So far in our ‘running a business’ series we have looked at:
In this article we are exploring some of the options available to you when you decide to exit. The perfect scenario is that you have created a business and lifestyle that is a going concern, but you feel it is time for you to pass on the reins, sell the business, retire, or just do something else. There is much to consider, let’s take a look at the options…
If you are the head of a family business, then hopefully your successors are already in place. However, passing a business on to family should not be seen as the easy option, as it still needs to be considered and planned.
- Are family members already embedded in the business? If not, are they really interested in learning about and running the business? If someone does not have the same passion as you then the business may not continue to move forward in the same way.
- You may have spent a considerable number of years in the business building up products or services, relationships with clients, and getting to understand the financial aspects of running a business. Plan so that family members have sufficient time to get to know all areas of the business.
- If there are several successors involved, then be clear on what the responsibilities will be. Each of them may have different skills and be suitable to specific areas and then can collaborate on the overall management.
- Consider the assistance of external consultants who are experienced in assisting family business with succession planning. They can fairly assess and then mentor family members so that you can avoid the risk of any family upsets.
- Do not plan that world cruise too early! The experiences and knowledge that you have accumulated over the years will be invaluable; it is inevitable that you will be required to assist in the transition.
Considering these key areas will ensure that a smooth transition is planned with the business remaining successful for the next generation and beyond.
What are the options if you have no family to pass the business on to, or if your primary objective is to make a profit to retire or invest in a new venture?
- Sell to an outside party This offers the best route to achieving the maximum purchase price, quicker funds, and a defined exit from the business as the new owners will want to take over control from the exit date.
- A management takeover. This could be through a management buy-out (MBO) or management buy-in (MBI); it gives an opportunity for the business to be passed to those that already have a working knowledge of the business and could be an option for a quicker sale.
What should you be doing to prepare for selling the business?
Start with the end in mind – know what you want to achieve from the sale and what the potential buyer and professional advisors will be looking for. This will make the process a lot easier.
- Prepare a valuation for information purposes. Consider if this value will provide you with sufficient funds.
- Increase the appeal of the business and help a buyer to see the potential that your business has. Your exit strategy should focus on how to maximise the value of the business. Ensuring profits are sustainable and growing steadily, and that you have a wide customer base and a strong management team.
- Consider the timing – keep an eye on profits, financial climate, and market trends.
- Ensure that your accounting records are in good order. As part of a sale process these will be scrutinised by the professional advisors of the buyer.
- Get your own professional advisors in place.
- Keep focused on the continued business performance as well as the potential sale. The sales process can be lengthy and time consuming.
How do you go about valuing the business?
A business is only worth what someone is willing to pay for it. However, there are several methods that can be used to provide a valuation and a starting point for discussions.
- Earnings multiples – commonly used for businesses with established, profitable history, this method applies a multiple to the sustainable (adjusted) net profit of the business. The adjustments to the net profit will consider abnormal and non-recurring items in the profit and loss.
- Discounted cashflow – appropriate for cash generating, established, stable businesses. The valuation basis is more technical and based on cash flow forecasts for several years.
- Entry cost – reflects the costs involved in setting up a business from scratch.
- Asset based – this is most suited to businesses with a significant amount of tangible assets such as manufacturing businesses. It does not consider future earnings.
- Industry rules of thumb – where buying and selling in the industry is common established methods can be adopted, such as recurring fees for professional firms.
There are several other factors that need to be considered during the valuation process, these may help to enhance or reduce the value of a business depending upon their significance and include growth potential, intangible assets, external factors, and circumstances around the valuation.
It is important to remember that this is not a precise science and any valuation provided will be a matter for negotiation.
And if there is no one to pass on or sell to?
This is typical for personal service companies and older, more traditional businesses, where there may now be a lack of interest or expertise to take the business over. If there is no obvious exit route, or if the business has seen a downturn in trade and is suffering losses that cannot be turned around then whilst the business is solvent you may decide to close the business and return any capital to the shareholders.
A member’s voluntary liquidation must be dealt with by a professional advisor who will ensure that the following actions are taken before distribution is made to the shareholders/members:
- All liabilities of the business are met
- Areas such as employees, assets and property are considered
- Tax clearance is given
What are the tax implications of selling or exiting a business?
Tax is part of day-to-day life, and even after you have exited the business, you will have tax obligations you need to meet right up until the date you exit (and potentially for some time afterwards depending on your exit strategy).
Plan your exit from the business in advance as this can maximise the tax-saving opportunities available to you and you can structure the sale in a tax efficient way.
Capital Gains Tax (CGT) is charged on the difference between the cost of the asset and the proceeds you receive on sale. This can offset your annual tax-free exemption, if available.
CGT is payable at 20% for higher rate taxpayers, and 10% for basic rate. You don’t always need to pay CGT – for example, if you are gifting assets to a spouse, civil partner or charity. And CGT can be reduced or deferred if certain reliefs apply.
Ideally, receive cash proceeds in a single lump sum and jump on that plane (post-Covid!) to somewhere hot and sunny!
You can agree to:
- Deferred Consideration – you don’t receive all proceeds on the date of sale, but instead it is deferred until a defined later date (often used when the buyer doesn’t have full cash proceeds to pay upfront).
- Earn Outs – the price the seller ultimately receives is subject to the future performance of the company.
- Or combining both Deferred Consideration and Earn Outs means your tax compliance obligations will extend for a few years (depending on your sale agreement) after you exit the business.
Finally, if you are non-UK resident or considering moving abroad prior to exiting your business, your position may be more complex, so seek advice (before you leave if possible).
Are there any reliefs available?
Yes there are but this will involve planning ahead. Making key decisions early on about how you will exit your business is critical as well as defining a clear strategy on what you will do with the proceeds if you sell.
- Business Asset Disposal Relief (formerly Entrepreneurs Relief) – reduces CGT to 10% on qualifying assets (selling whole business or part of a business). The lifetime limit is £1 million (this has reduced significantly since it was £10 million for disposals prior to 11 March 2020). It applies to sole traders or business partners making a disposal of business assets, where that disposal is a material disposal where the asset was owned by the individual for at least 2 years prior to the sale.
- Business Asset Rollover Relief – this is less relevant if you are exiting your business completely. Where there is a chargeable gain on the disposal of qualifying business assets and the proceeds are reinvested into new qualifying business assets within the relevant time period, the gain on sale of the asset can be deferred by reducing the base cost of the new asset equal to the deferred gain.
- Gift Hold-Over Relief – this applies where you gift business assets (including certain shares) or sell them for less than they’re worth. The donor is not charged to tax on the gain, instead the recipient’s base cost is reduced by the held-over gain – meaning they pay more CGT when they sell the shares.
Corporation Tax, PAYE, VAT and NI
- You will need to let HMRC know that you are no longer trading and you’ll need to submit final accounts and tax returns if required.
- You will need to let HMRC know if you are closing a PAYE scheme.
- You will need to de-register from VAT and cease paying NI contributions – although you may need to consider continuing to pay voluntary NI, depending on your circumstances.
How will your personal tax position be impacted once you exit your business?
The area most impacted will be inheritance tax (IHT) and Estate Planning. Exiting a business can leave you with a large pot of cash, so it’s important to consider both short and long-term consequences of IHT on sale proceeds, both for you and your families.
IHT is 40%, after the deduction of the nil-rate band (where available). For example, for an estate of £1 million, after the IHT has been paid and assuming there are no other reliefs, the net distributable estate is £730,000. You can see how a significant chunk of the estate ends up in HMRC’s hands. IHT planning can help reduce the IHT bill, leaving you to feel reassured that you are leaving your family financially secure and without unexpected large tax bills.
Trading businesses are exempt from IHT by qualifying for Business Property Relief, but as soon as you exit the business, the cash proceeds immediately fall within the net of IHT.
Depending on your exit strategy, consider whether you can gift business assets before exiting the business so as to qualify for BPR and be protected from IHT.
If you can’t, don’t panic. There are other options – it comes down to planning. Calculate a best estimate of the net funds you will receive, after accounting for final tax liabilities and invoices (e.g. legal fees, accountancy fees, post-cessation liability insurance). Then work out how much money you will need or want to retain.
Some possible options:
- Lifetime gifting is a popular option. As long as you live for seven years post-gift, this route will remove the assets from your estate on your death, thereby avoiding the IHT.
- You can also make use of other smaller lesser-known IHT reliefs which can all help save tax on your death. You can provide for your family during your lifetime e.g. helping children buy a property or helping with university fees – life isn’t getting any cheaper!
- You could also consider setting up a trust which can offer greater protection than outright gifting.
- If you choose to invest, e.g. buy a second home, an investment property or purchase investments – there may be tax implications depending on what you choose to do with the funds. If investments are abroad, you will need to consider offshore tax rules.
- Similarly, if you choose to move abroad, there will be both UK and offshore tax implications. Not all your income may be subject to tax after you leave, there may be tax implications overseas, so seek advice before leaving the country from an accounting firm that is an INPACT member.
- Investing into a pension (after seeking advice from a Financial Advisor).
- Finally, ensure your will is up to date!
Speak to us about exiting your business today.
Don’t wait until you are ready to sell — our experts can help you to plan the future so that you can achieve a successful outcome.
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