Paul Gillen, Financial Planner at Seven Investment Management, sets out the secrets for successfully exiting a business and realising the maximum value from the asset you have built up.
Most of the advice directed at entrepreneurs focuses on growth – raising finance, finding and developing employees and expansion.
That’s all understandable, given that the growth of your business is key to the future success. However, it often overlooks a key element of entrepreneurial life – the importance of an exit strategy.
Depending on how you run the business leading up to a sale, and how you’ve structured your finances and tax planning, your take-home profit could vary by millions of pounds
This article focuses on the three key stages: The growth phase where being smart about withdrawing capital and having the right legal and financial structures will pay dividends. The point of sale where getting the right tax reliefs in place and considering your future plans are key. And, finally, the ‘What next?’ stage, where you plan out what you’ll do after the sale completes.
Let’s say you’ve built up a business valued at about £20m – definitely a job well done. But depending on how you run the business leading up to a sale, and how you’ve structured your finances and tax planning, your take-home profit could vary by millions of pounds.
1. The growth phase
- Be smart about withdrawing capital
When it comes to paying yourselves, entrepreneurs tend to focus on the issue of salary versus dividends, so employer pension contributions are often overlooked. But they are an effective way to withdraw capital, and you also earn corporation tax relief for the business.
There are other smart options for the pension scheme, for example holding your business premises inside it. Rent paid by the business goes straight into the pension, along with any growth in the premises’ value. There are rules and thresholds to watch out for, but the right adviser can guide you through the detail.
There are other smart options for the pension scheme, for example holding your business premises inside it. Rent paid by the business goes straight into the pension, along with any growth in the premises’ value
They can also help you make best use of other personal tax allowances outside of the business structure, such as ISAs and Capital Gains Tax, so that your personal finances can be as tax-efficient as possible. Remember that tax rules are subject to change and taxation will vary depending on individual circumstances, so you must take professional advice.
- Guard against life’s ups and downs
If you’ve built a business over years, you don’t want your exit ambitions disrupted by the unexpected. But the death or illness of a director, key employee or major shareholder could certainly affect the value of the business.
It’s absolutely worth getting the right adviser to help you protect against the financial shockwaves of such events through life assurance and critical illness protection, and there are mechanisms available for ensuring continuity if one shareholder dies
It’s absolutely worth getting the right adviser to help you protect against the financial shockwaves of such events through life assurance and critical illness protection, and there are mechanisms available for ensuring continuity if one shareholder dies. Some of these are highly technical, but your adviser can help you set them up and do the regular reviews that are needed.
- Get the legal paperwork in order
If you own a business, it goes without saying you need a will. Equal priority should be given to setting up a Power of Attorney (PoA), appointing someone to run things if you become incapacitated. Without the right person to take the helm immediately if you’re out of action, the future of the business could be jeopardised or a sale derailed.
- Don’t do everything yourself
Planning the sale of a business is demanding because it’s not just the commercial side you need to manage: you’ve also got to consider your family’s financial planning, often for multiple generations.
By getting expert advice from people who can look after the financial, tax and legal issues for you and your family, you can focus on the business. That way you’ll get in the best shape for a grand exit.
Top Tip
Entrepreneurs are just the kind of busy people we had in mind when we launched findaWEALTHMANAGER back in 2012. We make it easy to get objective answers in tough to navigate market so that you can find the best wealth manager for your profile and needs. Plenty of the firms we represent make a specialism of working with entrepreneurs, and they might be able to provide just the “one-stop-shop” you seek for all your financial affairs.
Lee Goggin
Co-Founder
2. The point of sale
When is the right time to sell your business? It’s a question that keeps too many entrepreneurs awake at night, and there is no simple answer. One answer you’re rarely likely to hear is “immediately”. As a general rule, exiting a business should be planned well in advance – 12 to 18 months ahead, if possible. This allows time to structure the business for a sale, and to put the financial and tax planning in place for you and your family.
- Business reliefs
If you’re selling a business (or a share in it), CGT should be top of mind. You will want to take maximum advantage of Entrepreneurs’ Relief (ER) and do a thorough review of the structure of the business and its assets.
For example, having too much cash in the business or holding residential property could jeopardise your ER, potentially increasing your CGT rate from 10% to 20%. That could mean an additional £2m CGT on a sale of £20m.
Having too much cash in the business or holding residential property could jeopardise your ER, potentially increasing your CGT rate from 10% to 20%. That could mean an additional £2m CGT on a sale of £20m
Another relief worth considering is Business Property Relief on inheritance tax. Usually you lose this relief when you sell the business, but solutions such as family trusts may allow you to bank it. Tax rules are subject to change and taxation will vary depending on individual circumstances. The right adviser can help you explore the options available to your family.
- How much is enough to last for the rest of your life?
Say you have an offer of £20 million for your family business, but is it enough? For example:
- what does it mean in terms of an income for 30 years or more?
- how does this picture look once you’ve provided for children or grandchildren, or set up new projects?
- what other income or assets do you have?
- how will different scenarios around stock market performance or interest rates affect your lifestyle?
After answering those questions, you may have no idea whether £20 million is still a fantastic sum, or not quite enough. That’s where the right adviser is worth their weight in gold
After answering those questions, you may have no idea whether £20 million is still a fantastic sum, or not quite enough. That’s where the right adviser is worth their weight in gold. They can look at the price on offer, do cashflow modelling, and gauge what it means for you now and in the future. At which point, you can decide whether or not you will need to go back to the negotiating table.
- Tax allowances and reliefs
Both before and after the sale, you’ll want to use all of your tax allowances and reliefs, such as ISAs, CGT allowances and pension contributions. But with most business sales, the proceeds will far outstrip the maximum sums these allowances provide.
You need specialist advice on all the tax, legal and financial issues involved, and an approach that includes the whole family
When it comes to selling a business and dealing with the proceeds, every situation and every entrepreneur is unique. You need specialist advice on all the tax, legal and financial issues involved, and an approach that includes the whole family.
3. What next?
If you’ve just sold a business, you’ve probably had a hectic time of late. You’ll have sat through many a meeting with accountants and lawyers, and gone through a gruelling process of due diligence and negotiation. All on top of the day job of running the company.
And then it’s over. You’ve done really well out of the sale, and there’s jubilation all round. But what happens next?
- Your planning timeline
If you sell your business in your 50s or early 60s, then, as the actuaries can demonstrate, you probably have 30 to 40 years of your life ahead.
In our extensive experience of people who’ve sold their businesses or retired, this will involve different phases:
- an active initial phase, possibly catching up with overdue travel and leisure, perhaps also doing some portfolio work such as non-exec roles or supporting start-ups;
- a more sedate phase in your 70s or 80s, as you cut down on work and adventures, and think about downsizing and gifting to children or grandchildren; and
- a less independent phase where you’re looking at long term care.
Your post-sale financial planning should cater for these different phases, with enough flexibility to deal with the fact that you can’t predict the future. The right adviser can model your income and cashflow requirements, and make a tax-efficient investment plan that meets your needs.
They can also help you provide for younger generations (if that’s what you want), and will review your planning regularly to deal with changes to your lifestyle, family situation or the wider tax environment.
- The end of the road
As well as thinking about post-sale life, there’s the less attractive subject of death to consider. The current inheritance tax (IHT) threshold is £325,000 (£450,000 if you leave your main home to your children or grandchildren). If you’ve just released £20m or more from selling a business, a 40% tax bill is going to be staggering. So, it’s advisable to get specialist help on IHT planning as early as possible.
If you’ve just released £20m or more from selling a business, a 40% tax bill is going to be staggering. So, it’s advisable to get specialist help on IHT planning as early as possible
Back to the present
It’s not just a question of having too much time on your hands, but how you define yourself. So, we advise our clients to make the most of post-sale life. If you miss the status of running a successful company, you’ll probably need a range of projects, causes or hobbies to get stuck into.
Like so much in financial planning, everyone’s individual circumstances are unique, and nothing in this article offers a complete prescription. No two people or families are the same, so you need specialist advice from professionals who’ll listen to what you want next. It’s hard to overstate the value of the face-time our advisors give potential clients, so please don’t hesitate to call the professionals in and start making proper plans for the sale of your business and your life after.
