Selling a business can be an anxious time for its owner – letting go of what they’ve built over years of hard graft to someone else who will take control. There’s a huge amount of diligence required, paperwork, and stress, let alone the almost-existential question of what comes next in their career. Douglas Cameron, senior financial planner at Brewin Dolphin Glasgow, offers his tips.
From experience, one of the biggest concerns is financial: whether the proceeds for the sale will be sufficient for the vendor to continue the lifestyle to which they’ve become accustomed. Faced with uncertain income in the years ahead, they need to know how much is enough for the rest of their lives.
In many cases, they won’t know. And that is a source of considerable consternation as negotiations in a deal move closer towards a conclusion. In many cases, the business owner will only realise towards the final stages of a deal that the figure put in front of them isn’t going to be enough.
However, if the right steps are taken at the correct junctures in a transaction, that doesn’t have to be the case. Following some relatively simple steps can remove a serious amount of anxiety from the process:
1. Initial phase of the deal
Undertaking upfront personal cashflow forecasting can prevent deals falling through at the last minute.
The process helps reconcile the owner’s understanding of their long-term financial needs with an adviser’s initial valuation. It models various ‘what if’ scenarios, according to their lifestyle, earnout, representations, warranties, and a host of other considerations.
Of course, in some cases the analysis highlights a shortfall between the vendor’s desired outcome and the likely post-sale financial reality. A negative personal cashflow forecast for the business owner may emphasise the need for further value to be built in the company. While the results can undermine or underpin seller confidence, from our experience, everyone involved prefers to know any deal-breaking factors sooner rather than later.
2. Preparation for sale
A deal should mean all the vendor’s current and future needs will be met, and an important part of this is encouraging them to consider what they want to achieve for themselves and their family.
Having their full financial picture is crucial in that regard. Will other assets cause problems? Do they have any trusts or other vehicles? What will be the impact of Business Property Relief and Capital Gains Tax? What are the limits for Shareholder Relief and how should cash reserves be treated? All of these will need to be answered to get to the right sale figure.
They then need to look at how the proceeds of the sale can be managed. Large pension contributions are one option, but aren’t suitable for everyone, and limits apply. Joining another pension scheme or death in service arrangement can also affect any protection the vendor has in relation to their lifetime allowance.
Another choice would be to invest the proceeds in an Enterprise Investment Scheme (EIS), which offers tax relief of 30% on investments up to £1m if the shares are held for at least three years. Any Capital Gains Tax from the sale can be deferred when the gain is invested in the EIS – but this becomes payable when the EIS shares are eventually sold. An investment may also qualify for Replacement Business Property Relief.
If the business owner is planning to wind down by retiring or semi-retiring, there are a host of other points to consider. Annuities and other incomes options, taking a tax-free lump sum from pensions, pension drawdown, and how a retirement fund fits in with other savings are just some of them.
When the deal is done, the business owner will typically have to consider how to put the proceeds from a sale to best use, based on the questions already outlined.
While many will re-invest into other ventures, they seldom put all their eggs in one basket. They’ll often need to invest at least a proportion of their wealth in a portfolio of investments, which reflects their personal circumstances, objectives, and attitude to risk.
This could involve a range of equities, bonds, and alternative investments such as structured products or commercial property funds. They can also be used alongside other savings vehicles such as ISAs and personal pensions, depending on what’s most efficient.
Selling a business is rife with pitfalls – both emotional and financial. Ultimately, the key to a successful deal is knowing the financial figure which will let the business owner live the lifestyle they want to have after the sale – everything else follows from there.
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