By Adam Tavener, Chairman of Clifton Asset Management
In April this year, The Organisation for Economic Co-operation and Development published its inaugural annual report on financing for SMEs. Its conclusion was that small businesses, which according to the CBI account for 99 per cent of all UK registered companies, still face challenging funding conditions - with the SME credit crunch particularly acute across Europe.
Against this backdrop, there is a funding solution which could be accessed by a large proportion of SMEs. Our research has shown that 40 per cent of the UK’s SME owners have funds in pension schemes, which could be immediately deployed through pension-led funding, in particular, via the business’ own Intellectual Property (IP), In total, this has the potential to create an estimated cash injection of £100 billion into the UK’s SME economy but, according to our research, few small business owners or their advisors appear to know about it.
The research found that almost three quarters (73 per cent) of business owners appear unaware that they can source finance directly through their own pension funds. This is particularly true for smaller businesses (2-5 employees) and those established after the year 2000.
One specific area of pension-led business funding leverages the value of Intellectual Property (IP) held by the company. This is one of the most valuable, but least exploited, assets of most businesses. It is a little known fact that the vast majority of business assets reside in IP, which includes patents, trademarks, brands and even website domains.
However, almost all (84 per cent) of UK businesses we questioned value their Intellectual Property (IP) at zero per cent, and only six per cent of businesses value their IP at anything more than ten per cent of business worth. Surprising when, in 2010, the World Bank estimated that royalty and licence fees alone generated £5.25 billion in the UK.
In fact, the combination of the IP held within most businesses and pension-led funding could deliver a much needed cash boost to SMEs currently struggling to source funding. This is a solution known as IP-based pension-led business funding.
What frustrates so many Directors is knowing the quality of their business but, even in the light of recent government initiatives, they are unable to convince lenders whose own interests often come before the business they are funding. Traditional lenders may be quick to demand their money back if climate dictates and will usually require personal guarantees or a charge over a personal asset such as a director’s home.
Whilst not an either/or option, pension-led business funding changes the balance because it is funding by the Directors for the Directors and no right-minded business owner is likely to pull the rug from under their own, successful business.
Many SMEs have Director-owned pension schemes, usually in the form of SIPPS or SSAS. For around 40 per cent of the UK’s SMEs, these funds can be released, often through the purchase or lease-back of independently valued IP. Despite changes in the Finance Act 2004, which led to IP being recognised as an acceptable asset class for use in pension-led business funding, this appears to have been a secret well-kept from business owners.
Initiating IP-led pension-based funding requires detailed assessment of company accounts, track record, business plan and funding structure by a pension specialist. Once satisfied that there are strong enough foundations, the specialist will commission an IP valuer. It is essential the valuation is entirely independent of the funding process to satisfy HMRC and protect the pension fund and its trustees.
There are three main IP valuation approaches: cost, market and income. Cost examines investment in IP already made by the company and how much remains valid. The market approach looks at prices paid for similar IP by other companies, while income focuses on potential future value of the IP.
Once an IP valuation is received, the pension fund can agree to purchase and leaseback some, or all, of the IP value from the business and the funding is facilitated by the pension specialist.
Once the cash transfer has been implemented, there is usually a straightforward monthly lease payment between the business and the pension fund, which is a tax deductible item.
After many years of general disaffection with pensions and pension returns, the pension-led funding option is creating a very positive environment for business owners to maximise the value of their pensions both now and at retirement.
A recent report from the UK’s Intellectual Property Office (the Patent Office) states: “Achieving strong, sustainable and balanced economic growth is the Government’s economic policy priority and IP is an increasingly important means of supporting growth.” It seems help is at hand.
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