A Life In Numbers

If you have yet to attempt to complete an online Annual Return for Companies house then you may need to set aside a good chunk of time and have a few painkillers to hand.

If you have a business that is a simple private company with just a few shareholders and only one issue of shares all at the same price then you shouldn’t have too much trouble.  However, anything more than that and you could find yourself facing some serious frustration.

With good reason, Companies House is encouraging companies to submit their Annual Returns online and the cost for doing so is half that of a paper submission.  And, to their credit, some good changes have been made such as allowing more that 99 shareholders to be added (a limit not made explicit until you tried to manually enter the 100th and found you just couldn’t any further and then needed to repeat the process on paper) or the inability to handle low nominal values for shares (compounded by an inability to understand this was an issue) which has now been fixed.  However, I’m also hearing of instances where paper forms are being rejected because online ones have been started and this means the online version has to be useable and practical.

Where are the major issues now?

Firstly the requirement to update your directors details with the Country/State of Residence.  Not too complex in itself but it feels like repetitive information which is already included in the address.  When you select the country then you are prompted for a “date of change” which is not abundantly clear as most of your directors will not have had any change.  The answer here, according to Companies House, is to put the date of the Annual Return.  Also, although there seems to be an implication that you will also have to complete a 288c for this change, I’m assured that this is not necessary (as there’s been no change!)

The next challenge comes by way of the “Amount paid up on each share:” which has clear notes stating “The amount should include the share premium.”  Unfortunately, if you are a company, as many are, which has had more than one issue of the same class of share at different prices (multiple financing rounds either up or down) then the single box allowed for the submission of this data seems woefully inadequate.  Now, admittedly there is a later note which says “Multiple amount paid and unpaid details within the same class of share.  This form is not currently able to capture multiple paid or unpaid amounts for the same class of share. This information can currently only be provided using the Software Filing service or by submitting the paper version of the form.”  and they seem to be adding this sentiment liberally across the site, so it is obviously causing some consternation. 

The main issue here is that it smacks of a set up that has not been fully thought through.  Unfortunately, it seems it’s also not been communicated clearly to the help desks at Companies House.  I’ve had two separate calls today where I was told “just put the paid up share premium” and when I enquired how I should handle multiple values I was told “just put the current one”; then “put the total share premium”; then “just put in what’s needed to pay it off”; then “I’m not sure I understand this” then “sorry the technical department is busy” and finally “we can’t give you guidance on this and you’ll have to take your own legal advice”.  Our lawyers have confirmed this is a complex issue.

A little more digging has confirmed that the BIS (Business Ideas and Skills department) of BERR (which once upon a time was the DTI) have identified this as an issue.  This link BIS Paid Up Capital explains a little more and they are referring people to ICSA ICSA Guidance for more guidance.  The ICSA essentially say do what you can to provide information but if it’s too complex then ultimately just dividing the total share premium account by all shares should do the trick. 

I understand Company Lawyers are currently advising clients to go the paper submission route and submit all relevant details.  Ultimately it looks as if there is a realisation that this aspect of the Companies Act 2006 needs a little more work and there is talk of a change being made.  If you’re stuck with the online (which you will be if you’ve selected the “Proof” option then you’ll probably need to follow the ICSA guidance.

The next challenge to be faced is the Prescribed particulars (of rights attached to shares) which provides a relatively small box for a whole lot of potential information. 

Here the challenge may come for small companies, where they only have Articles of Association and no Shareholders Agreement and they will have to pick their way through understanding what’s relevant and ensure they don’t include information relating to Directors instead of shareholders.  For companies with more complex structures and detailed Shareholders Agreements as well as Articles, it’s unfortunately not possible to just write “as detailed in the Articles”.  You have to go to through and select all the relevant information and cut and paste it into the boxes in some coherent format. 

I’ve seen indications that there might be a limit on the amount of data that can be input but I haven’t found out whether that is actually the case.

There have been some interesting questions as to the objective of this particular request, as excerpts from Articles and Shareholders Agreement will never tell the whole story and for any potential or existing shareholders they would be better off getting hold of the complete documents.  So for small and medium private companies this does seem an extra burden that serves no real purpose.

 The details that have to be extracted for each class of shares are as follows :-

(a) particulars of any voting rights, including rights that arise only in certain circumstances;
(b) particulars of any rights, as respects dividends, to participate in a distribution;
(c) particulars of any rights, as respects capital, to participate in a distribution (including on winding up); and;
(d) whether the shares are to be redeemed or are liable to be redeemed at the option of the company or the shareholder and any terms or conditions relating to redemption of these shares.

There are a lot of beneficial changes coming out of the Companies Act 2006 but there is still a need to make sure companies can operate and continue without being overburdened by bureaucracy.  For many SMEs it feels like government departments assume you have as many administrative staff as they do.  There’s still a real need to reduce these burdens on hard pressed SMEs, even more so at a time of cost reduction when many are doing their best to get by and keep their staff employed. 

The new Companies Act is a decent step forward in many areas and it’s helping to simplify matters but at the same time its brought in some extra demands that do need more consideration as to how appropriate they are for certain types of companies, especially when it comes to SMEs.

It’s good to see that there’s some consolidation in the market for part-time FDs. The recent merger of FDUK and FD Centre shows that there is more interest than ever in the use of flexible finance resources by large and small companies.

As the credit crunch bites and companies come under more pressure to manage their cash, more and more CEOs and MDs are finding that they have more than enough to occupy their time without having to look after the company finances too. Operations that could be handled in a growth market now become much more challenging. And it doesn’t take much of a shift in the finances of a business to take it from healthy and prospering to wounded and struggling.

The continued growth of companies providing the services of a part time FD or CFO, shows how a good management team can make a great decision when they bring on an experienced finance professional. And there’s lots of choice, from the independent providers to the multiple franchise services. And between those two there are specialist organisations, like us, which bring a very focussed service to their clients.

A recent survey showed that the majority of Finance Directors in the top UK companies are now being paid over £1m a year. And most good FDs in both public and private companies are now commanding salaries of over £100,000 a year. And those are being paid because of the value that they can bring to the companies. Of course not every one brings an equivalent value, but if you have the right person in the role then the worth they can bring will be many times their salary in terms of value created and costs saved.

For an SME, £100k or £1m is most likely a step too far, unless they’re very cash rich or extremely well backed. This is why the flexible and part time FD is becoming more popular. When you consider that a full time FD on a salary of £120,000 is going to cost you at least another £90,000 in bonus, pension, employment costs, NI and recruitment fees. Not to mention share options and notice payments. And after all that, they may not even stay if they get a better offer elsewhere. Also, they won’t be working on your finances all the time you’re paying them once you take into account holidays, sick leave, training, general downtime and all the time they spend getting drawn into matters other than finance.

So is a good FD worth the money? My friend Tony told me a recent survey said that 9 out of 10 of companies believe it is. And 100% of the top performing companies think so. When you consider a good FD can bring at least 10 times their cost in added value to the company then the answer becomes very clear. The biggest challenge for a business owner is really going to come down to the commitment to the cost and the risk that they may not need all the time, all at once.

Will we see a part time FD being paid £1m, like the ones in the top UK companies? If they can bring £10m of value then it still seems like a good deal. Would you pay £100,000 for someone worth £1m? It would be hard to see why not, if you could afford it. What’s it worth to see your business protected from ruin? What’s it worth to see your business sustained during a period of economic crisis? What’s it worth to have your business prepared for the growth that can be achieved both during the current climate and in the future? When you look at it this way, you can see why companies are turning to FDs they can trust.

And that’s why I believe we’ll continue to see significant growth in the flexible and part-time FD market. Because smart CEOs and MDs can see the value they bring. And they like the flexibility and advantage of having an independent resource that can be called upon when its needed and dialed down during the quiet periods. And that’s definitely worth something.

I was having a discussion recently with a business partner of mine about whether the value of companies in the Web 2.0 sector is fully understood.

Back in the days of the dotcom boom we sold a company called Smartgroups to Freeserve for £60m. At the time we had very little revenues and certainly no profit. But we had a very good piece of software, a fast growing customer base and a great idea about how to generate revenues off the back of the service. Luckily, in Freeserve, we found a number of key individuals who completely understood what our company and service could bring to their business. Applying our software and service to their customer base could generate huge value for the business and that changed the way that the value of the company was viewed.

Now it would be easy to write off this deal as just another (for a change successful) example of internet euphoria. However, the priciples are still intact today and companies are still being valued and acquired on the basis of the future value they can bring to the acquiror.

If you read any academic or financial books on valuation of companies (and I’ve read a lot!) they invariably go down the route of valuing companies through variations on discounted cash flows (with or without terminal values), NPVs, revenue and profit multipliers (with much debate about the relative appropriateness of EBIT, EBITDA, EBITDAR, PBT or PAt), p/e ratios, betas and other more complex calculations involving variants of the Black-Scholes model or the Modigliani-Miller theorem.

However, in the past 20 years of working in this field, I’ve found there is a more fundamental valuation technique that seems to be known only to a handful of financial alchemists and some of the highest performing sales people.

A company is worth whatever the buyer is to prepared to pay for it.

All the financial analysis is generally used to justify the valuation (or at least give it some credence) after the event. Sometimes it stacks up, sometimes it doesn’t.

If you’re a large company, especially a quoted plc, who is looking to acquire a company that will simply add revenue and profit to your bottom line then looking at your own p/e ratio and applying that to the profit that will be added through the acquisition is a perfectly rational method of valuation.

However, if a company is being acquired because it brings new technology or IPR, because it solves a problem that has been holding back sales or development or because it brings a business advantage that can be applied across a much wider customer base, then the value needs to be considered in terms of the additional value it can bring to the acquiror.

A company like Oracle, for instance, with a Market Capitalisation of over $100bn may see that buying a company with a technology or business application that could enhance their profits by 0.5% could add $500m to their market value. This means that, although there would doubtless be some shrewd negotiation, the value of that acquisition and the price they might be willing to pay could rise up to $499m and they would still come out on top. Of course in practice this would be unlikely given all the risk factors involved but it allows you to see acquisition values in a different context. And if you have a software company that is just breaking even then it might encourage you to think wider than just achieving a high multiple of your profits.

After all this, the conclusion we came to (following the discussion at the start of this post) was that many people, even experienced financial experts and business people, still don’t fully understand how valautions are achieved. And after last week’s episodes in the financial markets they might be even more confused.

There’s something special about working with entrepreneurs. It can be challenging at times and it can also be extremely rewarding.

The biggest challenge for accountants working with entrepreneurs is that they don’t always follow the rules. In fact, it’s quite rare. This means that a large part of the job can be running around after them clearing up the apparent chaos they leave in their wake. Unfortunately, this can be equally true of both the good ones and the bad ones, and it’s not always apparent which is which (although you can often spot the really bad ones quite quickly).

If you look at successful entrepreneurs they have rarely followed a path of checking all necessary legislation and statutory requirements before setting off. And those that start up businesses trying to do everything by the book and do it all properly often find they fail before they even begin. They get so wound up in red tape and bureaucracy that they don’t have time to actually find clients and start the business. The ones that make it are more often than not those following the Richard Branson cry of “Screw it, let’s do it”. They’re the true entrepreneurs.

So what’s Entrepreneurial Finance? It’s really a way of making sure that the financial operations behind the entrepreneurs business really support what the company is trying to do. It means close management of cash and fast, effective reporting. It means understanding the value of expenditure and making sure that money is used as effectively as possible. It means being willing to speak out when things aren’t going to work (which can be a challenge when faced with a strong personality) and being willing to support the entrepreneur when they’re doing something a bit more risky or different.

You have to flexible and creative and ready to handle all manner of questions, challenges, ideas and curveballs. And you have to combine a “how can we make this happen?” mentality, whilst always keeping an eye on what could go wrong. You have to prepare for both the best and the worst scenarios. And one day you may be hiring and the next you could be firing. And you have to be willing to make decisions and stand by them.

Many people moving from the large corporate world into this environment find it all too much and quickly move back. And when entrepreneurs are looking for people to support them in the finance role they need to be aware of the challenges that will be faced, not just technically but on a personal front too.

If you’re looking for someone to fill your finance role in an entrepreneurial business (and if you don;t have anyone, you really should be) then you need to consider the personality and experience as well as the technical ability. Make sure that you can see the entrepreneurial element in the finance if you want to get the best finance support for your business.

There was a great article by Jonathan Moules in the FT this weekend explaining how entrepreneurs will often try and run a business without anyone to guide them on their finances. It was titled “First find a finance director, then run the business”. It gives me a perfect opportunity for a blatant plug as well as some useful pointers.

The article describes how many business owners have found they’ve struggled through worrying about their accounts, cash and finance becoming distracted from the main focus of running the business. It also highlights that many are put off by the perceived high cost of a finance director.

The reality, as many have found, is that a good finance director can easily increase the value of the company by more than their cost through identifying savings in expenditure and improving margins and contracts. They’ll also free up your time to run the company and provide new insights and ideas for developing the business.

For a growing business, more and more companies are turning to a part time finance director in the early stages and benefiting from the financial knowledge and experience they bring. Another article in the FT last week also described how a part time fd can work for a business.

It’s good to see so many people realising how effective this sort of service can be for their companies and to see entrepreneurs understanding that they can do much more with their business when they focus on what they do best.