing users AngelNews can build a detailed picture of how its site is used. From this position of knowledge AngelNews can set about making the site work harder to attract visitors. Growth in scale is clearly linked to a successful user information experience.

Effective information provider sites all have similar characteristics. They are easy to use, provide community-based inform­ation or provide the ability for users of the site to communicate with other site members about such things as news events, companies and market movements. Users can post comments, respond to questions and express ideas.

An environment for chatting is a powerful “pull” model to keep visitors engaged with activity on the site. Another characteristic of such sites is explicit personalisation that allows users to configure the site experience to deliver information on what interests them. Effective sites of this nature often build scale on their own.

Beyond this it is important to know how new visitors behave on the site. The information about visitor behaviour is determined by combining site metrics – length of stay, usage pattern – with other aspects, such as visitor identification through the use of internet protocol addresses or cookies, and categorising pages into topic and function areas. Reports about visitor behaviour reveal common paths through a site, popular entry and exit points, where visitors come from, session length and frequency, unique and repeat visitors, and demographic inform­ation.

This results in opportun­ities to link website inform­ation with a new visitor attraction programme. For example, recording where an existing user first came to the site from allows decisions to be made about additional new visitor acquisition on similar sites.

Whichever route is chosen, the key to building scale is to have a clear idea of what makes the site work for existing users and apply this to pull in similar like-minded visitors – often by using tools already on the site. Translating visitors into users builds scale.

Steve Durbin, director, entrepreneurial growth markets, Ernst & Young

November 19: Readers’ Questions

Q. We are looking to sell some of our shares in a small family-run limited company. At the moment we own a third share of the company. There are some buildings involved in the valuation, so it could be an investment. Have you got any ideas where we might start to look for buyers?

Name withheld

A. Selling small numbers of shares in private limited companies is not at all like selling a parcel of shares in a quoted company and there is no market for them as such. The first question to answer is why do you want to sell?

The next question you have to determine is what power you have to sell the shares at all. This is easy to find out from an inspection of the company's Memorandum and Articles of Association at Companies House.

Most private UK companies have “pre-emption rights” meaning that shares must first be offered for sale to existing shareholders before being offered to outsiders. Taking a minority stake in a private company, without a seat on the board, is not something to be embarked upon lightly. The best buyers in these circumstances are the company itself, another member of the family or the management team.

You should definitely investigate a share purchase by the company. There will be some legal changes to make and it is sometimes possible to structure these kind of share re-purchases so that they release capital back to the shareholders in a tax efficient way. The company borrows the money from its bankers and buys back the shares for cancellation. All the other shareholdings increase pro-rata.

Selling shares to outsiders should probably be ruled out unless the company has substantial growth prospects and more shares might be available, in which case there could be a case for involving one of the smaller private equity funds.

While it helps that the company has some buildings on its balance sheet, as this will mean that the bank can easily lend the company money for a share buy-back, this in itself should not influence the valuation unless the buildings are surplus and not required for trading.

Profitable companies tend to be valued as a multiple of their maintainable earnings, rather than their net assets. If all the shareholders are agreeable it may be quite easy to negotiate a value, otherwise it is best to commission someone independent to give an opinion based on comparables.

Selling shares will trigger a capital gain and it is important to plan the transaction so that you maximise any taper relief entitlement and minimise the chance that tax anti-avoidance provisions apply.

Anthony Vickery, partner, middle market mergers & acquisitions, at accountancy Ernst & Young

Q. I founded a mobile phone software company with four others six years ago. At the time we took an equal equity stake in the business. We have expanded rapidly recently and are looking to employ two more software developers and a couple of extra sales staff. We consider ourselves an entrepreneurial business and would like to encourage new employees to take a personal interest in our future success. Should we give them shares in the company as part of their pay package? Name withheld

A. Giving employees shares or share options can offer a number of benefits. For instance, it allows awards to be delivered to employees with reduced cash costs for the company compared with a bonus, allows for the provision of longer-term benefits and incentives, encourages employees to think like shareholders and be part of the management team and, last, but by no means least, offers potential tax benefits.

If you provide share benefits, working out the best method will be important. This might be through an immediate offer of shares but this is likely to be complex because of the requirement to deal with various legal and commercial points through the establishment of appropriate documentation and amendments to your Articles of Association. For example, you would need to cover how the employees could sell their shares. There would also be potential tax difficulties when the shares are acquired, as tax and NIC could be payable on the shares.

Another possibility would be to make awards under an enterprise management incentives scheme (EMI).

Approved by HM Revenue & Customs, it works through the grant of options that can be exercisable at any time or on a specific event, such as a sale or flotation. The option helps to control the time when shares are acquired and can also be linked to company performance. EMI options offer substantial tax benefits.

Stephen Woodhouse, tax partner at accountants Deloitte

November 12: Readers’ Questions

Q. Agoy was started four years ago to sell yoga mats and bags. Our products are now sold in leading retailers, such as Harrods. We have been expanding into new areas, such as yoga holidays and that needs investment and capital, initially about £50,000 to cover staffing costs. Agoy is 100 per cent owned by myself and my business partner but we have been approached by angel investors and have talked about giving them pieces of the company. How much should we give away?

Ian Floyd, Agoy

www.agoy.co.uk

A. Who were business angels named after? Do business devils exist? The angel may have the money you want but you will find that the devil is in the detail.

The question you ask is the one all investees ask first. But it’s one of the last things you should look at. There are more important questions – more about psychology than maths but vital to your situation.

Firstly, what does your angel investor want? An angel should be making the investment out of interest and motivation to help, not to interfere with, a small proportion of their personal wealth. If they don’t tick these boxes, steer clear.

What do you know about dividends, because the angel will want some? This investment is not for nothing. If you’re not clear, ask your accountant or legal adviser.

Thirdly, you should ask how long the angel wants to be involved in your business. The real fun comes if they haven’t taken a long enough view. Very few angel investments give returns in the short term. Do they know that?

Fourthly, how is the angel going to get out? Did you realise they would want to? Angel investors want capital gains from selling their investment.

Are you likely to exit the business at the same time, and if not, who can the angel sell his or her share to? If the answer is yes, then who are the likely trade buyers and what can you do to make the business attractive to them?

You should also consider carefully what the money is being used for. Is it necessary or just desirable? You need to know the positive impact of the money if you are going to value the investment properly.

Another useful question is, how much do you need? Have you got this right? A repeated need for capital can mean the slices lost get fatter, not thinner. Always prepare a detailed business plan and secure enough funds for at least 18 to 24 months.

You should also consider whether you can live with a sleeping partner. Some of the best business leaders can’t. If that applies to you, don’t risk it.

Is this a handshake deal? This is a part of your life and a handshake is leaving the future to the mood and attitude of both you and your angel to the time there’s a problem to resolve. Don’t.

Finally ask yourself whether there is an alternative to the angel investor. The answer is sometimes yes, and you must pick from all your choices. Do you really know what they are? Speak to your accountant or a specialist corporate finance consultant to get a steer on all your options.

Now the answer that you’re looking for. You probably know the proportion of the business the angel should get. It’s in your business plan, waiting to be calculated – assuming you’ve got one. If not, don’t do this until you have.

Your business plan will allow you to start the process of valuing the business now and years down the line, and so it will reveal the level of growth the angel could enjoy on the investment and the proportion they need now to satisfy their needs.

You need to persuade the angel that this needs to be a minority holding unless you want to lose effective control of the business. But bear in mind that holdings over the magic line of 25 per cent get rights that can stop you alone taking some decision over the future capital and direction of the business.

You may be small now but you deserve to grow, andthe problems you gloss over now will grow with you. So protect yourself by using that business plan and having an agreement drafted to regulate the future relationship with your angel.

Andy Raynor, chief executive of accountancy Tenon

November 4th: Readers’ Questions

Q. I run a successful business research and recruitment company and have been approached by various schemes that propose to amalgamate seemingly disparate research, but especially recruitment, companies and float on Aim. Am I right to be wary of such proposals or should I be less sceptical of the potential financial benefits for the company?

Caroline Plumb, Managing Director, FreshMinds

A. Generally speaking, the bigger a company, the more generous the market is in valuing it as a multiple of its profits. So putting together a number of small businesses, which on their own might be valued on a low multiple and listing them on a stock market to achieve a higher multiple of earnings could work so long as there is a
commercial case to argue – two plus two may equal five not four.

There are big risks involved in bundling together a group of independently managed companies in the expectation that the new entity will work as a cohesive new business. But, with the right advice, these risks are manageable.

First of all, will joining a bigger group work for your business, your employees and your fellow shareholders? If you believe that you will achieve more as part of a bigger group than as an independent company, then you can discuss the proposals with your corporate finance adviser and judge them on their merits.

Scrutinise the deals as if you are putting your own wealth at risk. Some of the questions to ask are:

Do you want to swap shares in your company for shares in the new company or are you being offered cash as well?

What are the prospects of these other companies?

Who will be the new chief executive, financial director and chairman and do you respect them and feel they are the right people for the job?

Will there be enough finance to fund the development of all the businesses in the new company and if not are you comfortable with how the capital is going to be rationed?

Will the businesses have enough in common to create synergies such as cross selling to clients or by sharing back office functions to save money and freeing you and your team to focus on business development?

As a people business you will need to know that there will be the right kind of equity participation and incentives for all the former owners and key staff.

You will also have to consider whether the businesses are mature enough for an initial public offering (IPO). If not then the distractions involved and costs of professional fees are likely to mount.

If on second thoughts you feel your business has potential in its own right, the prospect of an Aim listing or joining a bigger company may not seem attractive. One alternative could be to fund your expansion through pre-IPO financing.

By avoiding much of the legal and regulatory requirements of raising money through an Aim IPO you can keep your professional fees down to a much lower percentage of the funds raised. You could then expand your business, be acquisitive and become the “leader of the pack”.

Martin Savage, director of corporate finance at accountant UHY Hacker Young

Q. I have a new game, called Bounce Back 21, which is coming onto the market for Christmas. The game is a bit like the street game Kerby but I have brought it safely into the garden. It is made of plastic and is very light. I have design rights and copyright on the rules of the game for at least two years but cannot get a retailer to take it. I am trying to sell the game to the public via pamphlets and flyers as well as to the parents of the kids at school where I tested it. I have no
experience in marketing or sales. Is this the right thing to do?

Ronnie Mothersole

A. Getting that first sale is the most difficult of all challenges, particularly in a niche market as capricious as this one.

Cracking the retailers, though hard, is a much better bet than attempting to go direct to the public, with all the necessary advertising and profile building costs. But retailers, like all stakeholders, will invest in a team with experience more readily than they will in a product. So the fact that you are so open about your lack of experience will not fill any significant retailer with confidence.

One strategy is to aim for a small retailer first. An independent is less likely to be concerned about your lack of experience, resource and proven ability to deliver product in quantity or quality. Once you have proven your capability and have sold products, you have a story to tell to the bigger guys.

Secondly, you can invest in building your team. If you can convince retailers that you are supported by a team with experience and credibility you will be more readily listened to.

Have you put a limited company together? Have you an industry person acting as a non-executive?

Thirdly, you should consider taking a stand at a trade show. You will have to hurry for this Christmas but trade shows are full of one-product businesses trying to attract the attention of the large retailers.

Rupert Merson, partner at BDO Stoy Hayward

October 28th: Readers’ Questions

Q. Oxford Webware is a five-person web development company specialising in websites for trade associations and professional bodies. We are now recognised as experts in our field and need to take on more people fast to service our growing client base. But we don’t have the spare cash for expansion. We are profitable but our bank won’t lend us more than we have already borrowed and I am concerned that this is because we produced growth estimates that proved to be overly optimistic. How do we convince the bank that we have smartened up our act with regard to estimates without waiting for some hard proof? What other sources of finance are available to us?

Marcus Idle, Oxford Webware

A.Oxford Webware has a number of options available to fund the sales growth of its web development business. These include raising further finance from its bank, improving its working capital cycle, using the government’s Small Firm Loan Guarantee scheme, debt factoring and business angel financing.

ITo raise additional funds from its bank, Oxford Webware should prepare a business plan to summarise the sales growth opportunity and quantify the funding required. The plan should include a brief description of the business, a summary of the web development market, details of the customer base, along with actual and forecast financial information.

The business plan should provide a brief explanation of why the previous forecasts were not met and include a robust explanation of why the re-based financial forecasts are more accurate. The detailed assumptions underlying the forecast should be shown in the appendix, as this will provide comfort to the bank that the forecasts have been prepared on a reliable basis.

The company could improve the credibility of the information in the eyes of the bank by employing a firm of accountants to assist with the preparation of the business plan and financial information. The company should also approach several banks to ensure it obtains a competitive fund-raising offer.

Oxford Webware could also consider changes to its working capital cycle to improve the cash flow profile of the business and reduce the need for additional external finance. This could involve chasing trade debtors or delaying payment of creditors. The company could also consider amending the payment terms with its customers to improve cash flow, such as requesting stage payments or offering early payment discounts.

The company could consider slowing its overall sales growth to reduce the need for external funding. This could potentially be achieved by increasing selling prices to improve the gross margin and profitability.

The Small Firm Loan Guarantee scheme is a term loan from a bank guaranteed by the Department for Trade and Industry. The scheme covers loans from £5,000 to £250,000, which can be used for working capital, growth or capital expenditure. Loans can also be repaid on a monthly or quarterly basis. This scheme is ideal for Oxford Webware as it is designed for small, fast growing companies. Further details of the scheme are available at www.dti.gov.uk.

Another option is debt factoring, which provides cash advances secured on trade debtors and is specifically designed to fund sales growth. The funding can be provided by the high street banks, and they will typically provide up to 90 per cent of the trade debtors.

Finally, Oxford Webware could consider business angel funding. Business angels are high net worth individuals who take minority stakes in businesses in return for early stage and growth capital funding. A business angel will typically invest amounts up to £1m and they can often bring additional business and finance skills. A summary of business angels and contacts is shown in the BVCA Sources of Business Angel Venture Capital at the website www.bvca.co.uk

Chris Williams, corporate finance partner, specialising in the technology, media and telecoms industries, at accountant Deloitte

Q. I run a public relations business in London but I am confused about what staff are entitled to receive in terms of sickness pay. I have a friend who runs a company and he tells me that he doesn’t pay sickness pay, which has led to improved attendance and productivity. I read something recently about Tesco doing something similar. What am I legally obliged to do, and what have others done to reduce the amount of absence due to sickness?

Jim Hawker, Threepipe

A. First you need to see if your staff have any contractual rights to sick pay. These may be in their employment contracts, the handbook, or a separate sickness absence policy. If nothing is mentioned, then you have to consider whether the company’s approach to sickness absence has given employees the right to be paid if off sick, through “custom and practice”. If all of these draw a blank, then your legal obligations will be limited to statutory sick pay. The first three days are unpaid, and on the fourth day up to a period, or in some cases an aggregate period, of 28 weeks. For further information, see www.hmrc.gov.uk/employers/employee_sick.htm.

Most employers wish to root out the “I don’t like Mondays” and “TGI Friday” brigade. Informing staff that you are going to start monitoring absence is the first step to identifying the culprits. However, a high-handed approach is likely to lower staff morale and increase levels of absenteeism, so it is best to be collaborative. Ask your staff what they see as the causes for high levels of absence. Use peer pressure, by identifying the effect of short-term absence on colleagues and the business.

Recognising that staff have different requirements for time off and looking at ways to accommodate these, without them feeling the need to resort to taking a “sickie”, can have beneficial effects. A more flexible approach to starting and leaving times may mean that staff can be in for the man to repair the boiler or arrive back from a weekend away on Monday morning and still be in the office by 10am. You could also consider changing the salary and benefit package so that staff can “buy” more holiday time.

Implementing a sickness absence policy seems to have the effect of reducing ad-hoc absences and helps ensure consistency of treatment. The policy should set out that employees have to speak to their manager or the human resources department rather than leave a voicemail or call their colleague when they call in sick, and introduce back to work interviews.

The Tesco approach was the typical mix of carrot and stick. It aimed to reduce absenteeism by stopping pay for short-term absences, coupled with rewarding those whose attendance record was good. This approach, however, inadvertently penalises those who genuinely have poor health. In the US, many companies operate “duvet days”, when employees can stay in bed instead of going to work. However, most American companies only offer two weeks holiday and implementing a policy of “an acceptable number of days sick“ is an opportunity missed. Why not instead increase the number of holidays and be tougher on those who continue to pull a sickie?

Andrea Nicholls, partner and head of the employment department at solicitors Howard Kennedy

October 21st: Readers’ Questions

Q. I run a financial services company in Scotland that has grown substantially in the past few years. To take the next step, I feel that I must take my best people out of the sales firing line and have them managing expanded teams. However, I am wary that this will damage sales in the short term. Should I bite the bullet? Name withheld

A. I am delighted that your company has seen such success and that you have the ambition to continue your growth. The situation you face is a common growing pain of expanding businesses.

It is a difficult decision to move staff who have been directly generating revenue away from front-line positions but the implications are wider than just a short-term revenue drop.

There are four key considerations to think about:

First, you should step back and consider the views of your clients. Ask them what they value from your company and its people and how they think you could best improve your service while developing the business. It is vital that you do not alienate your existing customer base - you may find, for example, that a hands-on personal service from senior staff has been core to your business success so far.

Second, it would be worth doing a basic segmentation of your clients. Examine whether some of the smaller, less profitable customers could be served by teams, while the highest value clients could be served bythe existing, high-service model.

Third, the motivation and skills of your people are very important. It may be that great salespeople do not have the leadership abilities necessary to build and run great teams, or simply prefer their customer-facing work. Both you, and your new managers, will need to be able to motivate front-line staff to achieve and exceed your growth expectations, so give careful thought to who you will promote and what management training and incentives they should be given.

Finally, there is no need to take the risk of making a complete change to your operating model overnight. You could start with a single region and see how the new team structure affects one sector of your business. Alternatively, managers could share their team-building responsibilities with their original sales functions, by continuing to look after a smaller number of key clients, or by building relationships with potential new customers.

The growth option you suggest could well be the way forward.

Many companies find that they realise significantrevenue and sector growthby having a resource dedicated to expanding the business.

However, you must make sure you are not risking anything more than a short-term drop in sales.

Steve Varley, head ofadvisory services at Ernst & Young

Q. I have created a fantastic new dice game and want to know the first steps to marketing it without spending a fortune on world-wide patents. Where should I start? Name withheld

A. This is reminiscent of the Scrabble story and probably many other games where the creator is an individual rather than a corporation.

The simple answer is that there is no easy or well-trodden route to market for such new ideas.

As much depends on luck as upon careful planning, or even the quality of the idea itself.

However, with that caveat, there are certainly someinitial steps that youshould take. You do not give any details about the game itself nor about its target market.

You do not specify whether your objective is to make money from the game through establishing your own company and routes to market or whether you envisage the game to bean asset and plan to sellthe rights to a manufacturer.

Testing the market for the game is vital, as evidence you gather about its potential will help to persuade potential producers of its value.

Given that you are competing against electronic and interactive games that are universally available, and appear to be attractive to all ages, this market research is all the more important.

You do not specify the target age range but I am sure you are aware that it is much harder now to engender a craze similar to those that swept through schools as recently as a decade ago.

Assuming you can produce initial small volumes of the game through your own resources, you should consider setting up a website and also look at other potential low-cost routes to market for the immediate short term - the more exposure you give to your game, the more demand you could create and the more valuable the product becomes.

You should also consider consulting a lawyer specialising in intellectual property, who could advise you about registering any trademarks associated with the game and whether there are unique characteristics that could be protected in any way.

Jim Rogers, head of growth and strategic services at accountant Grant Thornton

October 14: Readers’ Questions

Q: I run a design business. A few years ago I employed two graduates and paid for them to attend several computer training courses. One of them has announced that he is leaving the company. Is it acceptable to ask him to pay back any training investment that he has received in the past 12 months? I have received a mixed reaction to this question but we spend a lot of money on training and feel that there is no point in doing this if people join a competitor.

Name withheld

A. A recent survey by the Chartered Institute of Personnel and Development reported that companies spend on average between £340 and £740 per employee a year on training and development activities. For many organisations that enter graduates into programmes leading to technical or professional qualifications the cost is often much higher. Other research demonstrates training as one of the most valuable benefits in attracting and retaining high calibre employees.

The starting point to answering this question is the employment contract. Many companies have a study policy written into their terms and conditions providing for repayment of training expenditure if the employee leaves within a qualifying period. Some companies write off the expenditure over the period of the contract. The rationale for this approach is that as the employee is trained, the organisation derives the benefit over time through their on-the-job productivity.

As an alternative, companies often incorporate these study terms into policy manuals or induction handbooks. These can have the force of contract provided they are appropriately circulated and communicated.

Failure to include provision at all leaves the employer on shaky ground as regards repayment.

In my experience, however, companies that reserve the right to reclaim training costs often do not do so. Each case should be judged on its merits but the company must balance the loss of workforce morale and employee goodwill against the sunk costs of a training course. Worse still, those that stay may be deterred from undertaking self-development.

It is a harsh reality that employees and their skills are portable. Remember that your employee’s replacement may well be a highly trained individual themselves and in turn you will reap the rewards of another’s investment.

Helen Lawson, director of management consulting services, BDO Stoy Hayward.

Q: I own a small software company in Scotland that has succeeded beyond my expectations. I have picked up a couple of clients in the Liverpool area and I am seriously thinking of starting an operation there. Should I move one of my senior people, who is willing to move, to north-west England and open a new office or would I be better acquiring a local company that already has a foothold in the area?

Name withheld

A: Many congratulations on your obvious success to date. The next stage in the growth of your company combines both important opportunities and significant risks. If you “move your own person” you will have someone in Liverpool that you can trust, who has a proven track record in servicing the needs of your clients, who knows your product and who will be better equipped to answer both current clients’ and target customers’ questions and concerns. The large amounts of effort you have taken to build a customer base will not go to waste. Do not underestimate the sales power of referrals by happy customers.

You could achieve big wins by incentivising your workforce for very little cost. For example, you can structure the move to incentivise the person involved by making him managing director – northern England rather than operations manager – Scotland. Linking that person’s pay to the success of the new branch will further motivate your employee to service your existing customers and attract new business to the region. Furthermore, this career progression will serve to motivate other employees in Scotland as they strive to prove they are ready for a similar move.

Moving to a new market is never easy and this type of growth is never predictable. Try to keep your costs flexible. I imagine the main costs of your new branch will be rent and payroll. My advice would be to take out a short lease on a property and negotiate profit-related pay with your important person.

If you acquire a local business you are purchasing local knowledge (a highly valuable commodity), a workforce (as long as their skills are valuable to you) and customers (if loyal).

Financial, legal and operational due diligence work is absolutely vital. For example, you need to ensure that the financial data you are given are reliable and not dressed up. You also need to ensure that the company’s existing customers are happy and do not invoke any change-of-control clause in their current contracts, leaving you with nothing more than another cost centre. Also check that there is no outstanding litigation against the company. This work is vital, valuable and not free.

My advice, unless you believe you have a cracking deal, is to use one of your existing people that you know and trust to lead the next stage of your growth rather than taking the higher risk route of purchasing an unknown quantity.

Stuart Watson, technology partner, Ernst & Young entrepreneurial services

October 7: Readers’ Questions

Q: I run my own catering company and have to charge my clients 17.5 per cent VAT on every invoice. However, it is a bit unfair because all food is zero-rated. I have heard that it might be possible for caterers such as me to pay less VAT. Is that right, or is there any other way I can reduce the VAT that I (and, by extension, my clients) have to pay?

Joanna Eeles from Sugar and Spice

A: Much of the food we buy in the supermarket is already taxable (e.g. confectionery, biscuits, crisps, and alcoholic drinks). It tends to be sales of unprocessed foodstuffs, such as vegetables, raw meat and fish that are zero-rated, although this can include some foods that are hot when sold, such as freshly cooked pies. When these raw ingredients are prepared, cooked and served in a restaurant, generally the whole supply becomes VATable as “catering”.

However, some catering can be zero-rated, such as sales of cold take-away buffets or sandwiches. Ultimately it depends on what sort of catering is actually being supplied to the customer and unfortunately it can get very complicated.

Charging VAT is not the end of the story, however. There is some compensation in the fact that you can reclaim VAT on the cost of cookers, transport and other overheads. Also, your customers may be able to recover the VAT you charge them if, for example, the catering is for staff.

Mike Beattie, tax partner at chartered accountants
Saffery Champness

Q: My company is an importer and distributor of paving and landscaping products. We need to open a distribution depot as part of expansion plans. We need a three-acre site but can operate from a modular building so there is no need to have an office building on site. Should I be looking for a yard or a unit on an industrial estate? I am looking within the M25. Can you advise me on how to search for a location?

Name withheld.

A: There is a huge demand for surfaced open storage sites in Greater London. Historically businesses such as plant hire, building materials and recycling companies have operated from industrial or fringe urban locations where land is cheaper.

Over the past decade we have seen substantial regeneration on areas for industrial and commercial use and also for mixed-use developments including retail, leisure and residential.

This pressure is continuing to reduce the availability of such sites and they are seen as the poor relation in terms of property investment, with investors taking advantage of development opportunities due to strong demand for higher-value uses, improved planning prospects and huge increases in land values and returns.

The net effect is that such properties are very rare within the Greater London area in particular and largely limited to sites that are earmarked for medium-term redevelopment and let to provide short-term income pending redevelopment. Your choices are limited and effort will be required.

Option 1: look at short term leasing situations, pending redevelopment – these can vary from six months to three years.

Option 2: focus on areas where redevelopment is physically difficult such as railway sidings, or sites riddled with underground services or obstructions too expensive to re-route or remove. Sites with impaired access (via low bridges) are worth considering if you can operate using smaller vehicles. More distant locations from London are also worth considering if you can operate from further afield.

Option 3: beat the developers by purchasing freehold land – you will need to budget well. Sites suitable for industrial development are selling from £800,000 per acre in parts of east and south-east Greater London, up to £2.5m per acre for prime land to the west, near Heathrow Airport. There are plenty of aggressive buyers, often off-market. There may also be additional demolition and resurfacing costs involved.

Option 4: consider leasing or purchasing built premises rather than just yard space. There is much more choice available but the costs are higher.

The best industrial property website is EGi Property Link via www.egi.co.uk. Other search options: request the Local Authority property registers, contact Network Rail, contact property departments of the main utilities companies such as Thames Water; call the commercial agents in the various suburbs and offer commission.

You should also try outside the M25 on the east and south east as there are more sites available there. Above all, be tenacious and do
not try to find anything in Stratford!

Laura Sutton is director of Savills Commercial in the industrial agency team.

October 1: Readers’ questions

Q: Could you advise me which foreign country would provide the best base for a small engineering consultancy? I am in the process of closing down my UK business to take advantage of business taper relief on company assets and would like to move abroad for a few years. Geographical location is relatively unimportant but easy immigration procedures, low personal and company taxation and good communications infrastructure are essential. Sunshine and good food would be a bonus!

Name withheld

A: This is a big decision. The first question is ‘Why are you planning to move abroad in the first place?’ If it is primarily for business reasons - to work and build a successful business - then issues such as language, culture, customers, competitors, people, your qualifications, visa requirements and potential local trading restrictions, become important.

But if it is primarily for a work break, then ‘sunshine and good food’ become the main drivers.

Once you have answered that question and have made a comprehensive list of your personal and business priorities, then draw up a short list of possible locations.

It’s impossible to generalise about the tax implications of such a move because it will vary depending on your existing personal wealth (capital), and expected earnings (revenue) from future business.

Various countries treat capital and revenue differently. You should seek advice about international tax issues in your favoured countries, considering business tax issues and personal finance affairs. For example, if you are to hold assets overseas you may need to draft a will in that country (as well as the UK) depending on local law. You should also seek local tax advice further down the line including implications from a UK tax perspective.

Once you have gathered all your information it is a good idea to draw up a scorecard. Allocate points based on what is important and how your needs are met in each of your short-list location (e.g. tax rate, weather, customers etc); this will give you a strong steer as to the best base for you and your business.

Jim Rogers, head of growth and strategic services at Grant Thornton

Q: I have a small consulting company that is unlikely to make a profit this year. I have agreed with one of my clients to take shares in lieu of payment for my work. These will be awarded in tranches on meeting certain growth milestones. Since shaking hands on the agreement we have both started to think about the tax implications. For my part I worry about how the shares will be treated as revenue for this tax year. If so, how would they be valued? I also worry that, on any future sales, the entire value of the shares would be treated as a gain, as if I had paid nothing for them. I don’t consider this to be the case as I am sacrificing cash today to get them. he shares could be worth up to £500,000 in three or four years’ time if things go well or they could be worth nothing. The client is keen for me to hold the shares in a separate company in case my company gets sold off. If that were the case, that would be the only transaction the new company would take part in.

Name withheld

A: As long as your company receives the shares as consideration for services rendered in the course of trade then receipt of the shares is likely to constitute trading income.

This ‘income’ will probably be calculated based on the open market value of the shares. Any sale of the shares later on is likely to result in a chargeable gain or capital loss, based on the open market value of the shares when they were received versus the proceeds from any eventual sale.

If your company continues to hold the shares as an investment then it’s possible that any business asset taper relief may be jeopardised if you sell your shares in your own company. If the shares are transferred to you or (broadly) to any entity that is not a subsidiary of your company, this raises a number of tax issues. For example, your consultancy company will be treated as having made a taxable disposal of the shares at open market value.

It is likely you will also be taxed personally on the open market value of such a transfer to you - or to a company held directly by you – as either a ‘deemed dividend’ or as a benefit in kind, which would also have National Insurance consequences.

A transfer of shares by you to a different company will be another disposal event but shouldn’t trigger any CGT liability, assuming the shares have not increased in value since you received them.

Also bear in mind that a gift of shares to a company could trigger an immediate inheritance tax (IHT) liability if you don’t hold all the shares in that company. This exposure exists even if the shares are transferred by your consulting company directly into the other company.

Rachel Goymer, tax adviser in Ernst & Young entrepreneurial services.

September 25: Readers’ questions

Q: “I run Fixits, an innovative toy design and manufacturing business in Newcastle. We want to access the US toy market but are not sure whether to license our products or link up with distributors. What is the best way to engage with and be successful in the US market?”

Afzaal Ahmed, Fixits

A: The choice Fixits faces is a trade-off. Licensing means lower margins but shifts the production and marketing problem to someone else. Working through distributors means higher margins but means increasing production and taking on a greater risk of unsold stock. The three key factors to consider are manufacturing capacity, core competence, and practicability. The US market should require a significant increase in capacity or a build-up of stock to satisfy the additional demand.

Developing a distribution network may only be profitable if Fixits can operate at a much larger scale. If Fixits lacks resources to invest in capacity or stock, or both, it may have no other choice than to license.

Secondly, Fixits must understand its core competence. New, fast-growing companies suffer because the skills needed to innovate and launch a company are not the ones needed to manage growth. Is the value in innovation or in manufacturing and delivery?

If products are well-protected, then licensing is a cost-effective way to generate revenue and will allow the company to focus on what it does best.

Finally, the practicability of the chosen route is critical. The toy market is highly seasonal, with some products generating more than 70 per cent of revenue in Christmas sales. Remember the success rate for new toys is estimated to be well below 5 per cent.

Negotiating a licence or distribution agreement is not an easy task. It could take out half of the management team for three to four months. In the short term, it may make more sense to demonstrate consumer interest in the UK and Ireland before licensing in the US.

Ben Thuriaux, manager, Arthur D Little
thuriaux.ben@adlittle.com

Q: “We started a company called Women Builders two years ago in Milton Keynes, providing skilled female workers for construction sites. We are currently looking at the possibility of franchising Women Builders and are not really sure which foot to put forward first. What should we do?”

Howard Shelley, Women Builders

A: You should think carefully about exactly what it is you are looking to franchise and satisfy yourself that franchising as a structure meets your needs and, in particular, that your franchise will be of interest to potential franchisees.

Key to this will be the robustness and distinctiveness of your brand proposition. You will need to think long and hard about the qualities and characteristics of your franchisees, then work hard on the terms of your franchise agreement.

If your idea is good, then someone will want a slice of it. On the other hand, they may just wish to steal it and set up in competition.

A potential franchisee will turn into a competitor if the franchise route is not compelling enough. You need to be careful here, not least because your potential franchisees won’t depend on your franchise for two of their key attributes: the fact that they are builders and they are women. The building trade is a fragmented industry, where many people go it alone.

The right people are key. The wrong individuals can ruin a brand. The right ones will make it. Remember the fire in the eyes of the Body Shop franchisees in the early years.

And the franchise agreement? This is complicated but lots of people have been there before and you should take advantage by getting professional advice. The British Franchising Association website, www.british-franchise.org, has a list of professional advisers.

Rupert Merson, partner, BDO Stoy Hayward
rupert.merson@bdo.co.uk

Q: “I set up an interior design business in January and my client ‘net’ has already spread into groups of people whom I did not know at the outset. As a one-person business, I have tended to do small projects so that I can juggle two to three of them at a time. I have now been approached to tender for a large contract, which would increase my experience but prevent me from doing any other projects for approximately a year. Is it worth it?”

Antonia Lazenby

A: Outlining your personal and business goals will help determine your business strategy decisions. Take a step back and look at whether taking on a year-long job will help you achieve your ambitions.

Is your goal to remain a one-person business with a broad client base, or to become a larger entity with employees, tendering for long contracts on big jobs?

You appear to have built up a good contact base already but you need to know how quickly you can rebuild that base if you lost contact with clients during the course of the year. Would you be able to leverage off this large contract by using their name as a key reference, helping your profile in the market place through brand association? Can you find ways to keep your current contacts fresh whilst on the larger contract? For example, you could spend two days a month developing new business.

You also need to consider the financial implications. Will the contract price be sufficient to buy you time, after completion, for business development? How will the payment terms affect your cash flow?

Jim Rogers, head of growth and strategic services, Grant Thornton

jim.n.rogers@gtuk.com

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