If you can’t imagine parting with your business and intend to keep it for the rest of your days, then you need to consider what will happen to your business after you’re gone. If, on the other hand, you envisage one day handing over the keys to your business for some cash to spend, invest and/ or retire in comfort, then a sale is on the cards at some point.
If you expect to leave your business within the next five years, then you should start planning now to maximise its sale price. A sale could involve selling to another business (a trade sale) or to your management team (a management buyout) which may include the next generation of your family.
Deals can be structured in many different ways and could involve you keeping a reduced stake and playing a decreasing role. Some of the sale proceeds may be paid to you at a later date (deferred consideration) and this may depend on how the business performs, known as an earn out.
A key part of your preparation should be conducting a full audit of your business to ensure there are no issues which could reduce its value in a sale process when the buyer undertakes its due diligence.
The most common legal issues to look out for are:
It is also important for you to take tax advice on the proposed structure of any sale. You may, for example, qualify for Entrepreneur’s Relief on the proceeds of the sale. This currently reduces the Capital Gains Tax rate down to 10% although it will only apply on proceeds up to a lifetime limit of £10m.
Not to Sell
If you don’t want to sell, consider whether your next of kin are willing to take up the mantle after your death. One advantage of passing your business to the next generation is that it may qualify for Business Property Relief (BPR) which provides up to 100% relief from Inheritance Tax (IHT) on the value of relevant business assets. If, however, you sell your business in your lifetime, then the cash you receive for it will not qualify for BPR so would be counted in the value of your estate for determining any IHT due. This effectively means the proceeds are taxed twice: once in your lifetime at Capital Gains Tax rates, and again in your estate at IHT rates. There are strict criteria for BPR to apply, so you should always take advice factoring this into your succession planning.
If your business is not going to pass to your family, then who do you want it to go to? If you have business partners, then they are likely to be the natural choice, but you probably still want your family to receive value for your share of the business. In these circumstances, you and your business partners may wish to have an agreement which includes taking out life insurance so that the surviving party/parties can afford to buy the deceased party’s share from their estate.
If you would like any advice in relation to your business, you are welcome to get in touch with our senior partner Richard Moran.
You can call Richard on 0113 222 3212 or email firstname.lastname@example.org.
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