Entrepreneurs and investors sometimes focus on the wrong end of a start-up from day one because they are more worried about getting their business off the ground rather than the exit strategy when they become high-fliers.
It’s easy to look at the Seed Enterprise Investment Scheme (SEIS) tax break potential of a new business.
Income tax reductions on tax paid up to £100,000; capital gains tax exemptions and tax-free growth are all good reasons to start a new business under SEIS.
But the key is also looking three years down the line when the SEIS program ends and what happens then.
SEIS end games
Three scenarios come into play for most entrepreneurs and investors –
- Move up into the Enterprise Investment Scheme (EIS) to grow the business more, putting off the exit decision for another three years
- Cash in the chips if the business is a success
- Plan for recouping losses if the business fails
These are not the only three end-games for a business start-up, but probably represent the most common.
SEIS ends after three years. Everyone involved in the business should have some idea of what will happen when the train hits the buffers.
Selling the shareholding is capital gains tax exempt, as in the growth in share value, so that represents a great exit opportunity for investors.
Unfortunately, many great business ideas fall by the wayside in development and will not come out of SEIS worth selling.
Not so easy to sell an idea
For these, SEIS offers investors loss relief, which in a nutshell offers the chance to set off any financial loss in value against other income at the end of the three year program.
Many start-up experts say that entrepreneurs are setting up their businesses around an idea with the plan of becoming part of a bigger company through a merger or acquisition three to five years down the line.
So want makes a successful business at the end of SEIS?
Three factors tend to attract the attention of larger firms –
- Profitability – If the germ of an idea has turned a consistent profit, then the business will attract attention in the market place
- Record-keeping – Buyers will want to do diligence with the finest of fine-toothed combs and will want to see every piece of paper relating to a financial transaction from day one.
- Branding – Standing out to customers and investors with a strong brand always helps
It’s easy to get caught up in the idea and forget the business side of the operation, but it’s easy to develop an idea but harder to sell one.
