Don’t leave planning your exit till it’s too late
However you plan to exit your business, getting all your ducks in a row at the right time is vital if you are to get the most out of your hard work.
The importance of forward planning
Whether you’re exiting three years from now or in three decades, when you do sell up then business exit planning is a crucial element of your financial strategy, and could make all the difference to your long-term personal finances.
Maximising the sale value
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.
Anyone who is considering buying your business will want to be clear about the underlying profitability trends. Are profits on the increase or declining? 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.
Your business valuation
When considering business valuations, some of the key questions to ask are:
- Are recent sales declining, flat, growing only at the rate of inflation, or exceeding it?
- Are stock and equipment a large part of your business’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 business’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 business’s goods or services?
- Does your business have to contend with extensive regulation?
- What are your competitors doing that you should be doing, or could do better?
- How strong is the business’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?
When is the best time to sell?
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.
- What are the current trends in the stock market?
- To what extent is your business desirable or 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?
Considering capital gains tax
Taxes are perhaps one of the less welcome 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.
CGT reliefs can reduce a 20% 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.
Calculating your CGT liability
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 2018/19. Gains will be taxed at 10% to the extent that your taxable income and gains fall within the upper limit of the income tax basic rate band and 20% thereafter. These CGT rates are increased to 18% and 28% for carried interest and gains on residential property.
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. Investors’ Relief also provides a 10% rate with a lifetime limit of £10 million for each individual. The main beneficiaries of this relief are external investors in unquoted trading companies.
CGT and non-residents
CGT is normally only chargeable where the taxpayer is resident in the UK in the tax year the gain arose, although the provisions of any double taxation treaty need to be checked. CGT may be avoided, provided the taxpayer becomes non-UK resident before the disposal and remains non-resident for tax purposes for five complete tax years.
Getting everything lined up to maximise your hard work is in itself more hard work. But bringing a business finance professional on-board can certainly make the load less, and also provide you with valuable guidance and insight.
To find out more about how we work with serious startups, have a look here. Or you can call Acconomy on 01202 678 993, or even email Nigel directly on firstname.lastname@example.org