Exiting your Business
Please note this section is currently being updated for 2016/17.
At some point you will want to stop working in your business and either sell up and enjoy the rewards of your labours, or hand over the reins to your successors. It may not be top of your priority list right now, but exit planning is a vital part of your financial strategy and could make all the difference to your personal finances. Good planning will also help ensure a smooth transition for your business, once you are no longer involved.
Developing appropriate strategies at each stage of your business's lifecycle is crucial if you wish to obtain the maximum rewards for your efforts. Important issues to consider include:
- passing on your business to your children or other family members, or to 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 tax-efficiently
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 important to start planning in advance, especially 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 very important to plan now if you want to maximise the net proceeds from its sale.
You will need to consider:
- the timing of the sale
- the prospective purchasers
- the opportunities for reducing the tax due following a sale.
We can assist with these considerations.
Maximising the sale price
Anyone who is considering buying 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.
Historical profits drive the value attributable to many businesses, and therefore a rising trend in profitability should result in an increase in the business's value.
This means that profitability planning is particularly important in the years leading up to the sale. So, what is the range of values for your business?
A professional valuation will put you on more solid ground than educated guesswork. We can work with you to determine how you can add value to your business.
Business valuation: some key points to consider
- Are sales declining, flat, growing only at the rate of inflation, or exceeding it?
- Are stock and equipment a large part of your company's value, or is yours a service business with limited fixed assets?
- 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?
- How up-to-date is your technology?
- Do you 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 contracts with your suppliers and customers been formalised?
Getting the timing right
It is important to consider a number of factors when deciding on the best time to sell your business. These could be factors that may influence potential buyers as well as your own personal circumstances.
Personal factors to take into account might include:
- When are you planning 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?
Meanwhile, business questions to consider include:
- 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?
- How well is your business performing when compared to other, similar businesses?
- Is your business running at, or near, its full potential?
CGT - minimising the impact
Taxes are one of the less welcome, but inevitable, aspects of a business person'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.
As a basic rule, 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.
It is possible that reliefs can reduce a 28% CGT bill significantly. 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 to which you might be entitled.
The governing rules for CGT
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 your overall income and gains position for 2015/16. 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.
A special tax relief, Entrepreneurs' Relief, is available for those in business, which may reduce the tax rate on the first £10m of qualifying lifetime 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 qualifying disposal of shares or partnership interest.
All planned transactions require careful scrutiny to ensure that the available Entrepreneurs' Relief is maximised. Remember to keep us in the picture - we are best placed to help and advise if you involve us at an early stage.
CGT and non-residents
CGT is normally only chargeable where the taxpayer is resident in the UK in the tax year the gain arose, though the provisions of any double taxation treaty need to be checked. CGT may be avoided on most assets, provided the taxpayer becomes non-UK resident before the disposal and remains non-resident for tax purposes for five complete tax years.
A non-resident is still liable to CGT if UK residential property is disposed of after 5 April 2015. The non-resident may have to report such a disposal within 30 days of conveyance of the property and may need to pay the CGT within the same 30 day period.
CGT and death - There is no liability to CGT on any asset appreciation at your death.
Inheritance tax (IHT) and your business
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
Remember to take into account your business interests when you draw up your Will. While reliefs may mean that there is little or no IHT to pay on your death, 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.
Next steps: contact us to discuss...
- Preparing your business for sale and minimising the tax due
- Identifying successors within the business
- Exploring possible purchasers
- Valuing your business
- Timing the sale and maximising the sale price
- Planning your transition to your next venture
- Providing for a smooth transfer of your business interests at your death or if you become incapacitated