Posted on: 04 Jun, 14
Every business owner should have a personal exit plan. We sometimes refer to this as a ‘starting with the end in mind’ strategy.
Whatever thoughts you have concerning the sale of your business, creating and putting into practice appropriate strategies is essential if you want to secure the maximum reward for taking the risk of being in business. Key issues to consider could include:
If you consider your business to have a market value, or if you want your business to provide you with a lump sum on sale, it is essential to start planning how you will realise that value. This is particularly important if you envisage selling your business within the next 10 years.
There are many personal factors that are likely to influence when you sell your business. These may include:
External factors can also be important in timing your sale. If you can time your business sale to coincide with a period of economic growth, when buyers outnumber sellers and will pay premium prices, you will most likely secure the best price.
The current economic climate is much more buoyant than it has been for a number of years. As a result, there are a considerable number of companies looking to buy as well as hedge funds looking to build a portfolio of business groups. The following questions may assist in assessing the climate for selling your business:
You should assess the strengths of and opportunities for your business.
Selling your business is a major personal decision and it is essential to plan how you will maximise the net proceeds from its sale. When might you sell? Who are the prospective purchasers? What are the opportunities you have to reduce the tax due on the sale?
Whoever buys your business will want to be clear about the underlying profitability trends - is your profitability on the increase or decrease? You should be able to provide up-to-date management accounts and forecasts for the next 12 months to prospective purchasers.
The value attributed to many businesses is driven by the historical profits and therefore a rising trend in profitability should result in an increase in the business’s value.
Increasing profitability is always important but no more so than in the years leading up to the sale. So, what is the range of values for your business? Although you may think you can make an educated guess, a professional valuation gives you more solid ground. These are the sorts of questions a potential purchaser might ask:
These factors will all have an impact on the price-earnings ratio – the price per market share divided by the annual earnings per share. This, in turn, will determine the market value of your business. You need to weigh up the factors which might influence the right time for you to sell your business.
When you raise that final sales invoice and bank 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.
Entrepreneurs’ relief applies to sales of a whole or part of a business. This relief does not apply to the disposal of assets. There are specific circumstances under which the relief can apply to such a disposal, but these are related to the disposal of the business in which the asset is used
Entrepreneurs’ relief has a lifetime limit of £10 million for a reduced rate of CGT. The effective tax rate is 10%, giving a maximum tax saving of £1,800,000.
As this is a lifetime limit, each disposal uses up relief which would otherwise be available for subsequent sales. The types of disposal which attract relief are:
Where the business disposed of is run through a company, the seller must own at least 5% of the ordinary share capital of the company which must entitle him or her to 5% of the votes; he or she must be an officer or employee of the company, and the company must be carrying on trading activities, and to no substantial extent any other activities.
There is also relief available on the proceeds of winding up or dissolving a former trading company, provided this is done within three years of ceasing trading activities.
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