Most people in business will, one day, wish to retire, sell or pass on the business. Even if it is your intention to die ‘in harness’ then doing nothing is still not usually sufficient to deal with any issue which might arise for your executors! If you are thinking of selling or retiring one day you should start planning now. You need a good lead time, ideally at least 5 years. If you don’t have this long and circumstances have changed then there still may well be useful things you can do.
- Think about all available options, and there are many.
- Quite probably you will need to restructure.
- There are a lot of taxes to consider. Ignore them and the value of a lot of your hard work may be lost to you.
- Get good advice, it’s cheap at the price.
Get a Plan. Whatever you have in mind write it down and consder, is it what you really want to do? Share it with advisers who can help. Maybe have a Plan ‘B’ as well. Your plan probably cannot be set in stone anyway, it may change, above all it’s your plan.
You need those 5 years; things change, keen buyers drop out just as they may when selling a house. You need to stay in control, usually you only get to sell a business successfully once.
Broadly the options are (or are a combination of):
- Do nothing. This may be fine if that is the Plan, but ensure perhaps that any borrowings are covered
- Succession by family
- Arrange a Management Buy Out
- Build for sale, probably within your own Trade
- Float on AIM, or a full listing
- Liquidate, and realise asset value
Each case is different but there are some rules of thumb which generally apply –
You don’t get paid out on both an earning basis AND on an assets basis. It is surprising how many people think they do, until they think about it. Because of this some restructure of the business and/or its assets may be important, perhaps early on.
For example, no-one pays cash for cash held in the business so think about extracting the cash first.
Again if there is a freehold think about extracting that, perhaps into another company. A purchaser may not be able to afford or may be unwilling to tie themselves to freehold. Yes, there may be tax to pay, or at least to be considered. Better if that is considered when there is time to think, and not in a panic, later on.
Think about whether there is the possibility land has been contaminated in some way. There may be tax breaks if it has, to offset the aggravation and costs.
There may be arguments for paying large dividends, or doing a hybrid of the options available above.
There may be arguments for not paying dividends but liquidating the Company, and claiming Taper Relief. You have to consider, with help, which is best.
Consider putting in place confidentiality agreements at a very early stage, otherwise you may find the business disappearing over a period to a competitor who appeared interested originally in buying. These may have to be carefully drafted.
Trying to improve the figures by reducing your remuneration is unlikely to succeed as don’t forget that a purchaser will have their own view of the profitability of the company, dependant upon their own circumstances, both now and in the future. Second guessing how a prospective purchaser may view your business is difficult.
Bear in mind that if you are selling a trading company, say for cash, you are probably selling shares that would be free of Inheritance Tax (after Business Property Relief) for assets that will be fully chargeable to Inheritance Tax at 40%. Again some restructuring early on can sometimes be useful to mitigate this.
Make sure all the profits are correctly reported. Saving say 20% or 30% tax for 5 years could cost maybe 100% on that bit of the purchase price for 5 years, on a 5 years earnings valuation basis.
Tax treatment can vary widely on a sale. Just one obvious example of this is Stamp Duty; 1/2% on shares, or it can be 4% on Property (over £500,000). Others are more subtle and/or less predictable. You need to consider the position carefully. It may be necessary to adjust group structures, ownership etc. before a sale.
Think about Health and Safety aspects, and get records up to date and correct, before the purchaser even comes round the corner.
Consider what the position is on continuing staff; some may be invaluable if you don’t plan to be there long term. Make sure they are onside and in step. Some may be less valuable.
Make sure all the records and documentation stacks up and is available.
Floating in the Stock Market is not suitable for many businesses but it can allow you to have your cake and eat it! We have helped clients to float their companies.
The Alternative Investment Market is not just a junior market, but was established primarily to obtain seed or working capital for developing companies. The AIM may not therefore be the place to float a successful cash generative company, especially if the prime-mover is intending to retire, but there are circumstances in which it may be.
In negotiating with purchasers or brokers, in many cases you are best not to regard them as professional gentlemen, however well you know them! Think of them as well dressed barrow boys because that is how it can really work out! Note that this is nothing personal to brokers or barrow boys, we like you all, and every one is different.
You may have to consider [dispassionately] breaking up your business and selling any trade or goodwill separately to the assets.
Avoid the ‘fire sale’ aspirations of predators. If a prospective purchaser is going to buy on an assets basis anyway, apart from any tax penalties there is nothing lost in this route, and tax wise it can sometimes be better, infact.
So some keys to EXIT ROUTE planning are:
- Get a Plan that is in your best interest. Write it down, confidentially, including a plan ‘B’
- Build the business up, make it well worth buying. In the meantime of course you can live quite well out of it.
- Be relaxed, point out to everyone early on that you don’t need to sell [unless you do, then all the rules change].
- Be prepared to take quite a lot of time, and spend a long time, steadily marketing the company.
- Talk to Gowers Limited, or other competent advisors, early on. Tax planning can be very cost effective indeed, and we, or they, may have some commercial ideas that help. Commercial ideas can be at least as cost effective as the tax planning.
- Be prepared to stay around, if necessary, after the sale, to get the maximum price. A purchaser who thinks you are about to do a runner may think they smell a rat even if there is not one there.
- Be realistic don’t hold out for the last penny and jeopardize the deal.
- Enjoy the process and make your own luck. Have FUN processing the sale or you will just find it to be a traumatic time, it is hard work but should be worth it in the end.
Generating the benefit from a long-term business in retirement is a significant goal for many business people. Many fail to achieve it through a lack of forethought and advice. Sometimes all it takes are small changes and a modest amount of planning to realise this goal.