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Business disposal – four key questions for owners to ask

Disposing of your business is an important decision that could have far-reaching implications for your future financial wellbeing. Simon Stygall, Chartered Financial Planner at Close Brothers Asset Management, outlines what you should be thinking about – and why.

Every year, tens of thousands of UK business owners decide to put their businesses up for sale. For many, it’s not necessarily an easy decision – and it may be one they have only reached after a lot of soul searching. But the reality is, few people want to run the same business for their entire life. At some point, they might want to start another business, retire, or simply free up their time to do other things.

Business owners may think about selling up at any time. Nevertheless, the economic uncertainty and personal pressures associated with the COVID-19 pandemic mean that many are giving particular attention to the issue right now. So, if you are thinking about disposing of your business, what are the four key questions to ask yourself?

What is the objective of the disposal?

There are many reasons why an owner might choose to dispose of their business. The business may not be generating the kind of income they need to support their lifestyle, or they might want to start another business instead. Perhaps their personal circumstances have changed, reducing the amount of time they can put into it. Retirement is a common reason for owners choosing to dispose of their business – the business may be flourishing, but they feel the time has come for them to step back and focus on other priorities.

Your reason for selling your business is likely to influence other considerations, such as the timescale of the disposal and your target sale price. For example, you might take a different approach if you have health concerns and want to dispose of the business quickly, compared with how you would proceed if you were planning ahead for retirement in three years’ time. 

What is my business potentially worth?

This is a crucial question, because your ability to achieve your future financial and personal goals could vary considerably depending on the value of your business. By getting an up-to-date valuation from a professional valuation expert, you will be able to get a realistic idea of what your business might be worth if you sold it.

If you plan to use the proceeds of the sale to fund your retirement, it is a good idea to ask your financial adviser to do cash flow modelling, so that you know whether the sale of the business will be sufficient to fund your lifestyle in future. If not, you might want to adjust your lifestyle expectations or delay your retirement for a few years with a view to growing your business and achieving a higher sale price. Alternatively, you may decide to sell other assets or make additional investments that will help you to achieve your financial goals. As well as a comfortable retirement, these goals may include supporting younger family members – for example, by helping them to get onto the property ladder.

Who will I sell my business to?

The way in which you dispose of your business will vary according to who you sell it to. A range of buyers could potentially buy the business from you, including any current co-owners, as well as family members, key employees or outside buyers. An up-to-date valuation will enable your prospective buyer or buyers to understand how much they should reasonably expect to pay for the business. If they need to raise finance, you may have to agree to a longer timeframe for the sale than might otherwise be the case so they can secure the necessary funds. Also, any sale might be contingent on a formal succession plan being in place. For example, if you sell to an outside buyer, you may be expected to remain within the business for a short period to ensure a smooth handover.  

How can I dispose of my business in the most tax-efficient way?

Tax is a critical consideration with business disposals. Poor tax planning could significantly reduce the proceeds you receive from the sale, and therefore your likely future income. By taking professional advice, you can ensure that you benefit from Business Asset Disposal Relief (previously known as Entrepreneur’s Relief) on the sale of the business. With Business Asset Disposal Relief, you will pay tax at 10% on your gain from the sale (bearing in mind the lifetime limit of £1 million) – considerably less than the 28% rate payable on gains from residential property and the 20% rate payable on other capital gains. It is also important to be aware that the proceeds of the business sale will no longer qualify for Business Relief, and therefore will form part of your estate for Inheritance Tax purposes. Advice is required to consider appropriate options for minimising this impact, if legacy planning is important to you.

What next?

There is a lot to think about with a business disposal. Having invested a huge amount of time and energy in building your business up, you will naturally want to hand it over to a buyer who can guide it towards further success. At the same time, you will want the business to be sold for what it’s worth and for the proceeds of the sale to be sufficient to fund whatever you want to do next.

For these reasons, many business owners request the support of their financial advisers when planning business disposals. An adviser can help you to plan for disposal and undertake the vital cash flow modelling that can predict your future financial needs. They can also help to ensure that the disposal is achieved in a tax-efficient way, alongside your other professional advisers.

To find out more about how Close Brothers Asset Management can support you with business disposals, please call 0800 345 7078 or email contactus@closebrothers.com

Capital at risk.  Any tax benefits depend on individual circumstances and tax rules are subject to change.

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