Exiting Your Business

exiting your business
EXITING YOUR BUSINESS

You have built up your business with a lot of effort and sometimes met with setbacks which you have overcome. You have helped it survive and grow and it has been running well for the last few years.

There will come a time though to exit and leave it to others to take it forward. You may have reached a certain age, got bored and want a new challenge or the ongoing stress is beginning to tell.

Just as it took you a lot of consideration to start the business (or take it over from a former employer or your parents), getting the right thoughts together about exiting is important and deserves the same amount of consideration as it affects not only you and your future financial wellbeing, but your employees and customers.

The short blog touches on two of these important considerations – Getting a realistic valuation of the business or company well before the process starts and ensuring that the tax liability on the gain on exit is minimised by ensuring that maximum tax relief available.

VALUING THE BUSINESS

I have come across valuations in the past carried out wrongly on a net asset basis taking no account whatsoever of the inherent goodwill which in some cases is significantly the more important element of value. This is a point to bear in mind.

I would therefore advise that a proper valuation is carried out by an independent professionally qualified expert who is experienced in carrying out valuations on a regular basis i.e weekly. Valuers with this professional status are entirely independent of the sale process and carry out valuations under various tried and rested methods which point towards, or confirms a valuation that can be justified as being the market value for sale to a third party.

The valuation depends on how well the business can deliver profits without you being there and a projection of at least 3 years’ earnings into the future. Afterall, people are buying future potential rather than past performance and a business must remain relevant in today’s market to have a future.

I would therefore take with a pinch of salt any value provided by a business sale agent as by and large they are compromised by the fact that they are paid a commission based on the sale value and sometimes give wildly excessive valuations in order to secure work.

Years ago, I had a client who was quite tempted with the offer of a million pounds for his business but on carrying out a valuation for that business we arrived at a valuation of £2 million so although he was being flattered by the valuation provided by the potential purchaser, he subsequently sensibly decided not to sell at such an under valuation.

TAX CONSIDERATIONS

The main tax consideration is ensuring that the capital gain realised is one that qualifies for Entrepreneur’s Relief and hence is taxed at a 10% tax rate. Well before sale, you ought to establish whether there is any risk that the gain might not qualify for the relief and try to comply with the conditions well before sale.

Entrepreneur’s relief applies both to the sale of shares and the sale of an unincorporated business where one is selling the tangible assets and the intangible asset of goodwill.

For the sale of an unincorporated business, you must either be a sole trader or a business partner in the business to qualify for Entrepreneur’s Relief on the gain realised.

Where a sale of shares is involved and the shareholdings spread across family members, it is important to ensure that each of the shareholders qualifies for entrepreneur’s relief if at all possible.

CHANGES IN THE 2018 BUDGET

There were two changes introduced in the budget on 29 October 2018 that imposed further restrictions. One of which was more important than the other. From 6th April 2019, the minimum period throughout which various qualifying conditions must be satisfied in order for the relief to be available is being doubled from one year to two years.

The second condition that has changed was that an individual must be entitled to at least 5% of the company’s distributable profits. The previous test required at least 5% of the company’s ordinary share capital and be able to exercise at least 5% of the voting rights in the company. Two additional tests to this 5% rule are that one must have an entitlement to 5% of the distributable profits and at least 5% of the assets in a company’s winding up.

Quite commonly there could be different classes of shares in existence in a company. There has been a concern recently because the dividends payable on each class of share were discretionary, there was a lack of entitlement to any percentage of profits available for distribution. However, a Government announcement on the 27 December 2018 seems to have allayed concerns in this regard by tabling an amendment to the Finance Act 2019. The new test looks at a future hypothetical sale and whether or not the shareholder concerned would be entitled to at least 5% of the proceeds of sale.

Apart from the percentage shareholdings, the individual has to be an employee or an office holder of the company throughout the qualifying period and the company needs to be a trading company or a holding company of a trading group.

OTHER THINGS TO CONSIDER

Presale restructuring of the company may be necessary to ensure tax optimisation in cases where you are selling to employees and they are paying you out over a period of time through future profits that they will be earning following your departure or stepping down as the owner/director. You need to seek specialist advice in this area which we can provide you with.

Apart from providing valuation, tax and structuring advice, we are as a firm able to provide consultancy advice on the necessary internal processes that need to be followed in order to ensure that valuable members of the team are kept fully aware of your intentions at all times so that your business retains its commercial value whilst going through the exit process which can take some time.

Leave a Reply

Your email address will not be published. Required fields are marked *