The First Wealth Guide for Business Owners – Part 3

In the third and final part of the First Wealth Guide for Business Owners, we look at how you need to prepare for the sale or transfer of your business, and how this fits in with the rest of your financial planning.

Did you miss the previous parts of this series? You can find part 1 (starting up your business) here and part 2 (running the day to day) here.

Did you launch your business with a clear idea of what you wanted to get out of it? Or did this develop over time? Perhaps you’re not even sure now – which would not be uncommon. There are any number of potential ways that you could exit your business, depending on your own circumstances and ambitions.

What’s universal when you come to sell your business is the need to make sure your exit plans align with and complement the financial plans you have in place. These things are intertwined – they don’t exist separately. One will help fund, inspire or direct the other.

If you have sat down with your financial adviser and set out your lifestyle plan, you’ll have a good idea of where you are, where you’re going, and all the life goals and ambitions you want to tick off along the way. These are individual to you. So your next step is to work out where and how the sale or transfer of your business fits into this.

For example, you might be a serial entrepreneur with an aim to build and sell numerous businesses over your career, and the sale of this one will help you to set up the next one. You might want to use the proceeds of the sale to establish yourself up as an angel investor, mentoring young entrepreneurs with your experience and giving them the financial boost they need early on in their own careers.

Maybe you’ve just had your fill of being your own boss, with a plan to tuck away the money you make from the sale as a future nest egg and return to a ‘normal’ job. You might feel like taking a career break and travelling the world or working for a charitable cause. Or passing on the business to your family, marking the end of your working life for good, and paving the path to a comfortable retirement.

Knowing Your Number

All of these scenarios, if you’ve planned correctly, will be a part of your lifestyle financial planning. This will have helped you to establish your ideal lifestyle, what it looks like to you personally, what you need to do to get there, and how much you will need to sustain it without fear of ever running out of money.

A crucial part of your financial planning is working out what this amount is. We call this knowing your number. The concept is based on a book by Lee Eisenberg, ‘The Number: What Do You Need for the Rest of Your Life, and What Will It Cost?’, which pretty much does what it says on the tin. In short, working out this number is liberating and empowering because it gives you a clear focus on your defined goal. Selling or transferring your business can be a powerful propeller towards this if you approach it correctly.

Keeping a Constant Sale Mindset

If you’re preparing to sell your business, you’ll naturally be keen to market it in the most attractive way possible to potential buyers and leverage everything you have to command a favourable sale price. Experts suggest that a successful sale is years in the planning, and some even say the prospect of a sale should always be present in a business owner’s mind.

In his book, ‘Built To Sell’, John Warrilow says business owners should run a company as if it will last forever, yet also strive to constantly maximize its value, building in the qualities that allow it to be sold at any moment for the highest price possible. He says that the biggest error business owners make is to build a business that relies too heavily on them, but that smart business people build a company to be sold even if they have no intention of selling or stepping back anytime soon. This means the business will always be a valuable, sellable asset.

Choosing your Exit

Exiting your business can happen in a number of ways, in terms of different types of sale options and also the decision to implement a succession plan if you’re passing on the business to a family or third party.

If you’re looking to sell, you’ll want to consider the best option for you, bearing in mind your life goals and where you are on your journey. This could be a straight sale or a merger with another business of a similar or complementary profile. Depending on the nature of the sale/merger and what you want to achieve, it could mean continued or flexible involvement in the company for you or a completely clean break.

As a condition of some sales, it can be common for the owner to remain within the business for two-to-three years to ensure that profit and growth forecasts are met – if they are not, this could reduce the sale price. However, owners who are selling up to retire need to factor this into their planning if they were hoping to sail off into the sunset the day the deal was done, as it might not be as simple and immediate as that.

A management buy-out gives the current staff the opportunity to buy into the business and take over the role of owner-manager from you. This can be a good way to ensure that the business is left in safe and experienced hands. If you’re not the sole proprietor of the business, you also have the option to sell your stake to another partner or investor.

Listing your business on the stock exchange via an IPO (initial public offering) is a way of selling your business to the public. The conditions need to be right and your business prospects robust and rosy, but in the right circumstances, this can be a potentially highly lucrative option.

If you make a capital gain when you sell your business (from the proceeds of the sale or any assets from the business that you keep) you will need to pay Capital Gains Tax (CGT). However, it could be possible to reduce the amount of CGT by claiming Entrepreneurs’ Relief or making use of other tax reliefs.

There are also administrative considerations to take into account regarding your obligations to staff and HMRC. There’s more information available on this Government website, and we can help advise on the finer details, alongside your legal advisers.

Making a Success of Succession

Instead of selling up, handing the business on to your family is a route that many business owners pursue. In this case, a succession plan is vital. Again, it can be a satisfying way to ensure that the business is cared for and progressed according to your wishes, but any decisions must be made with the same rigour and unsentimental logic that has made the business a success so far. The long-term survival of a business depends on a strong succession plan, which can drive growth, reduce the tax burden and prepare you, the individual, for the next stage of your journey.

As with many things in life, the earlier you start planning, the better the opportunities you’ll create for yourself. As I’ve noted in the earlier articles in the series, I can’t stress enough the importance of having your Money Team around you (including a good financial adviser, accountant and lawyer) when you’re making your plans and decisions about your business and how they articulate with your future financial lifestyle.

We hope you’ve found our three-part guide useful. It’s intended as an introduction to all the areas you need to address if you’re starting, running or selling your own business. Parts one and two are still available if you missed them.

Launching and managing a business can be all-consuming, so it’s important to remember not to let the pursuit of business success be at the expense of your financial planning or other life goals. If you’d like some advice and guidance with this, please drop us a line, we’d be more than happy to help.

This document is marketing material for a retail audience and does not constitute advice or recommendations. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.