How and when will you exit your business?
Whether you plan on leaving it to family when you retire or dream of selling it and starting something new, an exit plan is the key to a smooth, profitable exit.
When it comes to exit preparation, it is always a case of “the sooner, the better,” according to our Client Director Chris Yardley.
An integral part of your business plan, your exit strategy focuses on the legal and financial health of your business. It highlights everything from its current value to the improvements that may increase buyer interest. Taking a proactive approach – well ahead of your desired exit date – means that you are better able to groom your business for sale or your family members for succession.
When preparing for exit or navigating the sales process, Chris points out that many entrepreneurs forget to consider how they will deal with the proceeds of their business sale. This can be problematic.
“Too many business owners do not take the time to understand what the financial consequences of a sale would be on their family and personal wealth,” Chris states. “Oftentimes, I find that business owners need to think more selfishly about their own personal circumstances and not just the financial affairs of their business.”
In our exit strategy guide, we look at the steps that you can you take to prepare your business for sale. We also share insights to help you understand how you can protect and grow the proceeds of your business sale, with expert comment from Chris.
Preparing for exit: the key components of an exit strategy
At some stage in your life, you will need to exit your business. Your exit strategy helps you map out how this will happen, taking into consideration your personal financial needs after you sell or liquidate.
The key components of an exit strategy include:
Your personal exit objectives
As with any strategic exercise, you must first be aware of your exit objectives. What do you want and need to gain from your exit – do your sale proceeds need to fund your retirement? What timescale are you working to? If you are considering full or partial retirement post-exit, understanding your financial position and needs before you confirm your exit objectives will be highly beneficial.
The current value of your business
Within this section, you should include your business valuation and information about your key value drivers. At this stage, it is helpful to ask yourself whether your current valuation: a.) meets your expectations and, b.) will allow you to achieve your personal financial / exit objectives.
The type of exit strategy that you will pursue
The type of exit that you choose will be heavily dependent on your objectives. There is no ‘one size fits all’ solution and you should take time to consider the pros and cons – and viability – of each.
The different types of exit strategies include:
- Leaving your business to family members.
- An acquisition or merger.
- Being bought out by management or employees.
- Selling part or all of your ownership stake to partners or investors.
- An IPO.
Who your ideal buyer is
Who would you like to sell your business to and why? From angel investors to family members, your objectives and the type of exit strategy that you choose will influence your answer here.
The weaknesses and threats that will impact your business valuation
Are there internal weaknesses and external threats that could negatively impact your business valuation? Knowing these well in advance of your exit gives you time to address the issues at hand and, in doing so, grow your business’ value.
What you need to do to improve business value and exit successfully
This section of your exit strategy is effectively your ‘game plan’ – what activities do you now need to implement? For example, are public relations or business development campaigns required to help you exploit new opportunities for growth? If the business cannot be run successfully without you, can detailed process documents or additional team training help?
Exit planning in the time of Covid-19
The Covid-19 pandemic is having a profound impact on businesses; some are in high demand and seeing extreme growth, others are struggling to survive. While events like these are incredibly difficult to navigate – and the outcomes near impossible to predict – there are steps that you can take to improve your chances of exiting successfully during or after the pandemic.
Review your exit strategy
If you already have an exit strategy in place – either in your mind or on paper – review it thoroughly; have any of your previous exit plans and goals now become redundant? For example, are your value drivers still relevant? How have changes impacted your business valuation, and could this negatively impact your personal financial situation post-exit? Will your previously mentioned ideal buyer still be open to purchasing your business, and financially able to do so?
Plan for tax rises
While little is known about how and where they will be introduced, post-pandemic tax rises are an inevitability. Seeking professional advice can help you consider the impact that potential changes may have on your continued profitability or your personal financial situation post-exit.
Ensure your business accounts are well maintained
Times are tough; buyers may now place even greater emphasis on due diligence. Take steps to ensure that your business accounts are always audit-ready; that they are well maintained and consistent.
Post-sale: making the transition from business wealth to personal wealth
From understanding what happens if you lose Business Relief (BR) to navigating intergenerational planning, the post-sale phase of your exit is fraught with complexity. Chris tells us that an experienced financial adviser will be able to “help you structure your assets in a way that protects and grows your wealth, providing you with an asset allocation framework that is based on your risk profile and objectives with short, medium and long-term goals.”
“Business owners have a lot going on in the period where they are selling their business, or selling some of their shares,” Chris states.
“But, no matter how busy they are, they cannot afford to overlook the importance of structuring the proceeds of the sale in the right way.”
While Chris’ advice is relevant to all entrepreneurs, it is especially important for you if you are planning on partially or fully retiring post-exit.
“You need to understand the sustainability of your cash flow,” Chris begins. “For how many years will your financial assets provide you with the income that you require?” He mentions other commonly asked questions: should you give money to your children? What will happen if you get divorced?
“This is a fundamental change of circumstances,” he continues. “Asking questions early on and planning means that you will be less likely to run into problems in the future. This is especially the case in complex family situations – there can, for example, be a lot of conflict around inheritance.”
Dealing with the proceeds of your sale
When it comes to dealing with the proceeds of your sale, Chris lists three things that all business owners should do: “one: prepare early, two: consider the consequences of crystallising business wealth and converting it into personal wealth, and three: engage your family.”
“Structuring the proceeds of your sale can take between 3 – 6 months,” Chris warns. You cannot simply call a financial adviser and have your proceeds dealt with immediately. “First, we need to obtain information from yourself and relevant third parties. After we have done this, we can then start providing you with advice, discussing it in detail and working with you to implement any recommended steps.”
Preparing early ensures that your sale proceeds will not be left sitting idle in your account for an extended period; actions to reduce tax liabilities and grow your wealth can be taken in advance. It also allows you to:
Become aware of – and avoid – any unnecessary risk
If the proceeds of your business sale are simply deposited in your personal account and your bank or building society experiences difficulties, your money could be at risk. The Financial Conduct Authority (FCA) only provides deposit protection for amounts of up to £85,000 per eligible person, per bank / building society.
Discuss the steps that you can take to avoid an inheritance tax catastrophe
If, while trading under your ownership, your business qualifies for Business Relief (BR) for inheritance tax (IHT), it is worth noting that, as soon as you sign a binding contract for sale, you are no longer viewed as the owner. This means that, if you unexpectedly pass away, your proceeds will be subject to inheritance tax at a rate of 40%.
Consider the consequences
When you sell your business, you will need to consider the financial consequences of doing so – from the tax implications of your sale to successfully growing your wealth post-exit. An financial adviser can provide you with support and advice in a number of areas, including:
Tax Efficient Planning
When dealing with the proceeds of your business sale, Chris stresses the importance of “making sure that tax-efficient structures are put in place.”
An adviser will ensure that you are aware of the tax efficient planning opportunities that are available to you, also highlighting relevant allowances and reliefs. For example, you may qualify for Business Asset Disposal Relief (previously Entrepreneur’s Relief), which reduces the Capital Gains Tax (CGT) payable on your sale proceeds.
Estate planning and inter-generational planning
Questions such as “can I afford to give money away?” or “when should I give gifts?” – are best answered by advisers who are experienced in estate and intergenerational planning. Advice given will help ensure that your loved ones’ exposure to IHT is minimised.
While there is always risk associated with investing, Chris tells us that an adviser will “ensure that the investments made are suitable to your risk profile and objectives,” carefully monitoring performance and market changes to protect and grow your wealth.
If investment decisions are delegated to a discretionary fund manager he recommends that you make sure that “you are comfortable with that relationship – that you see it as a positive.”
After deciding how best to manage the proceeds of your sale, you will most likely have money set aside for an emergency fund or for the payment of a future liability. To ensure that you are always receiving the best possible interest rate for your cash deposits, your adviser may recommend the use of a cash management service. This will make comparing – and switching – accounts easier and faster.
Engage your family
Regardless of whether you are leaving your business to family members or choosing another type of exit strategy, Chris stresses the need to “make sure that they are not ignorant of what is going on with the business and the potential sale.” The sale – and the changes that occur after – will impact everyone, especially if you are approaching retirement.
If family succession is your exit of choice, he recommends “getting family members engaged with the wealth that has been generated and the investments that are subsequently made.”
How will you be dealing with the proceeds of your business sale?
To discuss your personal financial needs as you prepare for exit, or to deal with the proceeds of your sale, contact our team of experienced financial advisers.