Planning for retirement
Selling a business
Selling your business is arguably one of the biggest decisions you can make as a business owner. It can be a protracted process requiring broader considerations beyond the balance sheet and getting the right price. We’ve created this Q&A to explore the top 10 most commonly asked questions and provide insightful tips to help you consider the bigger picture when selling your business.
When is the right time to sell a business.
There are many reasons, both personal and commercial, for those looking to sell their business. Some may be looking to down tools and enjoy their success and wealth. Others may want to start a new venture. Recent events might also play a role. Until the global pandemic, many business owners may have felt their trading business was the best source of value for the long term. But after the stress and turbulence of the past few years, you might now wish to diversify your wealth and have the reassurance of taking some risk off the table. The market environment will also be a factor. When investors, such as Private Equity and Venture Capital firms, have money to spend, it becomes more common for business owners to receive a surprise offer, which will need to be quickly evaluated.
Regardless of the reason or timing of the transaction, when it comes to selling a business, early preparation is key. There’s more to this than just the practicalities. There are the emotional aspects to the sale. It can be hard to let go of a business you’ve poured your heart and soul into over the years. This can be especially true for family businesses. If you’re looking for a buyer who will continue running the business in its current form, this might take longer to find.
Why do I need a Client Adviser when selling a business.
Your Client Advisor will ensure a clear understanding of your current position and most importantly your needs and priorities for the future. That means that all scenarios, including business sale, can be factored into the tailored guidance that ensures your wishes and priorities are achieved during a busy and often stressful period.
Your Client Advisor will guide and advise you through each step of the process – pre-sale, point of the sale and implementing the long-term future plan aligned to the needs of you and your family.
We can be a regular sounding board, enabling you to reflect on the professional advice you’ve received and helping you to ask the right questions, having been down this path with clients many times. We can be a “counsellor” to help you tease out what the future looks like post sale for you and your family, engaging on your wealth management journey well before any exit.
What professional support should I consider when selling a business.
Once your goals are clear, we can help you build the right advisory team for the transaction, tailored to your personal requirements. You might also consider existing advisors who have worked with you as you were setting up and growing the business. If this is outside of their expertise however, then you will need to bring together a team for the task now at hand. Alongside your Client Advisor, typically you will need legal, tax and corporate finance advisers.
What questions should I be asking myself when selling a business.
Crucial questions to ask yourself when considering selling your business are:
1. Why am I selling and therefore what do I want to achieve? Should I consider other means such as an Initial Public Offering (IPO) or private equity investment? It’s worth being aware that there will be very different dynamics if you sell to someone in the trade versus selling to an investment company.
2. Do I want to retire and step away fully, or do I want to continue to work in a company which I partly own, or not own at all? Do I want cash or am I happy to hold shares invested in the new company?
3. Are my personal affairs in order to allow me to exit efficiently?
4. Do I place value on maximum cash out upfront or will I take a higher overall value if I defer some of the consideration in the form of loan notes, shares or future milestone payments?
5. What might this mean for the employees and management team – are they interested in buying the business? Who is the perfect buyer - is it size of the cheque or the cultural fit important to you for your former team?
Where to start when selling a business.
Spend time “working on your business, not in your business” ahead of selling. This can help to maximise the value of your business and lay the groundwork for what comes next. Before the likely point of sale, think about your personal long-term plans and objectives. The sales process can be busy, move quickly and bring high levels of stress, so preparation is key to ensure the best outcome possible. When you are ready to sell and personal requirements are clear, bring together an advisory team to examine options, valuation, potential buyers, enhancements to maximise value and to consider the structure of the potential deal.
Is a business the best way to preserve my wealth?
The only right answer to this question is the right answer for you and your family. Private business remains a hugely successful segment of the economy and the ability to create and grow wealth is clear to see. However, recessions and black swan events can change the fortunes of a business. There are no guarantees. That’s why it’s worth looking at all the options open to you for preserving wealth.
For many, working with Client Advisors to slightly alter the focus from being a “family business” to a “business family” creates a roadmap to explore diversification of interests, diversification of risk and creation of a wealth plan which may well still have the trading business as part, but not all, of the strategy.
You may consider de-risking for the family, as opposed to a full sale. This can involve diversifying to transfer wealth from the business to you as an individual. For example, profit extraction via pensions or increasing the level of dividends where possible. Although many business owners say “my business is my pension”, pensions can be a useful tool in wealth and generational planning, and this approach can offer some protection, should the business falter at a later time.
Is selling my business the best financial option for me?
There is no single “right” answer. It has to start with what’s important to you and your family, now and in the future?” Ask yourself “What do I want to achieve?” and “What part does the business play in that?”
There are a number of different options to consider. Maintaining a successful privately owned business through generations and handing off control when the time is right whilst maintaining income can work for many. In this situation, you would want advice on how to set up the business for sustained success over the long term. This helps to avoid the risk of “clogs to clogs in three generations” – where the majority of wealth created by a business owner is gone by the time it reaches grandchildren.
It might suit you better to bring in capital via external investment or from employees interested in taking ownership, especially if you want to stay in the business and take profit to build some personal wealth. Floating the company is a natural progression for some business owners. For others, full sale is the chosen route and cleanest exit strategy.
Only by really taking time with your Client Advisor and other advisors can you be clear on your priorities. These conversations will enable you to properly assess the options in a way that will drive the best outcome for you.
What are the tax implications when selling a business?
When selling a business, taxation is a big consideration given the ever changing tax regimes. Changes to Capital Gains Tax rates, business owners’ relief, business asset disposal relief and investor relief mean that the tax environment at the point of sale will be difficult to predict.
It’s certainly true that you should never let potential changes to the future tax environment drive decisions that would otherwise not be made. Once the decision to sell is made, it’s critical that you obtain professional tax advice and undertake appropriate tax planning. This will create the most efficient exit strategy and the right structure for your wealth post sale.
Understanding the type of tax that will be due, when it will need to be paid and any relief available is the minimum requirement. Planning and managing your position to control those aspects is achievable and desirable.
Your trading business is likely to be exempt from inheritance tax. The definitive position on this will be decided by your local inspectorate of taxes when it becomes due. When it is sold for cash, the proceeds are immediately inside your estate and these are potentially subject to 40%* tax upon your death. Structuring and managing your wealth pre and post sale is essential, and this is something a Client Advisor can help with.
Is selling a business considered capital gains
Yes – proceeds from the sale of a business are subject to capital gains tax, although relief or lower rates of tax may apply depending on individual circumstances. Planning before the sale to understand and make use of such relief is important.
How is the sale of a business structured and what options are available
The sale of a business can be structured in many ways to suit both the seller and the buyer. Offers can be made as cash, cash plus shares in the new company, cash plus loan notes, upfront payment, plus deferred sums subject to hurdles or performance expectations being achieved. In many cases the buyer will want to take advantage of the expertise of the seller. It is very common for an earn out period to be built into the sale agreement, meaning that the seller continues to work for a period of years post sale to ensure a smooth transition. Be ready for the emotional hit of not being in charge of “your” business any more! It can be a difficult adjustment to make.
Management buyouts and employee ownership are becoming increasingly common, whereby external capital is raised to support the transition of ownership to the employees of the business. Many business owners also see this as a way to protect jobs and pass on control as a key part of their legacy (and one which may be more important than price alone). Tax implications can be very different depending on how the company sale is structured and it is important to take early professional advice to achieve the best outcome.
We recommend that you seek professional tax advice to understand your personal tax liabilities.
This will depend on personal circumstances and the prevailing tax rules, which are subject to
change.