Note: This guide will be updated for the 2014/15 tax year in May.
Exiting your business
Your exit planning strategy
When starting a new business venture, few people give consideration to how they will exit the business when the time comes. Nevertheless, it is essential to think about your exit strategy in advance, so that you can maximise the personal financial gains, as well as ensuring a smooth onward transition for the business.
Developing appropriate strategies at each stage of your business’s lifecycle is crucial if you wish to obtain the maximum rewards for your efforts.
Every business owner should develop a personal exit strategy, and some important issues to consider 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 your 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 important to start planning in advance how you will realise that value.
This is especially 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 now in order 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.
Let us help you maximise the net proceeds arising from your ‘ultimate sale’.
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: key questions 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?
Timing the sale
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?
You will also need to consider business-related issues including:
- 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?
Minimising the capital gains tax bill
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.
CGT basics: 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.
Valuable CGT reliefs may be available: It is possible that reliefs can reduce a 28% CGT bill to zero. 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.
The rules governing 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 2013/14. 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 main 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 at the time the gain arose, though the provisions of any double taxation treaty need to be checked. 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.
CGT and death – There is no liability to CGT on any asset appreciation at your death.
Inheritance tax (IHT) – planning your legacy
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: 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.
Follow-up – Contact us about…
- 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