So, you’re looking to get some financial planning in place for your business exit? Having an independent financial adviser to support you through your business sale can be invaluable, not just after the sale but also during the process itself.
Potentially, the main obstacles for many when selling their business are taxation, associated costs, and legalities. And let’s not forget many people need to consider what they will do with the money once the sale has been completed.
In his latest insight, Oscar Hjalmas guides you through how value can be maximised from a business sale and, most importantly, what to do with your funds post-sale.
Understanding Your Business’s Value: Key to a Successful Exit
There are various ways to value a business, but here are five of the most common business valuation methods:
- Discounted Cash Flow Analysis: Predicting future cash flows and then discounting them back to today’s date to get a valuation.
- Comparable Company Analysis: Comparing your business with similar companies, using financial ratios to establish a “fair value”.
- Precedent Transactions Analysis: This is the most straightforward way. It looks at what your competitors sold for and makes a judgement on how much your business is worth.
- Asset Based Valuation: Values your business purely on its assets, such as machinery or property, and doesn’t include any other factors.
- Earnings Multiples: This method looks at your company’s earnings, often EBITDA (Earnings Before Interest, Tax, Depreciation, and Amortisation), and multiplies it by a sector-agreed number to estimate value.
When selling your business, you and your accountant can use a variety of these valuation methods. You’ll naturally be seeking the highest possible value, while your buyer will be seeking the lowest. But it’s important to have a financial plan in place to ensure you can maximise the valuation.
Minimising Tax implications During a Business Sale
Taxation is a huge maze when it comes to business exit. This is where working with a good independent financial adviser, in conjunction with an accountant, is paramount to achieving good outcomes for you. Some example taxes you might encounter are:
- Capital Gains Tax: A tax on the profit you make when you sell an asset that has increased in value.
- Income Tax: A tax on your income, potentially including any proceeds from the sale of your business.
- Sales Tax and/or Value Added Tax: A tax on the sale of goods and services.
- Transfer Taxes: Taxes levied on the transfer of assets, such as property or shares.
- Corporation Taxes: A tax on the profits of a company.
All of these taxes can be mitigated, or even completely eliminated, if an appropriate tax efficient strategy is adhered to.
One of the main ways to mitigate some or all of the taxation element is by using Business Asset Disposal Relief (‘BADR’), previously known as Entrepreneurs’ Relief. This allows you to pay only 10% on the first £1,000,000 for qualifying sales. We’ll discuss this in more depth later on.
Another possible avenue is to use what is commonly known as a HOLD CO structure, whereby your business is held in a parent company. This is why it’s so important to seek professional advice to ensure you’re maximising the value of what you have worked so hard to create.
Illustrating Tax Efficiency with BADR and HOLD CO
For example, let’s say you sell your business, which is owned 50% with your spouse, for £5,000,000.
You can both use BADR, releasing £2,000,000 and paying only £200,000 in tax (10%). You can then pay a dividend to your HOLD CO for the remaining £3,000,000.
As long as you plan in advance, you have options for mitigating the cost of selling your business. This is also an area where sound pension planning can significantly reduce your tax burden.
As you can see, seeking professional tax advice early that is tailored to your individual circumstances and needs is crucial.
Post-Sale Financial Planning: Securing Your Future
Your business is sold, the tax implications have been considered and finalised, and all professional fees are paid. What’s next? Is retirement planning highest on the agenda, or do you plan on diving straight back into another venture? You may even be considering investing some of your money. One thing is for certain: you will need a structured plan to manage your finances moving forward.
Most business owners tend to be “asset rich, cash poor”. Well, this no longer applies to you.
Having a clear financial plan with defined post-exit financial goals is crucial in this new phase of your life. This is where an independent financial adviser can help, providing structure and continuous reviews to ensure you’re making the right decisions with your money.
A good financial adviser will go through all aspects of your finances, including budgeting, retirement planning, and estate planning.
Your finances are all interlinked, so a holistic approach will yield the best long-term outcomes.
Diversifying Your Investments After a Business Sale
There’s no “one size fits all” scenario here. A Scandinavian saying we quite like is “Many small streams make a river”. When considering your business exit, there will likely be a variety of solutions available to you.
You may be considering:
- Investing in another business or starting a new one.
- Building a broad investment portfolio.
- Purchasing a buy-to-let property.
- Keeping some money back in cash as a “rainy day fund”.
- Engaging in philanthropy.
Whatever you choose to do, ensure that there is no crossover risk between your various decisions.
For instance, don’t create an investment portfolio heavily weighted in property and then purchase a buy-to-let, as your risk will be too concentrated.
It’s more appropriate to diversify your overall portfolio into various “risk buckets” to give yourself the best chance of positive long-term returns. Employing effective investment diversification strategies is key.
Contact our Independent Financial Advisers in Dorset
To give yourself the best chance of a successful business exit, it’s important to engage with an independent financial adviser and other professionals as early as feasible in the sale process. This will greatly help with navigating all of the complexities involved and assist in planning for a secure future.
If you have questions about using financial planning for a business exit or sale, our independent financial advisers in Dorset and Hampshire are ready to assist you with expert advice and strategies tailored to your specific needs.
Contact Oscar Hjalmas, our CEO and independent financial adviser, on 01202 676983 or email advice@baggette.co.uk to arrange a consultation.
Baggette + Co Wealth Management is authorised and regulated by the Financial Conduct Authority. The Financial Conduct Authority does not regulate estate planning or tax advice. The above information is correct to the best of our understanding as at the date of publication. Nothing within this content is intended as, or can be relied upon, as financial advice. Capital is at risk. You may get back less than you invested. Tax rules may change, and the value of tax reliefs depends on your individual circumstances.