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.

Financial Advice for the established SME

An established SME will have larger staff numbers which leads to a more developed corporate structure with levels of management beneath the board. How do the owners keep those staff incentivised, all pulling in the same direction?

In the last blog I talked about some staff benefit package options (pension, death in service, private medical etc) which are all valuable benefits alongside an attractive level of pay. For the senior team and non-shareholding board members more incentive may be required. These are the people that have a great deal of responsibility in your business and people who you would expect to drive it forward.

A great way of galvanising a senior team and creating a culture of shared responsibility is with share ownership – often via an Enterprise Management Incentive (EMI) Scheme. With an EMI scheme selected employees are offered an option to buy shares in your company at a specified point in the future (which could be at point of sale) but at the value (or discounted value) at the time the option was granted. This gives the senior staff a financial reward that is directly determined by the success of the business. The tax position can also be advantageous in that there is no income tax or NI on the benefit received and on sale of the shares capital gains tax (CGT) can be at the entrepreneurs rate of 10%. A good accountant will be needed to advise on and set up such a scheme – again highlighting the real importance of having a strong team of advisers.

After making sure your key staff are bought into your business – this lead us to another what if? These are very important people to your business and if something happened to them there could be big negative consequences for the company. Key person protection is designed to pay out a lump sum on the death, terminal or critical illness of the insured key staff member – the idea being that the proceeds can be used to replace lost profit or for finding and hiring/training a replacement. Another area to consider for the shareholders would be director share protection. This would provide money so that if one of the shareholders dies the remaining shareholders in the business would have the funds to purchase the deceased’s interest from their estate. This is typically put in place alongside a cross option agreement to make sure the estate sells. This is hugely important – without one if a shareholder died you could find yourself working with an unwelcome new director or the estate may want to sell the share which could be difficult – leading to financial problems for the company and the family.

A conversation I often have with owners of SME’s is about property – not so much as an asset class but in relation to their specific property, the business premises. Many business owners would view rent as “dead money” and prefer to own their premises. They could buy their premises personally however any rental income paid by the business would be taxed on the individual at their marginal rate. Instead the premises could be owned by the business and held on balance sheet meaning the company saves the rent, but potentially this could put off a buyer in the future as they may not want or need a large property asset. An alternative could be to buy the property via pension – this could be via a SIPP (self-invested personal pension), a collection of SIPP’s (maybe all the SIPPs of the senior team) or perhaps even a SSAS (small self-administered scheme) which is a pooled pension fund only available with a sponsoring employer. The advantage of this would be that the company could fund pension contributions for the business owner(s), their pension scheme(s) could then borrow up to 50% of its net assets (on commercial terms) to provide additional funding to purchase the premises. With the pension fund(s) owning the property the business could then continue to pay a commercial rent to the pension fund, but this would not suffer any tax as it is within pension. The rents could be used to pay down the borrowing and then be an attractive income producing asset for the owners pension fund – all separate from the business.

It should be remembered however that property is not a liquid asset and can be difficult to sell, this could lead to problems when the time comes to take benefits from the pension. This could be further complicated when the property ownership is shared between pension funds and also when the members are no longer part of the business (post sale or retirement). There could also be conflicts of interest if the business decides to relocate/expand.

These points would need exploring further and good quality advisers would be required for legal, tax and financial planning – but all are real considerations and options for the established SME owner.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Any reference to taxation will be based on your individual circumstances and subject to change.

Steve Jordan is a director at Five Wealth with particular skills in advising business owners, entrepreneurs and high-income professionals. Use the links below to read his other blog posts, or to find out more.

A high growth business

After making a profit the next target is growth, to be a “high growth business” is a goal for many entrepreneurs. Running a business that makes a profit is an achievement, growing that profit year on year is fantastic. But with this comes the next set of considerations and planning requirements;

What do I do with the excess capital?

How to I take more out of the business without paying lots of tax?

How do I make sure my staff stay and I continue to attract more?

I have always been an advocate of people de-risking their personal positions. If an individual has separate assets/investments that are not linked to their business it gives them piece of mind and the ability to direct 100% of their focus to their business which is their primary goal. Extracting excess capital in a tax efficient manner, and then using this capital to build portfolios that can grow independently from their business achieves this goal.

At this point the company should have a good quality pro-active accountant who will provide advice on the combination of salary and dividend and the company’s scope to pay pension contributions. They then need to decide what to do with capital; cash reserves should have been built when the business began to make profits, so long term investment portfolios should be the next step. The tax efficient ISA allowance has now been increased to £20,000 p.a. so beginning to build ISA portfolios should be an initial and annual target.

The pensions that were started a few years ago when the business made profit can now be more fully funded using carry forward allowances and annual contributions allowance. Contributions into pensions can be made directly from the company gross and are considered a business expense so will result in a reduction in the corporation tax bill. Advice is essential here as the calculations for how much can be paid into a pension in any one year depend on a number of factors and the calculation is anything but simple – especially as the contributions get larger. A strategy here may be to plan potential contributions over the next few years in order to maximize funding scope and tax relief.

For those that don’t want to take too much out of the business (or don’t require it) then there is the option to invest on balance sheet. It is important that invested capital is not required for anything in the business and that this can be sure to be the case for at least 5 years if equity investment is considered. There are a number of other considerations here and advice would be essential but it is a viable option for those wishing to grow their excess cash within the business.

The driving force behind most businesses are the staff. Most companies will be in the midst of auto-enrolment now, but viewing the pension scheme as an attractive benefit and providing increased levels of contributions in excess of the minimums is a good way of rewarding staff and attracting new ones. Other considerations could be given to setting up Death in Service Schemes, group private medical cover (can include families) and even income protection. These can all be relatively inexpensive ways of putting together a really attractive benefits package for employees.

These are just a few of the things to consider when a business gets to the “high growth” position they aspire to. There are many other things to consider and everyone’s individual position and business will be different so there’s no one size fits all approach. What is important at this stage is to begin to formulate a plan with your adviser for you and your business.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances. Any reference to taxation will be based on your individual circumstances and subject to change.

A young business that is beginning to make some profits

At this time the owner(s) are likely to be working very hard and fully focused on continuing to drive the business forward. They have already accomplished the toughest thing, making a profit! they now want to push on and grow. For this they will have a business plan and perhaps a mentor to help them put that plan in place. If the business has a plan then so should the business owner, for themselves and their families.

Entrepreneurs tend to be very driven individuals, goal oriented and focused on the task at hand. They though, like all of us have worries, what ifs?

What if something happens to me and I can’t work?

What if the business goes through a tough time?

What about the mortgage, the school fees, other debts?

But, what if these worries can be taken care of? This would give the individual more time to focus on their main objective – growing their business.

At this stage the first thing on the list should be protection; for them, their family and their business. A relatively small outlay life cover should provide enough capital to cover all debts (including mortgages). Thought should be given to protection of income and also in the event of a critical illness. Protection for the business too; if something happened to you would someone you trust step in to run it, or potentially sell to generate capital?

What about personal exposure to the business? Reducing debt elsewhere and building cash reserves/investments that are separate gives peace of mind. This is hugely important and allows the individual to focus on their company.

For those with more scope thought should be given to the longer term – by setting up a pension now even if minimal amounts are contributed this effectively stores up unused pension allowances for the future. For high earners (those earning over £150,000) the pension contribution allowance is gradually eroded down to just £10,000pa once they are earning over £210,000pa. The ability to take this level of income from their company will be most owners long term aim, but building up a tax efficient pension fund will also be a target. The new rules on pension contributions could prove problematic in the future but by starting a pension early it effectively starts the clock for carry forward contribution enabling lump sums to be made at a later date. This is because unused contributions can be carried forward for a period of 3 years on a rolling basis.

These three areas I believe should be the first planning an entrepreneur takes when he/she begins to make profits from their business. They are relatively small and inexpensive steps so shouldn’t hinder growth but should enable less worry and more time to focus on their company, which has to be a positive!

Residence Nil Rate Band

On 6^th April 2017, the Residence Nil Rate Band (RNRB) was introduced and is available to those who, on their death, leave their main residence to a direct descendent. Initially the RNRB will be £100,000 per individual, rising to £175,000 by the beginning of the 2020/21 tax year, potentially allowing married couples to pass £1m of their estate value to beneficiaries free of Inheritance Tax (IHT).

Increases in the RNRB

The RNRB will increase per individual as follows:

The RNRB will be offset against the value of the property before the standard Nil Rate Band.

Tapering

Estates over £2m will see their RNRB tapered by £1 for every £2 over the threshold, meaning that the RNRB is lost once an estate is over £2.2m (individual) or £2.4m (couple) applicable to the 2017/18 tax year. Estate values are based on all assets less liabilities immediately before the individuals death. The tapering of the RNRB is applied before any exemptions or reliefs, meaning that qualifying assets for Business Property Relief (BPR) and Agricultural Property Relief (APR) form part of the estate when determining and applying the taper. Any lifetime transfers made within 7 years of death are not included.

Qualifying descendants

The RNRB only applies to transfers made directly to children, grandchildren (and spouses thereof) and trusts, provided the beneficiaries are treated as owning the trust asset (therefore excludes discretionary trusts). Consequently, those without children are prevented from benefitting.

Provisions for downsizing / sales

Downsizing provisions may apply where an individual, on or after 8^th July 2015, has sold, given away or downsized to a less valuable property. In order to claim under this provision, some of the estate must be left to qualifying individuals and will be limited to the lesser of the amount of estate bequeathed or the value of the RNRB in the tax year of death.

Transfers on death

The RNRB is transferable between spouses and is also available when the first death occurred prior to its introduction. There is also no requirement for the first to die to have owned a qualifying residential interest at the time of their death.

This summary provides an overview of the Residence Nil Rate Band, if you think that your circumstances may need reviewing in light of its introduction, please contact us for further clarification or advice.