Breaking up in business

Sometimes things don’t work out in business and it’s time for the owners to go their separate ways.

It’s fair to say that business relationships usually begin with enthusiasm and passion, grow through balance and communication and endure the highs and lows of life. Sometimes, however, businesses don’t weather the storm and things come to an end. As such, it is important to have a plan.

In business, having clear agreements around how the partners can exit the business is acknowledged as good practice. As such, it is important to have this conversation at the beginning a of a business partnership and document it.

When selling or exiting a business, it’s important to remain professional. You might feel disappointed over a failing business partnership but angry or emotional communications won’t help the process. Take your time, remain calm and if you find yourself drafting a sharp-toned email, save it to your drafts and review it again the next day before deciding whether or not to send it.

Always seek professional guidance – there are lots of financial and legal experts in the market who have considerable expertise in this area and who can help you to successfully exit your business.

When the time comes, you need to have a good understanding of your firm, its financials, any outstanding issues, etc. If you and your business partner(s) decide to sell the firm to another company, the buyer will be keen to download your knowledge of the business. If you can explain things in detail to the potential new owners, it will help to build their confidence in the deal and could positively affect how much value they assign to the purchase.

Financial issues and long-term partnership agreements can complicate matters. However, you should aim to exit your business in a way that is mutually beneficial and satisfactory for everyone involved.

Fast Follower Versus First Mover Advantage

Most of us are familiar with the term “first mover advantage” but sometimes the “fast follower” is the winner.

A Fast Follower is a company that quickly imitates the innovations of it’s competitors by collecting research and data. By figuring out the innovations that seem to have the greatest potential, companies are able to weed out the “duds.” For example, many people consider Google to be the innovator of the pay per click search engine. Google was actually a Fast Follower. A firm called Overture came out with this idea two years before Google launched it’s superior version.

By learning what Overture was doing right, Google was able to spend more time focusing on what they could do better. This learning process is one of the main components of the Fast Follower strategy.

A similar situation occurred in the mobile phone market. Motorola pioneered the mobile phone. Samsung and Apple were late to the party but today they are market leaders in this highly competitive market sector because they found a way to do it better – they focused on making smart-phones with touch screens, great cameras, email and internet functionality.

The First Mover generally has to invest considerably in research and development. They have to test various options before bringing their new innovation to the market. Fast Followers can leverage off the research that has already been invested in by the First Mover so their time to market is faster and their research & development costs are usually lower.

That said, the First Mover will set the benchmark for their particular market. Fast Followers therefore have to work hard to offer a solution that is better in some way. The Fast Follower needs to get this right.

Consumers are generally more forgiving of First Mover errors. If a Fast Follower enters a particular market, the existing customers of the First Mover will have set their expectations and they will tend to expect the Fast Follower to meet or even exceed those standards, in order to trigger a buying decision.

While First Movers can gain a competitive edge and initial market share, there’s a lot to be said for the Fast Follower approach and learning from the mistakes of others. However, Fast Followers need to be just that – FAST.

How to avoid becoming a micro-manager

Holding your employees accountable without micro-managing can prove difficult for any business owner or manager.

We have all been in a situation where we know we can do something better ourselves. We find it difficult to watch someone make mistakes but if we interfere we can end up falling into the trap of micro-managing our employees.

Micromanagement is the ultimate controlling management style. It involves trying to manage and personally control, monitor and approve every decision, every team member or every situation. From an employee’s perspective it is demoralising as they feel that they aren’t trusted and that their manager is always checking up on them.

If you struggle with delegation, you are more likely to become a micro-manager. Delegation isn’t easy. To begin with, you need to be comfortable with the fact that you can’t do everything yourself. You then need to identify the tasks that you are happy to delegate to others. In some cases it can be helpful to set out your strategic plan in writing then transfer the necessary knowledge to a team member that you know will be able to handle the task.

Over time, you will learn to let go of the notion that everything needs to be perfect. In reality, nothing is perfect. In business, everything should be fit for purpose but this doesn’t mean it must be 100% perfect.

In order to avoid micro-managing your employees, begin by hiring good people. If you hire a team of people who inspire confidence and are keen to take on responsibility, you will feel more comfortable trusting them to do their job. Before hiring a new team member, consider the current needs of the business, the team dynamic and make sure that any new recruits will fit well within the existing team.  If you trust and respect your people, they will perform well and you will find it easier to step back and let them do their jobs.

Finally, empower your team members to make decisions. Arrange regular update meetings regarding progress, make yourself available in case they have any questions that they want to run by you, but give them ownership of their objectives and make them accountable for delivery of their responsibilities.

Key Business Trends for 2020

The environment, wellbeing, mental health and technology look set to be some of the big business trends in 2020.

As we move into 2020, businesses will have to adapt in a world that places greater emphasis on sustainable business practices. People will want to work for firms that take care of their employees in terms of their physical and mental health.

Technology will continue to be the key enabler to allow us to work flexibly, remotely and more effectively. It looks like 2020 is set to be a busy year for businesses in the UK and internationally.

Customers are becoming more environmentally aware. Companies like Beyond Meat, the maker of plant-based, protein-rich foods or Everlane, which creates clothes from recycled fibres and plastics, are gaining traction. People are trying to reduce their carbon footprint and are making buying decisions on the basis of the environmental credentials of businesses.

As a result, businesses are responding by focusing on their environmental and sustainability policies. Many firms are adapting their CSR activities to include environmental projects in order to help drive the green agenda in local communities. As we move into 2020, this trend is likely to accelerate.

On the technology side of things, machine learning and artificial intelligence (AI) are continuing to advance. The AI industry is growing and businesses have access to more powerful tools in order to create new customer experiences. For example, music-streaming service Spotify uses AI to make the listening experience more personal by creating customised play-lists for each user.

Younger workers are putting greater emphasis on physical wellbeing and their mental health. Employers will need to adapt in order to attract the next generation of talented employees. Flexible working and wellness programmes are high on the list of priorities for Millennials and Generation Z employees. The businesses that really embrace these new trends will attract the best people.

ADVISORY FUEL RATE FOR COMPANY CARS

These are the suggested reimbursement rates for employees’ private mileage using their company car from 1 December 2019. Where there has been a change the previous rate is shown in brackets.

Engine Size

Petrol

Diesel

LPG

1400cc or less

12p

 

8p

1600cc or less  

9p (10p)

 
1401cc to 2000cc

14p

 

9p

(10p)

1601 to 2000cc  

11p

 
Over 2000cc

21p

14p

14p

Note that for hybrid cars you must use the petrol or diesel rate.

You can continue to use the previous rates for up to 1 month from the date the new rates apply

DON’T FORGET THERE MAY BE TAX TO PAY ON YOUR DIVIDENDS IN JANUARY

The rules for taxing dividends changed radically from 6 April 2016 with the removal of the 10% notional tax credit and the introduction of new rates of tax on dividends. For many taxpayers that means more tax to pay on dividends on 31 January each year.

If you are a higher rate taxpayer and received £22,000 of dividends in 2018/19 only £2,000 of those dividends are tax free now, leaving £20,000 of those dividends to be taxed at 32.5% meaning £6,500 due on 31 January 2020, and possibly payments on account of your 2019/20 liability, unless your tax liability is likely to be lower in 2019/20.

FINANCE BILL SHOULD NOW PROCEED

Now that the General Election is out of the way, the tax changes in the draft Finance Bill scheduled to take effect from April 2020 are now more likely to go ahead.

The key tax measures “in limbo” until legislated in Finance Act 2020 are:

– Extending the “off-payroll” working rules to the private sector

– Restricting R&D repayable credit for SMEs

– The proposed 2% reduction in P11d car benefits

– Limiting CGT private residence letting relief

If the changes to CGT private residence letting relief go ahead from 6 April 2020, it may be worth considering the disposal of a property that currently qualifies for this relief before 6 April 2020.  The “off-payroll” working rules will almost certainly proceed, even if not from 6 April 2020, and thus businesses and workers affected should prepare for the planned changes. Contact us if you need help in assessing the likely impact on your business.

NEW YEAR’S RESOLUTIONS TO SAVE TAX

At this time of year we think about New Year’s resolutions. It is also a good time to start planning your tax affairs before the end of the tax year on 5th April.

An obvious tax planning point would be to maximise your ISA allowances for the 2019/20 tax year (currently £20,000 each).

You might also want to consider increasing your pension savings before 5 April 2020 as the unused annual pension allowance is lost after three years.

For those looking to do some inheritance tax planning it would be a good time to review (or make) your Will.

PENSION PLANNING

For most taxpayers the maximum pension contribution is £40,000 each tax year, although this depends on their earnings. This limit covers both contributions by the individual and their employer.

Note that the unused allowance for a particular tax year may be carried forward for three years and can be added to the relief for the current tax year, but then lapses if unused.

Hence the unused pension allowance for 2016/17 will lapse on 5 April 2020 if unused. Note that under the current rules the net after tax cost of saving £10,000 in a personal pension for a higher rate taxpayer is only £6,000.

GIFTS OUT OF SURPLUS INCOME

Inheritance tax only applies to gifts of capital. There is currently a very generous exemption from inheritance tax for regular gifts out of income. In order to qualify for the exemption it is important to set up regular transfers and to be able to prove that after those regular gifts you are left with sufficient income to support your normal lifestyle.

We can assist you in taking advantage of this generous exemption and keeping the necessary records for HMRC.

There are a number of insurance based products that take advantage of this relief and the regular payments could be used to fund school fees for children and grandchildren.

PASSING ON THE FAMILY HOME

The Labour party were proposing to reverse the recent Tory party inheritance tax cuts if elected. They were referring to the additional nil rate band for passing on the family home. This additional relief should be taken into consideration when drafting your Will and we can work with your solicitor to make sure your Will is tax efficient.

When fully phased in from April 2020, an additional nil rate band of up to £175,000 is available on death where your residence is left to direct descendants.

This is on top of the normal £325,000 nil rate band.

The residence nil rate band is however restricted if your assets exceed £2 million. The rules are fairly complicated but we can review your personal circumstances to enable you to take advantage of all the relief that you are entitled to.

Note that the additional inheritance tax relief is available even when you downsize to a smaller property or move into care, provided assets of equivalent value are left to direct descendants in your Will.