Planning ahead to get maximum value
8 June 2014
Planning should start at least a year before an exit in order to get the best tax breaks and maximum value from a deal when a business is sold. Ann-Maree Dunn, tax partner at accounting firm WMT, says: “One of the key tax issues for exit strategies in family businesses is accessing entrepreneur’s relief.
“Entrepreneur’s relief is a generous rate of tax for people that sell their businesses. Maximising this means sellers can pay 10 per cent tax on their gains, instead of the standard capital gains tax rate of 28 per cent.” For larger businesses, planning may include making sure several directors are able to benefit from this relief.
What planning the business undertakes to get the best tax break in an exit strategy entirely depends on the owners and what they want to sell. Andrew Williamson, corporate finance partner at WMT, says: “The way the exit is structured always varies, depending on circumstances. But there are some generic strategies you have to think about to see whether they are applicable. These include: how the shares are held, how the business is structured, where the trade is, what buyers are interested in, and what the key assets in the business are.”
Dunn explains that many people who own their own company are looking to sell only parts of it. They may have property tied up in the business that they want to keep, or shareholdings that are spread fairly widely across family members. She explains that it is important to get the ownership structure of a business correct, so the assets they want to keep can be held as separate entities outside the sale process. This will ensure they will not impact on the full value for sale.
Dunn adds that this process can be lengthy. “The earlier business owners start planning their exit the better,” she says. “Five years ahead of the planned exit is a good benchmark.” The minimum she recommends is 12 to 24 months, which “will prevent business owners falling into bear traps or having problems that could have been fixed if they had time, but are impossible to resolve closer to sale”. If a business does not plan, it risks missing out on tax relief and not getting the best price.
It is also important to keep your options open. Buyers can appear unexpectedly before a planned exit date, and often the best deals can be within the existing management team. Management can also create tax breaks for the company when exiting by offering share option schemes. “Your existing management team knows the business inside and out,” Dunn says. “A lot of people have a strong sense of loyalty to their own team that will help them take the business forward.”
According to Williamson, a plan for an exit strategy requires ingenuity, and businesses should “make sure they are working with advisers who look at the situation from every direction to find the right route for both the owner and the business”.
So, if you are thinking of your exit strategy, plan early, plan well and be prepared to flex your strategy to make sure you and your business benefit from tax breaks and obtain the maximum value in a sale.
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