Financial Advice when selling your business.
Sale is often the long-term goal when an entrepreneur starts out. They want to build their business into an established company that they can ultimately sell and receive a (hopefully large) capital sum which will be taxed at just 10% [1]. Although I have a working knowledge of some of the options available (Trade sale, Management Buy Out, Employee Ownership, Private Equity deal etc) I am by no means an expert and that is what a business owner needs in this situation, a good corporate finance adviser – they should really be having discussions a few years before. That said, although a financial adviser isn’t the one who will organise the exit for you, a good one can play an invaluable part in the process.
I have spoken to many business owners who have sold, are approaching sale, or at some point will sell. They often have a “magic number” in their head as to the figure (£) they want to receive. Sometimes this is achievable, sometimes it isn’t – but what drives this figure? The question I would ask is – what do you want to do afterwards? This should hopefully lead to a real conversation which could be about all the things that have been put off whilst working flat out on their business – retirement plans, travel, bucket lists, property purchase(s) or perhaps just the next business they want to start. From those discussions a plan can be developed as to how much capital will be required to achieve their goals and then how much income will be required to live comfortably, for perhaps the rest of their lives. Once we have those answers we can work back as to what their magic number should be to achieve those plans.
This sounds relatively simple, but a good financial planner is needed to explain how a capital sum could be structured across a number of different tax wrappers in order to produce a regular “income” stream (that maybe a combination of income and capital) that uses all available allowances and hence limits the tax that is paid on that income. Too often when doing these rough calculations people just look at a pot of money, apply a 4% yield and assume 20% tax will be paid on that yield. With good planning, depending on the sums involved, the net figure should be significantly closer to the gross than this.
The time to seek financial advice is actually well before a sale occurs, your adviser should be part of those early discussions coming up to sale, working alongside your other advisers and helping understand how the capital you may be able to receive could be structured to provide for your long-term requirements and what planning can be done in advance of a transaction. You may find that the magic number is less than you thought?
Once the sale completes it should be about implementation of the plan that has been constructed well before. Many exits involve an initial capital payment then a staggered earn-out based on performance, the owner is often retained in the business on a salary for a period of time to manage the transition. Each deal will be very different and can change as terms are agreed. A bespoke but flexible plan is needed and an adviser that has knowledge of experience of such transactions is very important.
It is important to not just focus on the now, but also the future. If a structure can be set up that achieves your initial objectives it should also be mindful of your longer-term plans. In most cases this will involve intergenerational planning and inheritance tax (IHT) planning. A significant sum of money if managed well could provide an “income” and be passed on to children and grandchildren inheritance tax efficiently using a combination of gifts/trusts, and potentially more bespoke structures such as Family Investment Companies. Such bespoke advice would certainly involve a trusts lawyer and tax accountant.
The aim of this blog is not to set out a standard financial plan for those selling a business, nor is it to simply list a range of suitable products/investments and how they may be used. It is to highlight that for those in this position good advice is not only essential, but it is essential that advice is sought early on in the process, ideally at the stage sale is being considered.
[1] Entrepreneurs’ Relief means you’ll pay tax at 10% on all gains on qualifying assets which would include owning 5% or more share in a trading business and voting right.