Second in Davy's SME Series - Planning To Sell Your Business – What’s Your Strategy?
Whether you are looking to sell your business now or further down the line there are many issues to consider.
At a business level there are tax, legal and commercial aspects to deal with. From a shareholder or business owner perspective the long-term plan for you and your family will no doubt be a priority. There are also other questions around how your desired income in retirement will be funded and how to prioritise any competing financial obligations. Ensuring that you have an effective pre-exit strategy in place is key to achieving the desired outcome of any business sale.
1. Have an effective pre-sale strategy
While no two businesses are exactly alike we have found that there are a number of common elements to an effective pre-sale strategy. The strategy should be:
- Fit for purpose commercially: The corporate structure should be optimised from both a buyer and a seller perspective, without impacting on the performance of the business itself in the years up to the sale.
- Flexible: It should be possible to adapt your strategy to take account of changing circumstances, for example if you decide to bring your children on board in the business, or introduce co-investors.
- Tax-efficient: It is important to be aware of the various tax reliefs which may be applicable on a sale and to ensure you have all your ‘ducks in a row’ in terms of meeting any conditions attaching to such reliefs. This can significantly impact upon the post-tax sales proceeds you stand to realise.
- Consistent with your overall financial plan: A business exit strategy should not exist in isolation; rather it should be part of an overall plan to meet your short and long-term financial goals.
With all of this in mind, what steps can you take now in order to give yourself the best chance possible of creating an effective pre-sale strategy?
2. Put in place a financial plan
A crucial first step in achieving your goals is to put in place a financial plan to help you identify your objectives and create a road map to achieving them. For example, a financial plan can help you understand how long your capital base can endure under various spending and inflation assumptions. This is particularly relevant in a post-sale environment where you go from owning a productive asset from which you can draw a salary, to managing a pool of capital which has to support your spending needs from now on.
3. Maximise your pension funding
Having put in place a financial plan, the next step for most people will be to maximise pension funding, where circumstances permit and where the cashflow of the business allows. Building up a pension through a small self-administered scheme is a tax-efficient way of saving for retirement and extracting cash from your business.
Through a combination of company and personal contributions, owners have the opportunity to build up a tax-efficient fund of up to €2 million.
4. Ensure your business is structured appropriately
Another question which arises frequently is the optimal structure when gearing up for a sale. There is no one-size-fits-all approach and there are a variety of structuring options which range from an unincorporated sole trader to a holding company structure containing one or more incorporated entities.What structure is optimal for you will depend on your long-term plans, what you want to achieve and what might be attractive to a potential purchaser.
5. Optimise your tax reliefs
A final and important step in this process will be to consider what tax reliefs might apply on a potential sale, and how you can best position yourself to take advantage of them.
The basic rate of Capital Gains Tax (CGT) on a disposal of assets is 33% (2017 level), up from 20% in 2008. Certain more favourable treatments can apply in certain circumstances, however.
- Retirement relief can provide for a tax-free sale subject to certain conditions being met and certain consideration amounts;
- There is also a new 10% rate of CGT which can apply to the first €1 million of gains when a business is sold; again subject to certain conditions;
- If your business is held through a holding company structure then it can be possible to defer the CGT altogether until such time as the proceeds are taken out of the holding company.
There are various other permutations from a tax perspective, depending on your circumstances and the structure of the business.
Putting in place an effective pre-sale strategy begins well in advance of the sale of the business itself. Starting early, creating and sticking to a plan and working with experienced advisers is critical to ensuring the best possible outcome.
Anthony Moyles is a senior private client adviser with Davy. He works with company owners to provide best-in-class financial planning, investment management and asset selection.
We would welcome the opportunity to discuss how we can help you achieve your financial goals. To arrange a consultation please contact Anthony Moyles, +353 1 614 9984, firstname.lastname@example.org
Established in 1926, the Davy Group is Ireland's leading provider of wealth management, asset management, capital markets and financial advisory services. The Davy Group is headquartered in Dublin, with offices in London, Belfast, Cork and Galway. Employing over 670 people, it offers a broad range of services to private clients, small businesses, corporations and institutional investors, and organise our activities around five interrelated business areas - Asset Management, Capital Markets, Corporate Finance, Private Clients and Research.
Please note that this article is general in nature and is not intended to constitute tax, financial or legal advice. It does not take account of your financial situation or investment objectives. Prior to making any decision which may have tax, legal or other financial implications, you should seek independent professional advice. There are risks associated with putting any financial plan in place. The value of investments may go down as well as up.
Davy Private Clients is a division of J & E Davy. J&E Davy, trading as Davy, is regulated by the Central Bank of Ireland. Davy is a member of the Irish Stock Exchange and the London Stock Exchange. In the UK, Davy is authorised by the Central Bank of Ireland and authorised and subject to limited regulation by the Financial Conduct Authority. Details about the extent of our authorisation and regulation by the Financial Conduct Authority are available from us on request.
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