How to do business in unpredictable times

Despite initial strong post-pandemic growth in 2021, businesses of all sizes face a level of volatility caused by the perfect storm of global supply chain issues, energy prices increases, rising inflation, and a deepening political crisis. At the risk of alarmism, all businesses large and small will be touched in some way by some or all of these issues.

It is clear, however, that there is both a need and an appetite for business to grow despite this disruption to the economic status quo. This raises key questions; where should the smart money go, and how should it be structured?

Financial and legal services businesses have weathered the pandemic well, and we anticipate continued levels of consolidation and investment in these sectors. With this in mind, we would expect law firm mergers to gather momentum as firms see healthy growth.

In addition, sectors such as technology, infrastructure and renewable energy are likely to lead the way to a sustainable recovery.

M&A, investment and joint venture activity should remain strong, although risk factors have changed, and therefore giving some additional consideration as to how to structure a deal is advisable. Many deals are structured through limited company arrangements, but an alternative and more flexible structure may be afforded by the use of a limited liability partnership (LLP).

Like a company, an LLP offers limited liability to its participants (known as members). This should be a key consideration and drive a move away from a general partnership arrangement.

Also like a company, an LLP has a separate legal personality which allows it to contract, hold property, borrow and grant security in its own name. This is a key differential from a contractual joint venture, where both parties participate directly.

Unlike a company, an LLP doesn’t pay corporation tax. Profits are taxable in the hands of the members as they arise. Tax planning is particularly important here. Many professional services businesses, such as law firms, are traditionally structured as LLPs in any event and the tax treatment is a well-trodden path. Businesses with reinvestment or profit retention requirements need careful drafting and structuring to maximise the investment benefits.

The most significant and advantageous feature of an LLP is its flexibility. Profits and capital can be allocated in any such proportions as the members shall agree, and indeed this may be adjusted in accordance with performance and other targets without the need to transfer shares or trigger any taxable gains throughout a member’s participation.

This is an attractive feature to reward a client for enhanced performance, or to protect a client against downside risk. Many investors will find this a useful mechanism for a revenue return and exit strategy, calculated by reference to a pre-determined formula.

Flexibility also extends to management and voting considerations. There is no need for these to follow shareholdings or introduce special classes of shares, and decisions are largely free of any statutory prescription. The ability to restrict and control exit arrangements for members will, drafted correctly, provide further protection for the business and members.

The use of LLPs as merger and investment vehicles, both in the professional services sector and more widely, offers a level of flexibility making them uniquely adaptable to changing risk and economic factors, and should be firmly on the agenda for business looking to future opportunities.