Emergency Funding to pay tax bills
February 3, 2023
My first valuations call of 2023 was from an entrepreneur running a UK tech success story.
He urgently needed funding for a US tax bill. This is not as unusual as you might think…
Payment platform Stripe has recently been seeking $2bn funding, allegedly to help the company pay a tax bill relating to an employee incentive scheme.
My contact was offering a 75% discount to the investor who would solve the problem quickly.
I wonder what could happen to UK company valuations if the UK tax authorities start getting tough and emergency funding rounds start to pile up?
Where VC valuations (whether they are for start-ups or even scale-ups) are paper exercises for reporting purposes, many might argue that it really does not matter too much what the company valuation should be.
However, there are two themes that matter for new investors or investors considering following their money in the next few months until we have seen peak down round.
First, much as some might dislike it, because an important part of valuation work is to use a selection of comparable quoted companies to set benchmarks, this inevitably ties private companies to what the markets are doing.
However, there can be a lag on timing.
Just because the main western indices have performed ok in January, this does not automatically mean private company valuations should rise accordingly.
There are rumours that another major sell-off in the US is on the cards, but the greater influence on valuations in private companies will remain the down round trend we are seeing.
Second, worries about the state of the UK economy and broader macro factors cannot be ignored, including the risk that tax authorities start to get more aggressive in terms of tax collection.
Whether you think the IMF is wrong about this year and next, the fact that company insolvencies are rocketing suggests that all is not well on this side of the pond.
Often HMRC is the largest creditor of a failed company. Should HMRC start to push harder we might see more emergency funding rounds led by the founders who are determined not to let their company fail. This will put more specific and general pressure on valuations. There are also the valuation ramifications if cashflows become more constrained because tax authorities tighten up.
Every situation will need careful examination because there are some positives.
For example, the VCT/EIS fundraising market appears to be having another great year, so there will be funds looking to allocate to exciting private company opportunities and there are some sectors (cyber-security software and AI in particular) which remain hot.
Beauhurst has announced 305 new fundraisings yesterday on top of 246 the week before. It also reports that there have been 35 MBOs in the last two weeks and 106 acquisitions.
The devil will be in the detail, especially around M&A activity and what valuations those acquisitions and MBOs have achieved.
We remain very sensitive to investment round valuations, especially as we head towards the end of the tax year. This can lead to some investments being made to beat this year’s deadline, with investors perhaps taking a more relaxed view about valuation because of other factors at play.
Speaking of funding round valuations…
Last year we undertook some interesting analysis of the hope premium investors pay to get into a great deal.
A Harvard Business Review publication found that leadership can have a 25 – 30% impact on the market value of a company. This reinforces the generally held view that investors attribute a significant amount of value to the company’s management team.
If you have a client who needs reassurance that the valuation for a deal can be justified whether it’s for an acquisition, an investment or even a buyout of a minority holding, we can help.
Roughly half of the valuations we undertook last year were for these types of scenarios and the feedback has consistently been that we have helped such transactions proceed better.
