Planning for a Profitable Future
Let’s be blunt as we explore the objectives for business owners. No generic language, just a reality check at a critical time in the economy and many business owners’ careers.
There are two objectives for a business…
- Generate profit
- Build value for an eventual exit
These are of course not mutually exclusive, in fact doing 1 better will make 2 easier. In my experience many business owners accept lower profits and justify this as ‘building the value’, and many others focus on making money with no eye on the end game at all.
A separate article and BPMA event will explore the ways to drive profit and help business owners to maximise income and business value with a more structured and focussed approach to the bottom line, so I won’t cover that here. Except to say that better run and more profitable businesses provide business owners with more options, and are often quicker and easier to exit from.
A profitable business future must also include a successful exit, and very few owners pay enough attention to this issue. Let’s just explore for a moment what we meant by exit…
The first critical point to understand is that none of us live for ever. There must be an exit at some point so planning for this is important for the business, its employees, its customers, and all other stake holders in it. An unplanned exit may not just lave the shareholders short changed, but many others may be badly affected.
However, exit also does not necessarily mean a sale of the business and retirement to a beach. Let’s just explore a few possible options…
Full sale
You may decide that there is actually a date when you want to sail off into the sunset. Shareholders find a buyer and sell 100% of the business. There may be a transition period, but after 12 or 24 months, someone else will own and run the business and all you have is a lump of cash to fund retirement.
Partial sale
It has become increasingly common for owners to sell part of the business and retain some interest. That may be 50%, 60% or any proportion that works for both sides. Shareholders take some cash and reduce their financial risk as they approach retirement, and involve a buyer in a controlled transition. More often than not the remainder is sold on at a future date, but that isn’t essential.
The next point is to consider who you may sell to.
Trade buyer
Probably the most common buyer is someone in your industry. A competitor, a supplier or even a customer. Someone where there is a good strategic decision to add your business to theirs. They will look at your financial performance but also at how adding your bit to theirs may generate extra value. Do you have fantastic customers, a geographical location that fits, or a product, expertise or other commercial upside?
Your team
Management buyouts can be very effective. They already know the business and you know them. There may be challenges in raising finance and often sellers leave some value behind to be paid from future profits.
Similarly, family members involved in the business may be the best buyers, with some creativity on how value is withdrawn for retiring family.
Equity Investors
There are many investors with spare cash that would see an investment in a good trading business as a safe move. They may be doing that with many businesses and putting their own management team in place, or allowing owners to take some money out to protect their retirement plans but carry on running the business and paying a return to the investor.
Another key issue is the taxation of any form of exit. In broad terms cashing out of a business is a capital gains tax transaction (CGT). For most, the sale should be covered under BADR rules (used to be Entrepreneur’s relief) meaning each qualifying shareholder gets £1m lifetime allowance at a 10% tax rate. Anything above this is at 20%.
It is possible to sell to an Employee Ownership Trust and pay 0% tax, but this is not as easy as it sounds so quite an unusual option despite the tax savings.
It is important to understand the tax element of a deal in terms of when it is due as well as how much. Where sales proceeds are paid over a number of years, it is possible that tax is due before any money has been received.
In short, the current tax regime for existing a business is actually a good deal for most, but tax is complex and must be carefully planned and fully understood.
The critical points to understand are…
- Most owners think a business sale is a one off, all or nothing decision. In reality all sorts of deals are possible, to sell some of the business or sell it all over a number of years.
- Many think that the sale must be to a competitor buying up a similar business. There are many different potential buyers inside and outside of your business. All should be fully explored.
- A well planned sale could see the exiting owners getting perhaps double or more than that from a unplanned and rushed exit. Grooming the business to maximise its value, and running a sale properly to get the best price on the best terms, can have a huge impact.
And the most important point… Start looking at this years before you plan to get out. If you have time, you have options. If you are relaxed about selling you can play hardball on any deal, if you are fed up and have no energy for continuing the business, you will do a bad deal.
If you want help understanding your options, your business value and how to improve it, get in touch or if you’re able to attend the BPMA member webinar on 28th September, you can find out more and ask questions. Visit bpma.co.uk/events to register.
Peter Hill
Mark Holt & Co
01752 229079
