Coming out from Lockdown
With a road map now in place to exit the pandemic lockdown, Shaw & Co’s finance expert Colin Burns highlights what business owners should be considering in advance of ‘coming out’.
The ‘new normal’ is certainly a buzzword many business owners are familiar with. However, it is worth considering what this may look like from a practical point of view. Many businesses have already adopted a variety of new working practices. Whilst it makes sense to review these, it’s also worth considering whether they should become a permanent feature of day-to-day operations once lockdown ends. Here I share my thoughts on what owners should consider:
1 – Covid safety measures in the workplace
These will continue for some time albeit probably diluted depending on how successful we are in containing the threat from the virus and its mutations. It is highly likely that employees who are now used to working from home will want to retain an element of flexibility around this and employers will need to balance this desire in a way which maximises benefit for all parties.
It may be possible to reduce some overhead costs as a direct consequence of lower ‘in office’ activity. Bear in mind much of the technological cost in facilitating home working will already have been borne by the business so why not maximise it? One obvious ramification will be for property investors as office space may no longer be desirable and rental yields will inevitably be squeezed with supply likely outstripping demand.
2 – Leveraging the benefits of technology
Taking the technology theme further, I believe all businesses should fully embrace technology to help deliver not only efficiencies, but more collaborative and intelligent working. We now have commercial agility that was not thought possible pre-pandemic. Even though we are strong at innovation and have some world class systems deployed throughout larger companies, the UK’s adoption of ‘tech’ is only 16th in Europe and 31st globally according to 2019 World Economic Forum’s global competitiveness report.
3 – Government support schemes
Following the recent Budget statement, it is clear that some elements of government support will continue, not least the extension of the Furlough Scheme until the end of September. The tailwind effect of the various government loan schemes launched during 2020 are going to transition to a ‘Recovery Loan Scheme’ from April 2021.
While a continuing support scheme for lenders is welcome, the key difference here is that it no longer attracts the Business Interruption Payment. This means any new borrower under this scheme will be required to cover the interest costs and capital repayments from day 1 in addition to any fees payable. It remains to be seen whether this will be a widely adopted product or, perhaps like the predecessor to CBILS – the EFG Scheme – it will struggle to gain traction.
4 – Impact of Budget 2021
The Chancellor’s Budget covered a number of topics and excluded others – notably the possible change in capital gains tax (CGT) which would impact owners looking to sell their businesses. This uncertainty in particular has driven the recent high levels of M&A activity with strong multiples continuing to be achieved for businesses in ‘preferred’ sectors.
We expect high levels of M&A activity to continue with future CGT hikes no doubt remaining under review and business owners reassessing their own personal circumstances particularly in light of the challenges posed over the past 12 months. It is worth reading our ‘Ultimate Exit Guide’ for some useful tips should this be anywhere on your agenda.
A few other key points from the Budget include:
- £5bn allocated for ‘re-start’ grant to help companies to get going after lockdown.
- Increased annual allowance for investment up to £1m from £200k. To help turbo charge this capital investment, they announced a 130% ‘Super Deduction’ capital allowance for qualifying plant and machinery investments. It will be important to read the fine print on qualifying assets to make sure tax benefits are maximised, although tax relief itself should not be the sole business motive behind investing in new machinery! Proper planning of asset utilisation and return on investment still need to remain the key cornerstones of any investment decision.
- Corporation Tax hikes, as expected, have been deferred until April 2023 when they will increase to 25%. This will only kick in where reported profits are in excess of £250k with those reporting profits less than £50k continuing to be taxed at 19%.
5 – Reduced VAT rate in hardest hit sectors
There will be further support for those sectors hardest hit by the pandemic such as hospitality, leisure and travel. This includes a continuation of the reduced VAT rate of 5% until the end of September, increasing thereafter until normal rates resume by April 2022. This is in addition to waiving business rates for hospitality and leisure for 3 months and then discounted by two-thirds for a further 9 months.
With the fiscal deficit resembling post WW2 levels there will be a difficult rebalancing of the economy in the years ahead. Tax rises are inevitable with the most profitable businesses clearly (and understandably) bearing the brunt of this as mentioned above. Careful tax planning will clearly be a priority to maximise disposable income for reinvesting in growth projects.
6 – New hires
In terms of growth, this might be a good time to consider new hires to cope with fulfilment of order backlogs. There should be plenty of highly qualified and motivated people seeking new challenges. We have spoken in previous articles about market consolidation and for those coming out the other side with a strong balance sheet, opportunities will definitely present themselves.
A recent survey by the British Business Bank suggested much positivity about growth potential from small and medium sized businesses with 35% and 38% of respondent respectively expecting growth.
7 – Managing liabilities & working capital needs
Unfortunately, very few businesses have avoided a build-up of certain liabilities during the pandemic – property arrears, tax liabilities, additional debt to name but a few. HMRC have set up a dedicated COVID-19 Helpline and may be able to agree further bespoke Time-to-Pay arrangements. We expect this Helpline will be more of a ‘Hotline’ – let’s hope the department is well staffed! It is therefore essential to consider the working capital needs of the business and whether the financial resources you have available will be sufficient to address the likely pressure to normalise these liabilities.
Now is certainly the time to dust off those business plans and, with Brexit bedding in, perhaps new markets beckon? Being flexible and a having a willingness to adapt to changing market dynamics will be key as we exit lockdown in the months ahead.
8 – Competition & consolidation
Whatever the challenges, your business won’t be alone in facing issues – your competitors are very likely suffering the same effects. As the saying goes “never let a good crisis go to waste”. Some of your competitors may not have weathered the storm quite as well as you. With a bit of prudent acquisition finance, you may well be presented with expansion opportunities that solidify or grow your business, whilst rationalising central costs and capex requirements. Some of the best deals are done in a downturn.
Colin Burns, Funding Advisor, Shaw & Co
Colin Burns is a Funding Advisor at Bristol-based Shaw & Co. He is part of one of the largest corporate finance advisory teams in the South West. He is a fully qualified Chartered Banker and Green Finance Certificate holder. Over the last 15 years he has arranged facilities in excess of £250m in over 20 MBO transactions including small owner managed businesses and listed corporates.