There is an interesting dynamic at play in the UK technology sector. The capital markets are erratic; there have been no new initial public offerings (IPOs) in the UK technology sector in 2022; valuations are dwindling and the weakness in sterling is creating an environment ripe for public to private transactions of listed UK technology assets by overseas acquirers.
On the contrary, the sentiment in the UK private-backed segment of the market continues, unabated, UK deals for the quarter ended September 2022 were up compared to the prior year and London was recently quoted as the leading start-up hub for tech businesses outside of Silicon Valley. In capturing the imagination of investors wanting to be involved in the next big thing, the tech sector is one of the most likely to attract early injections of capital from private equity or venture capitalists.
Fast-moving and future-defining, it’s an industry where companies still in relatively early stages of growth and development are finding themselves with major decisions to make, particularly financially. Going from tech start-up to £10m turnover is quite a journey but there are a few financial and regulatory matters to consider along the way.
A robust financial plan is invaluable from the outset and taking the right advice early on can save time, money and stress. MHA MacIntyre Hudson (MHA) are the UK member firm of the Baker Tilly International Network, an international, multi-service team of sector-focussed advisers, specialising in audit, tax and corporate finance.
Andrew Gandell, Audit Partner and London Tech Sector Lead of MHA, believes that even before statutory audit thresholds are met, technology companies should be open to engaging the services of a professional adviser.
“For SMEs and start-ups in some sectors, it’s some time before they need to think about audit requirements,”
said Andrew.
“But such is the nature of the technology sector, businesses are often receiving significant investment from an early stage because it is seen as offering new and innovative opportunities by the market, and investors want to get in early.
“It can move very fast once that starts to happen, the benefit of access to capital, expert advice and networking from a private equity investor can super-charge growth. It will typically be a requirement of the investment agreement that an audit is required and appointing the right audit firm, with a technology sector specialism, breadth of service streams and international capability and who can guide the business through the current investment cycle and beyond will pay dividends.”
Attracting interest from private equity and venture capitalists is just one facet of the business landscape for tech firms. They will need advice throughout on everyday business areas such bookkeeping and accounts preparation, as well as advice to ensure they are maximising the benefit from R&D tax relief and have the right tax strategy in place.
Although some smaller businesses may see spending on the services of an audit expert as an unnecessary cost in the early days, the requirement for an audit can be upon them all too quickly, leaving them exposed if processes, systems and controls are not in place to demonstrate robust financial practices.
Andrew added:
“I spend a lot of time talking to early-stage companies about the pros and cons of appointing an adviser, and the extent of our services. When you’re moving into a round of funding, being able to demonstrate that you have involved an independent expert adds strength in terms of how your business is viewed by someone looking in from the outside.
“Advice will highlight where there can be some development needs and, although there is always a cost of an audit, costs may be lower if the business is at an early stage. The audit process will likely identify other areas of the business where there is an opportunity to reduce costs, maximise reliefs and streamline systems.
“MHA has a whole spectrum of clients that are regularly looking for investment and so that means that whatever stage a business is at, we look after other businesses who are or have been in the same position. The ideas, learning and best practice we bring to our clients is enhanced through our deep sector expertise and working with similar clients.”
The nature of technology companies is that they must remain nimble, for some businesses this can mean the use of a flexible workforce, such as contractors, rather than investment in permanent staff. Tech developers often enjoy freedom in their working arrangements, choosing to work from different geographical areas to the main business hubs. This can present employment tax dynamics that must be considered. It’s key to partner with a firm that understands this, can involve an employment tax specialist at the right time and can support you more widely at all stages of growth and scaling up right from the start.
Andrew added:
“Once an MHA client, you have access to a full range of services (independence permitting) and geographical reach through the Baker Tilly International network, that you can draw upon. That can be anything from ensuring you’re transfer pricing compliant if you’re multinational, due diligence, considering exit readiness before an acquisition or expansion into a new territory.
“With so many investors focusing on tech, it’s wise to have a robust set of processes and policies in place from the very earliest stage.”
Find out more about MHA at www.macintyrehudson.co.uk
Audit Partner and London Tech Sector Lead at MHA