From one small business owner to another: planning your exit

As a small business owner Angela MD of ETC Tax talks exit planning.

Introduction

Small business owners choose to run their own business for many reasons. For lots of business owners, their businesses give them ultimate flexibility and control of their own destiny.

We are able to choose what decisions we make, what hours we work, and how we draw an income.

Whilst running a small business certainly isn’t easy, especially in today’s climate, the potential rewards can be attractive, but often the real “pay-day” for small business owners comes when our businesses are sold. This is when things can get really exciting….

Yet many small business owners simply do not have, or allow, the time to think about their exit plan whilst growing their business. We do not think about the when, the where or the how.

It is somewhat ironic that as a tax adviser, (and having previously worked as a commercial tax lawyer) I have worked with business owners at all stages of their journey, and always encourage my clients to take some time out to plan for the future.

…….how is it the saying goes?  “Do as I say, not as I do!”…..

Top ten steps towards getting the exit that you deserve

So as I plan for our new financial year and start to think further ahead, I thought I would set out my top ten steps towards getting the exit that you deserve.

1. Plan ahead: as the saying goes, it’s never too early to think about your exit. Whilst an exit may not be high on your agenda if your business is in its infancy or has only been trading a few years, thinking about an exit early can make things so much easier when the time comes to take the plunge.
2. Consider the business’ valuation: as your business starts to grow you will likely be more interested in what your business is worth, what factors might impact this and how those might be addressed. You may also want to bring key management into the business with some form of share incentivisation.
3. Review company structure: it is useful to periodically check in on how your business is structured; are there different arms to the business which would benefit from separation; does the business own a property and, if so, do you want to ringfence this; does the business have or is it starting to accumulate a large cash balance? If so, a pre-sale restructure may be of benefit.
4. Consider pre-sale tax planning: are there any losses that need to be used prior to any sale; should any dividends be paid to shareholders before the sale, should any shares be transferred to other family members?
5. Get your paperwork in order: it is important to ensure that the business’ historic and current records are complete and accurate. This includes ensuring that any capital gains tax and capital allowances calculations can be or have been calculated correctly. This will greatly assist with the buyer’s due diligence process and make your life as a seller much easier too!
6. Consider the possible routes to exit: third-party sale, management buyout (MBO), company purchase of own shares (CPOS), or employee ownership trusts (EOTs). You need to understand which method will best achieve your desired objectives and what that means for you as the business owner.
7. Determine the tax treatment: once you have narrowed down a couple of viable routes to exit, it will be critical to understand the tax analysis of those options. Does one option produce a more favourable tax result, and are there any specific tax reliefs available?
8. How will the consideration be structured: you now know what your business is worth and your exit options, but you need to understand how you will get paid. Will there be an earn-out; is any element of the consideration deferred; will loan notes be issued? The tax consequences of the consideration structure need to be properly understood.
9. Getting the paperwork right: once you have agreed how the sale will be structured, you will need to consider whether a pre-sale tax clearance is needed. Once HMRC approval is given (if needed), legal documents can be drafted. It is important to make sure that the legal documents correctly reflect the agreed deal and that they do not prejudice or otherwise disagree with the tax analysis.
10. Post-sale: at this point, the deal is done and you can breathe a sigh of relief! However, the work is not quite over yet. You will need to report the sale and deal with any tax compliance. You need to ensure that any capital gain is calculated correctly (taking into account any reliefs such as business asset disposal relief or investors relief). You may be claiming holdover relief, or you may want to reinvest some of the sale proceeds in EIS investments to achieve a capital gains tax deferral. All of this needs to be carefully documented.

In summary

Once all is said and done, you will hopefully be in receipt of a nice cash lump sum in exchange for your shares, and after all that hard work I really hope that you might treat yourself to something nice – a new car, a holiday; even a boat!!

Take your time and enjoy your success, but once you come back down to earth don’t forget to get some advice on your inheritance tax position!!

Next Steps

Our team at ETC Tax have significant experience in advising small and medium-sized business owners at all stages of their business, including advising on all aspects of exit planning, and would be happy to assist with:

• Valuations
• Pre-sale tax planning
• Reorganisations, reconstructions and demergers
• Tax due diligence
• Structuring a sale
• Inheritance tax planning

Do get in touch if you would like to find out more and in the meantime I wish you continued success with your small business.