Tony Granger outlines some different routes to a successful business exit and how to fund it.
Business exits can be planned or unplanned. The two main types of business under consideration are limited companies and partnerships, including LLP’s. The planned successful exit will consider several factors, including:
- the reason for the purchase or sale (retirement, consolidation, profit taking, new blood, death, disability, etc.);
- the purchaser and purchase price, including the terms of payment;
- the valuation of the business for sale purposes (this should be ongoing);
- the best way to be paid for selling the business;
- taxation considerations;
- funding considerations; and
- legal and compliance requirements.
The way the purchase or sale is funded could have tax and other implications. For example, once company shares are sold for cash, the value of any inheritance tax business property relief is lost by the seller. Also, one would wish to be taxed on a capital gain with entrepreneurs’ relief (if available) applying at 10% on the sale of shares, rather than as an income receipt where marginal tax rates apply of up to 45%. The latter could occur if the amount is seen as a revenue receipt or remuneration.
Buying out a shareholder or partner
The shareholder, for example, may have reached retirement age and wishes to sell their shares to other shareholders or third parties. Note that there may be constraints on who can buy and sell in the shareholder or partnership agreement. Usually, shares must first be offered to existing shareholders, or there may be a clause that an incoming partner may have to be a lawyer if it’s a legal practice. The main problem is usually the lack of available cash of existing shareholders or partners to fund an exit.
Purchase company shares
Points to consider might include the following:
- existing shareholders using their own capital or raising capital through loans (including a remortgage, where interest is deductible for tax purposes);
- the company raises cash through borrowings or from private investors, or from the sale of assets, then buys back the shares of the exiting partner and cancels them;
- if the shareholders insured each other and one died, cash is available to buy the deceased’s shares; and
- part of the exit funding package could consist of non-cash items, such as pension contributions or transferring ownership of a company asset.
Purchase a partnership/LLP share
Points to consider might include:
- existing partners or new incoming partners providing their own funds or taking loans to fund the business entry or exit. Specialist lenders provide finance for professional partnerships, such as accountants, solicitors, and surveyors;
- partners can contribute to a provident fund to provide funds in the future for a partner’s exit;
- partners can set up an unfunded annuity scheme as part of his leaving package, and
- a partner would like their capital and current accounts in the business to be paid out to them (as well as a value for goodwill). This causes working capital problems, and part of any deal may be to replace working capital. There may also be issues if the partnership owns a property where value needs to be paid to a retiring partner.
Practical Tip:
Proper planning is essential to avoid tax traps. Decide what is being sold, and at what price. You will need tax advice and specialist funding advice in advance. Good succession planning cannot start too soon.
