Family Business ~ Insight | 2014 – A Year of Progress

Overall 2014 has been a year of positivity for the Covisory team and for our clients. It’s been great to see clients pursuing new opportunities and projects again with a positive outlook. Thank you to all our clients ~ we have enjoyed working with you and being part of your support team.

In 2015 we have a number of new projects coming into play and look out for our new look website that now splits out into three distinct divisions:

  • Covisory Partners
    • Where you will find how we can help you with Tax, Business Advisory, Succession & Governance
  • Covisory Management
    • Where you will find how we can help you with Valuations, Relationship Property Analysis & Forensic Accounting
  • Covisory Trust Services
    • Where you will find how we can help you with Trusts, Trusteeships, & Foreign Trusts

As always we love catching up with you and the many questions and projects you have involved us in.

Again best wishes for Christmas and bring on 2015. We can’t wait!

Nigel&Sally

Family Business ~ Insight | Base Erosion and Profit Shifting (BEPS)

There has been a lot of talk in the media and in tax circles recently about BEPS proposals internationally.  Basically the problem is that countries do not believe that existing transfer pricing regimes ensure that the correct amount of tax is paid.  One only needs to look at companies like Google, Starbucks and Apple to see the contrived international structures that they use.

However, in our opinion, BEPS is likely to never go anywhere.  The reason for this is simply that countries are not going to collectively sit down and work out how a corporate group’s profit should be divvied up between them and who gets the right to tax what.  Firstly, they do not have territorial authority over profits made in other countries.  Secondly, it ignores the simple political reality that each country will want to take a greater share of the profits and tax them than the others may agree.  For example, developing countries where goods are manufactured will argue that they should receive a greater share of the profits because they actually manufacture the goods, whereas developed countries will argue that they hold the IP and the IP gives rise to the profits.

The real problem underlying all the discussion around where tax should be paid and how much tax should be paid is that the very countries that are whinging and whining about the use of these structures are the very ones that create the opportunities.  The beneficial tax regimes in Ireland, the UK and the USA are there for all taxpayers to use.  Often the governments will put them in place so that they retain the very large companies that they then berate for paying no tax.

In some ways the analogy is of letting a child into a candy shop, not supervising them and simply telling them they should not help themselves to any lollies when all the lids of the jars are taken off and they are all within easy arms reach.  The governments themselves need to look at their rules before they can get concerned about what the companies are actually doing.

Family Business ~ Insight | A Recent Tax Case you need to take note of

Greymouth Holdings Limited v Jet Trustees Limited

This is an interesting little case out of the High Court involving a shareholder dispute between three different parties.  Court orders were made in 2013 requiring the group 2 shareholders to effectively sell their shares to the other shareholders but in actual reality the order was made to sell the shares back to the company itself.

What is interesting with the case is not the legal dispute, but it highlights a fact that we have seen before.  Often in litigation between commercial parties, where settlement is made, the transferor of shares often executes an agreement stating that they will transfer them to the transferee or their nominee.  Often the transferee will attempt to have these shares repurchased by the company but the consequence of this is that the transferor is deemed to receive a dividend which is taxable.

This would mean that the transferor is taxed on the share consideration and it is no longer a capital gain.  Naturally this reduces the net consideration received.

In the Greymouth Holdings case the court found that its orders were explicit that the fair market value was to be paid but this included the resident withholding tax, ie it was not Fair Market Value plus RWT.  There was no other right of set up or lien.

Accordingly, when dealing with sales of shares and in particular commercial disputes between parties which are settled, ensure that any nomination clause excludes the repurchase by the company itself.

Family Business ~ Insight | The Roles of Family Business in our Economy

At Covisory we are focused upon and dedicated to family business.  We do some work for corporates but our primary focus is on family businesses and their owners.

In our experience family businesses are more innovative and often able to out perform larger more financially resourced businesses.  This is because they are nimble on their feet and able to adapt and innovate quickly.

However, family businesses still have their own challenges.  There is always a need to balance the family and business issues and we see that in the parallel planning process that we so often go through with our clients.  If a family business makes $100 of profit after tax, there are going to be a number of competing demands on that profit.  These can range from paying the owners a dividend, to reducing debt within the business or privately, to funding capital equipment purchases, working capital or research and development.

The parallel planning process is about looking at where a family is going with the business and where the business is going itself and making sure that the two are in alignment.  Often it involves a recognition from the family that they simply cannot strip all of the profits out of the business, or from the business that the owners are entitled to a fair return on the money they have invested, particularly if they are not financially independent from the business.  This is an important challenge for owners to make sure that all their wealth does not remain tied up in a single risky asset being their business.  We have all seen too many businesses fail when Mum and Dad are getting close to retirement so it is very important to ensure that Mum and Dad put other savings away along the course of the businesses life to fund their retirement.

Maintaining the family control of the business is also important.  However, in our experience there has been a greater recognition that especially for higher value businesses often the best answer for a family is to sell it at the appropriate time and deal with the family by looking at how that money is distributed not only between Mum and Dad, but the children as well.  This could include both participating and non-participating children within the business.

Grooming a business for sale is not a 5 minute job.  We remain frequently surprised at how often owners of businesses think they can simply put their business on the market, and it will be sold and they will be retired in 3 months.  While this might be achievable, in our experience too often they will leave too much money on the table and ignore a number of viable alternatives.

The sale of a business is a process, it takes at least 2 – 3 years if you want to maximise your value out of it.  We normally like to look at all your key contracts and ensure that they are well documented and in place.  A good information memorandum is a must but it is also important to make sure that the business becomes more independent of Mum and Dad, the private costs are removed, that financially the results are optimised and that even a financial audit is obtained on an annual basis from a reputable accounting firm.  Whether that needs to be a big 4 or an international firm depends on the size of the business and who the likely buyers are.

In some cases we will work with owners of businesses to sell down a part of their business and take some money off the table.  This might lead to a further sale or listing in the future, or in some cases it may simply be the sale of a part of the business to a long term co-investor.  Either way, it is a good way of Mum and Dad getting some money off the table that is safe and can provide for their retirement.

For many businesses, Mum and Dad live the dream that children will come into the business.  While this is a worthwhile dream and should not be dismissed, it can cause tensions within the family particularly if that business ends up going to the child that came in, yet other children were not given the opportunity or appropriate financial compensation.  The passing of a business to a child or children can actually blow families apart if it is not handled properly.

More than likely, there are also issues from a hand over view point as often Mum and Dad simply don’t want to pass the business on to the children and the handover is haphazard and problematic.  Careful succession planning is needed to pass a business down through the generations.

So why are we stating all of this when it is probably the obvious, simply because in our experience it is obvious but sadly most family businesses don’t actually stand back from the business and look at whether they are running it to take cash out of it, or to build up its capital value and sell it ultimately.  The business may be the goose that lays the golden egg, but in reality you have to look after the goose and not make it lay too many eggs or it may suffer ill health.  Also, if you want to sell the goose in the future, you need to make sure it is in good health and producing as many eggs as possible.

At Covisory Partners we frequently work with business owners to help them maximise their exit value on the business, but more importantly to go back a step before that and look at what the real options for their businesses are.  To often families will not know what to do with a business and will end up selling it only because they met a business broker or private equity firm that tells them that’s the best thing.  Those firms are not necessarily interested in maximising the value out to Mum and Dad.  Whereas at Covisory we will look at all the options for you.  In our experience, too much money is left on the table by families exiting their businesses.  Will you make the same mistake?