Budget 2010 brings good news for UK sellers of consulting firms
by: Paul Collins
In his budget speech on 24th March 2010, Chancellor Alistair Darling announced a doubling of the so called ‘Entrepreneurs’ Relief’. In conjunction with the resurgence we are seeing in the consulting M&A market as we move out of recession, now could be a great time for owners to start planning their exit strategies for 2010 to 2012.
|Consulting entrepreneurs who sell their firms must pay capital gains tax (CGT) on money generated by the sale of all or part of the business. In April 2008, the government introduced a new tax relief on CGT known as entrepreneurs’ relief. This reduced the tax liability from 18% to 10% for the first £1m, with 18% thereafter. In his speech on the 24th the Chancellor doubled this relief to £2m, so you will only pay 10% CGT on the first £2m of capital gain and 18% thereafter. Notwithstanding the details yet to be unravelled in this announcement and the uncertainty with a general election approaching, this looks like very good news.
In addition, the consulting M&A market is steadily improving and this adds the potential for a higher valuation of your business based on the increased demand we are seeing from trade buyers.
Our expectation is that price multiples (the valuation applied to your pre-tax profit or sales revenue in the form of a multiplier) will follow the increase in demand led by all of the big 4. At the peak of the last economic cycle in late 2006 firms were selling for a 40% premium on a 5 yr rolling average price. This premium dropped to a 10% discount at the start of 2009 and now prices are back to the average of the last 5 years. We expect premium prices to start to appear in the second half of 2010 and increase through 2011 and 2012.
Whether they will ever reach the peak of the 40% premium achieved in 2006 is debatable but there is no doubt that now is a good time to plan the sale of your firm for later this year and beyond. So if you’ve been holding back due to the recession, or even if it is only a glimmer of an idea in your mind, you should begin the evaluation process now in order to optimise timing and value for a sale in the 2010 to 2012 window, when hopefully the new CGT tax relief will also be available.
Paul Collins is managing director of consulting industry merger and acquisitions (M&A) specialists Equiteq LLP.