Month: October 2024

There have been a lot of headlines recently around agency reorganizations – think Omnicom, Monks, Deloitte and IPG. Green Square’s Barry Dudley raises some questions that, as we approach the end of the year, agency owners should consider asking themselves. Earlier this week, I was caught by the headline of an article in another revered media business, the FT. It read, “PwC to embark on ‘unsettling’ overhaul.” Having spent some years in Andersen and then Deloitte through the dotcom boom and bust of the late 1990s and early 2000s, I have a lingering fascination for that world. I was expecting the piece to be about another round of redundancies – all of the Big Four accounting firms have been reorganizing and making cuts in recent times. There are indeed 2,700 staff and partners affected by the reorganization, but that doesn’t necessarily mean they will become redundant. So, what’s going on and what food for thought might there be for us in the creative, media, production and tech worlds? This is a UK-only initiative, led by senior partner Marco Amitrano and managing partner Laura Hinton, that is going to “simplify” the business and “reduce duplication.” As any business evolves, it encounters more and more complexity, which can sometimes add unwanted fat that goes unnoticed. Perhaps as a result of growth and absolute size, perhaps as it extends its offer, right through to handling things such as how WFH is built into operations.  

Food for thought 1

When did you last step back from your business to consider whether a reset or reorganization might be needed to perhaps simplify or rethink layers that may have started to make things harder, not easier? Another of the objectives was to “create scale and increase our market impact.”  

Food for thought 2

If you were to carry out some sort of review, what would the levers for scaling and creating market impact be? It’s relatively easy to look for places to cut costs; what’s not so simple is finding new ways forward that take the business to another level, turning the fat into muscle. Hinton told staff, “I know that, for some, change can feel energizing, while for others, it can be unsettling.” With the creation of six new teams, including a standalone ‘digital delivery unit’ covering tech, innovation, AI engineering, cloud and data, it sounds as if there is going to be quite a bit of nervousness for many people.  

Food for thought 3

What lessons did you learn from how your staff reacted the last time you added a new dimension to your business and changed old ways for new ones? Change is never simple, but when the term AI creeps into the mix, it will almost certainly make some mildly terrified – it needs to be planned and confidently managed.  

Food for thought 4

This is a repetition of a food for thought in a piece I did on Next 15 and S4’s results – Whether you think AI is going to turn things on their heads or it’s going to just be something that makes your existing business a little more efficient, you have to have a view. And you have to demonstrate knowledge and confidence around AI to your clients and prospects, not least because they are likely to know less than you!   PwC is clearly going on the front foot with this! So, AI can’t be ignored, but for me, humans possess magical and unique creative capabilities that will never become automated. Jo Bacon, the new Group CEO of M&C Saatchi UK, summed things up really well when she recently spoke to The Drum: “At the end of the day, I think creativity is human; there is a human element to all creativity. AI is an idea that humans have had to train, so a truly original idea cannot be created by AI. “AI does have an important role in any agency’s future, but I think it will be used as an efficiency tool for production and an effectiveness tool; it’ll never be trained to replace human creativity. It doesn’t have that human edge to have an emotional conversation. Of course we’re investing in AI, but we have a lot of great creatives that are still writing great content and great stories. Excellent storytelling is still very much at the heart of what we do here.” Read more

In less than a month, the UK’s new chancellor, Rachel Reeves, will unveil her first budget and Green Square director Tony Walford says agency owners should brace themselves for tax changes that could hit them where it hurts. It’s hard to overlook that Rachel Reeves, the UK’s new chancellor of the exchequer, is preparing the country for significant tax changes in the upcoming budget on October 30. And while Labour has committed to maintaining income tax, national insurance, VAT and corporation tax at current rates, capital gains tax (CGT) and inheritance tax remain in the spotlight. As M&A advisers, at Green Square we are frequently asked about potential CGT changes and how they might affect business owners. While we can’t predict the future, here’s a simple guide to the current CGT situation and possible change – though remember, this is a general overview and specific tax advice is always recommended.

Historic CGT position

Back in 1997, CGT rates in the UK were based on the individual’s marginal income tax rate, with a top rate of 40% for higher-rate taxpayers. Ironically, it was the Labour government that introduced taper relief in the 1998 budget, which significantly reduced CGT on business assets. Under taper relief, the longer an asset was held, the lower the CGT rate and, after two years, the effective rate could be as low as 10%. In 2008, Labour replaced taper relief with entrepreneurs’ relief (now called business asset disposal relief, or BADR), which further reduced CGT on qualifying business sales to 10%, up to a lifetime limit of £1m (later increased to £10m under the Conservatives, but then reduced to £1m in 2020).

Current CGT position

Under the current rules, shareholders who are employees, including directors and founders holding at least 5% of shares for two years (and EMI option holders for more than two years), qualify for BADR. This allows the first £1m of lifetime capital gains to be taxed at 10%, with the remainder taxed at 20%. As an example, if a business founded by three shareholders is sold for £15m, with each owning a third (and assuming they hadn’t tapped into their lifetime gain limit), their £5m gain per person would incur £100,000 in tax on the first £1m (at 10%) and £800,000 on the remaining £4m (at 20%), leading to a total CGT bill of £900,000 per person.

Potential changes

Rachel Reeves has not provided any details on CGT changes, but there’s speculation it could be aligned with income tax or a flat 30% rate or tapered based on the length of ownership (as it was in the old days). Here are a couple of possibilities: 1. Worst case: removal of BADR and CGT aligned with income tax This would be a case of Labour reversing the business growth incentives it had created from 1997 onwards and the shareholders in the above example would each pay £2m at a 40% rate (or £2.25m at a 45% rate) compared with £900,000 currently. If the first £1m remains under BADR, their CGT bill would be £1.7m at 40% or £1.9m at 45% – still a significant increase from today’s rates. 2. Median case: removal of BADR with a flat 30% CGT rate Our shareholders would each pay £1.5m. If BADR is unaffected, the bill drops to £1.3m, still £400,000 more than the current rate.

What would we like to see?

As M&A advisers, ideally the current CGT regime would stay as it is, rewarding entrepreneurs for taking risks and creating employment. But that’s very unlikely to happen. Given changes are inevitable, we’d suggest increasing the 10% BADR lifetime allowance to £3m, with anything beyond £3m taxed at 30%. In the example above, a gain of £5m would result in the same CGT bill of £900,000, but gains over £5m would see higher taxes. A £10m gain would be taxed at £2.8m instead of the current £1.9m. Painful, but not draconian.

When are changes likely to take effect?

Given the £22bn hole in public finances we keep being reminded of, it’s likely that changes will take effect from budget day, October 30. However, there’s a chance they could be deferred until the next tax year, April 6, 2025, allowing time for preparation. For those close to completing a sale, it’s advisable to aim for closure before October 30. But be cautious of accepting a discounted deal just to expedite the process – it would be quite annoying to find the discount given was more than the ultimate tax increase. Additionally, if completing before October 30, pre-paying CGT on future earnouts to lock in the current rate is worth considering. For those planning to enter the market soon, we suggest waiting for the budget outcome. While if changes are immediate, you may reconsider selling depending on the new rates, if the changes are deferred, there’s a tight window to close a deal, with six to nine months typically required to find the right acquirer and complete the sale, so you’d have to move fast. Read more