“As the General Election nears, many business owners are concerned about the potential for tax changes, such as an increase in the rate of capital gains tax” — In a startling reflection of the uncertainty prevalent in the UK business environment, 65% of owners are looking to sell off their enterprises, with two in five (40%) planning to exit within the next year, according to new research from leading wealth management and professional services group Evelyn Partners.
Quote from Tom Shave, Partner at Evelyn Partners
Welcome to our 300th Share Radio commentary since the station went 100% online six years ago. Share Radio was first launched in November 2014 as a digital (DAB) broadcaster in the United Kingdom, but during those first three years the new business devoured a significant amount of start-up investment, finding revenues hard to earn in the new digital-streaming world in which we live today. So, Share Radio has found a new stability in its online model, supported by our regular presenters and our strong technical platform.
Entrepreneurial activity is the throbbing heart of business. It's an essential part of human endeavour, and it would be hard to imagine that artificial intelligence could ever replace its ability to create long-term businesses and the economic growth that they generate. This human endeavour relies on those gut feelings which steer judgments on risk and competing priorities that are vital in keeping its momentum going. Of course, knowledge must be built through experience, but it's certainly not dependent on university degrees — ask Sir Richard Branson about that.
There is, however, a grave risk that many entrepreneurs may pack up shop and leave the United Kingdom in anticipation of harsh tax treatment in the event of a change in government, as reported in The Times last weekend: and that appears all the more likely following the weekend’s revelations of tensions within the Conservative Party over the exit of Boris Johnson.
Politicians may speak of restoring growth, but their period of Influence is very short-lived as the experience of the last few years has shown us. So this week we take a look at the drivers of long-term entrepreneurial activity, which are the key to building reliable growth for the future.
Firstly, it's important to draw a distinction between serial and long-term entrepreneurial endeavours. The former are motivated primarily by making money, and are content to see the product of their efforts sold for the best price as soon as possible before moving on to the next opportunity. This process is closely aligned to the motivations of private equity, as we explained on 30th May.
The long-term entrepreneur’s primary motivation is to accomplish real, long-lasting change: it may be a breakthrough in the way things are done or some other innovation, but for them money-making is a means to an end rather than an end in itself.
Once the endeavour is underway, it's important to understand the total commitment that the entrepreneur has made. Some may find it difficult to draw a distinction between an employee/manager/board director of a business and the entrepreneur: but there is a world of a difference in terms of their personal commitment. Any of the former can give notice and walk away at any stage: the entrepreneur risks losing everything by doing such a thing.
When it comes to risk-taking, people often imagine that entrepreneurs have a substantial appetite for risk. This is rarely the case, however: entrepreneurs, having made their commitment to their endeavours, are generally quite cautious about risk-taking. They're well aware that if the level of investment required goes well above their own capacity to raise it, it will mean heavyweight dilution of their interest in the business: which will not only handicap the returns that they can achieve but also reduce their level of control in steering business strategy.
If they can find an early source of income it can therefore become a surrogate form of capital, which will enable their stake in the business to be maintained even if it involves a short-term strategic detour from their long-term purpose.
During the early stages of a business, entrepreneurs will often make real sacrifices in terms of personal salary and their standard of living, in the interests of maintaining their focus on the business and the level of their stake therein.
Economists and politicians need to understand these commitments that entrepreneurs make, and not seek to converge capital gains tax (CGT) with income tax. It is this spectre which has alarmed business owners so much, as the research undertaken by Evelyn Partners has shown.
In the past, CGT rates have been tapered by index-linking cost prices in order to encourage long-term commitment and, more recently, there was the introduction of a specific segment of CGT designed to apply for entrepreneurs (but this has now been reduced in value to an almost meaningless level). These were genuine attempts to recognise the risk and personal denial undertaken by these individuals.
In terms of their personal salary sacrifice, it's important to recognise that much of this would have been taxed at standard, not higher rates: in which case it is effectively a penalty for being an entrepreneur to tax their eventual capital gain at the highest marginal rate of income tax.
I mentioned Artificial Intelligence earlier, and it’s worth asking the question, ‘would it be possible for AI to be entrepreneurial?’. In terms of innovation, its ability to hoover up human creativity may well provide a source of great ideas, as explained graphically in this extract from a speech by Bishop Steven Croft at the Oxford Diocesan Synod last Saturday:
‘The first iteration of digitalisation extracted data about us. In the first digital world, facts like our age, ethnicity, location and viewing habits could be extracted — or inferred with ever increasing granularity — and then used to tailor our attention: surveillance to sell. But the onus was on our information and opinions, not our ideas. There have been a host of downstream harms and unintended consequences that we are still discovering.
‘But now, even before that first clean-up is complete, Generative Artificial Intelligence is coming for our creativity. Everything, but everything we write, or say, or sing, or paint, or draw, or sculpt or … everything: all of it, is — or soon might be — hoovered up inside a ‘foundation model’, because our creativity is the coal that powers this new generative AI furnace.’
In order for AI to emulate the entrepreneur, we need to ask how it would cope with the judgments required for risk-taking and setting priorities which are so often based on human instinct — could they be replicated? For short-term serial entrepreneurs that's possible; but for building long-term business growth I would suggest that it’s almost inconceivable. It could therefore be deduced that the capacity for generative AI to replicate entrepreneurial endeavour is inversely proportional to the duration of the endeavour.
Over the past forty years the successful elements of my entrepreneurial journey have been in retail investment, principally with The Share Centre: the start of my journey to find a more egalitarian form of capitalism. There have also been several financially unsuccessful endeavours, including my attempt to establish aviation services in the western highlands of Scotland and, it must be said, with Share Radio itself. It's been a bumpy road, being an entrepreneur.
So far as Share Radio is concerned, however, I can assure you that I have every intention of continuing to operate the station well into the future — and this celebration of our 300th online commentary is witness to that determination.
Gavin Oldham OBE
Share Radio