Exiting your business

Preparing for your exit

Although you may not intend to sell your business for some time, it is important to plan carefully for this eventuality.

Indeed, creating and putting into practice appropriate strategies at each stage of your business life is crucial if you wish to obtain the maximum reward for taking the risks inherent in being in business.

Every business owner should develop a personal exit strategy.

Important issues to consider may include:

• Passing on your business to your children or other family members, or a family trust
• Selling your share in the business to your co-owners or partners
• Selling your business to some or all of the workforce
• Selling the business to a third party
• Public flotation or sale to a public company
• Winding up
• Minimising your tax liability
• What you will do when you no longer own the business

Selling the business

If you consider your business has a market value, or if you are looking to your business to provide you with a lump sum on sale, it is essential to start planning in advance how you will realise that value.

This is particularly important if you envisage realising the value of your business in the next 20 years.

Selling your business is a major personal decision and it is vital to plan how you will maximise the net proceeds from its sale.
You will need to consider:

• When might you sell?
• Who are the prospective purchasers?
• What are the opportunities to reduce the tax due following your sale?

Let us help you maximise the net proceeds arising from your ‘ultimate sale’. 

Maximising the sale value

Whoever buys your business will want to be clear about the underlying profitability trends – are profits on the increase or declining?

Up-to-date management accounts and forecasts for the next 12 months and beyond will be close to the top of the list of the information which you will need to make available to prospective purchasers.

The value attributable to many businesses is driven by their historical profits, and therefore a rising trend in profitability should result in an increase in the business’s value.

Profitability planning is always important, but is particularly so in the years leading up to the sale. So, what is the range of values for your business?

Although you may think you can make an educated guess, a professional valuation gives you more solid ground. Determine your position today and then work with us to establish how you can make your business more valuable.

Valuing the business: key factors to consider

• Are sales flat, growing only at the rate of inflation, or exceeding it?
• Is yours a service business with limited fixed assets, or are stock and equipment a large part of your company’s value?
• To what extent does your business depend on the health of other industries?
• To what extent does your business depend on the health of the economy in general?
• What is the outlook for your line of business as a whole?
• Are your company’s products and services diversified?
• Does your company use up-to-date technology?
• Does your business have an effective research and development programme?
• How competitive is the market for your company’s goods or services?
• Does your company have to contend with extensive regulation?
• What are your competitors doing that you should be doing, or could do better?
• How strong is the company’s staff base that would remain after the sale?
• Have you conducted a thorough review of your overheads, to identify areas where costs can be reduced?
• Have you formalised contracts with suppliers and customers?

Deciding when to sell the business

You need to weigh up the factors which might influence the right time for you to sell your business.

Personal factors which you might want to take into account include:

• When do you want to retire?
• Do you have any health issues?
• Do you still relish the challenges of running your business?
• Does your business have an heir apparent?
• Will your income stream and wealth be adequate, post sale?

You will also need to consider business-related issues such as:

• What are the current trends in the stock market?
• To what extent is your business ‘trendy’ or at the leading edge?
• Is your business forecasting increases to the top and bottom lines?
• Is your business doing better than other similar businesses?
• Is your business at, or near, its full potential?

Minimising your capital gains tax liability

Taxes are one of the realities of the businessperson’s life. When you raise that final sales invoice and realise the proceeds from the sale of your business, you should be completing one of the last steps in a strategy aimed at maximising the net return by minimising the capital gains tax (CGT) on sale.

CGT basics: As a basic principle, CGT is charged on the difference between what you paid for an asset and what you receive when you sell it, less your annual CGT exemption if this has not been set against other gains. There are several other provisions, which may also need to be factored into the calculation of any CGT liability.

CGT reliefs may be very valuable: It is possible that reliefs can reduce a 28% CGT bill to zero. If you want to maximise your net proceeds it is vital that you consult with us about the timing of a sale, and the CGT reliefs and exemptions which you might be entitled to claim.

The current rules

The taxable gain is measured simply by comparing net proceeds with total cost (including costs of acquisition and enhancement expenditure). The rate of tax depends on the date of disposal and, if that date was 23 June 2010 or later, your overall income and gains position for 2010/11. For disposals up to 22 June 2010, there is a flat rate of CGT – 18%. For disposals on or after 23 June 2010, gains will be taxed at 18% to the extent that your taxable income and gains fall within the upper limit of the income tax basic rate band and 28% thereafter.

For those in business there is a special tax relief (Entrepreneurs’ Relief) which may reduce the effective tax rate on the first £5 million (£2 million 6 April 2010 to 22 June 2010, £1 million prior to 6 April 2010) of qualifying gains to 10%. Generally, the relief will be available to individuals on the disposal (after at least one complete qualifying year) of:

• All or part of a trading business carried on alone or in partnership
• The assets of a trading business after cessation
• Shares in the individual’s ‘personal’ trading company
• Assets owned by the individual used by the individual’s personal trading company or trading partnership where the disposal is associated with a main qualifying disposal of shares or partnership interest.

Transitional relief is available for certain disposals arising prior to 5 April 2008, where gains were deferred, such as QCBs (qualifying corporate bonds) and EIS (Enterprise Investment Scheme), provided the deferred gain would have qualified for Entrepreneurs’
Relief if it had been available at the time of the original disposal. The provisions also allow for Entrepreneurs’ Relief to be claimed in reorganisation transactions arising from 6 April 2008.

What is clear is that all such planned transactions will require careful scrutiny to ensure Entrepreneurs’ Relief is maximised. Some disposals which would have qualified for the maximum business assets taper relief do not qualify for the new Entrepreneurs’ Relief. Keep us in the picture – we are best placed to help and advise if you involve us at an early stage.

Non-residents and CGT

CGT is normally only chargeable where the taxpayer is resident in the UK at the time the gain arose. CGT may be avoided, provided the taxpayer leaves the UK before the disposal and remains non-resident for tax purposes for five complete tax years. Furthermore there is no liability to CGT on any asset appreciation at your death.

Inheritance tax (IHT) and your business

Lifetime transfer(s): For the business owner, the vital elements in the IHT regime are the reliefs on business and agricultural property (up to 100%), which continue to afford
exemption on the transfer of qualifying property, or a qualifying shareholding.

Transfers on your death: Do not overlook your business when you draw up your Will. Reliefs may mean that there is little or no IHT to pay on your death, but your Will is your route to directing the value of your business to your chosen heir(s) unless the disposition of your business interest on your death is covered by your partnership or shareholders’ agreement.

We can provide guidance on the following:

• Grooming your business for sale and minimising the tax due
• Identifying successors within the business
• Identifying possible purchasers
• Valuing your business
• Timing the sale and maximising the sale price
• Planning your transition to your next venture
• Providing succession options through your partnership or shareholders’ agreement
• Providing for a smooth transfer of your business interests at your death or if you become incapacitated
• Your business and your Will