Exit Strategies for Business Owners

27 May 2021 David Robinson View all News

For business owners, one of the most powerful tax saving ideas is to take money out of a business you own, or partially own, when you exit from it. This is known as a business exit strategy. As a business owner, a business exit strategy allows you to reduce your stake in a company and generate a profit on your investment if the company has been successful.

Like most things in business management and corporate finance, however, there's a lot of important detail to get right for your business exit strategy.

Common ways to sell a business (Exit Strategies)

There are many different ways for business owners to sell their business, as well as many different types of recipient who may wish to take over your role as partial or majority owner. Here are some of the most common ways to sell a business.

Business Exit Strategy Characteristics
EOT (Employee Ownership Trust) Sell your business to an EOT for the benefit of all employees – this option can be completely tax free.
Trade Sale Sale to another business. This can sometimes achieve the top sale value.
MBO (Management Buy-out) Sale of shares to management team, often on deferred terms or using bank debt.
CPOS (Company Purchase of Own Shares) Sale of shares back to company by exiting shareholder. This is a simple way to exit the company.
Family Buy-out Passing the family business on to the next generation while extracting cash.

 

Employee Ownership Trusts in a nutshell

  • EOTs have been around since 2014.
  • They are becoming more and more common due to the various benefits for the exiting shareholder and the wider business.
  • They are a smart alternative to an MBO or trade sale given the right circumstances.
  • There are significant tax benefits for both sellers and employees, providing certain conditions are met.

Under the right conditions, an Employee Ownership Trust is the most tax efficient way to sell your business. You can find out more about EOTs via our website, or by downloading our free EOT guide.

Business Exit Strategy Preparation

Selling a business is, in many ways, like selling a house. You need to get your house in order before the sale process to ensure the sale is a success. For a business, it is essential that you groom for sale, which means maximising value and minimising the risk of price chip or a deal falling over. Here are some ways exiting business owners can do this:

  • Remove any assets that are to be retained, and demerge non-core trade activities you do not wish to sell along with the main business.
  • Incentivise and reward key staff in a tax efficient way – this is a powerful way to build business value ahead of sale.
  • Make sure you claim tax reliefs, such as Capital Allowances or R&D tax credits.
  • Rather than taking a dividend out of the business before the sale, leaving cash in the business for sale can be another powerful way to exit with more money and less tax.

Ensure all available Tax Reliefs on sale are maximised

It is very important that you claim for the maximum tax relief that you are entitled to. Generally, the Capital Gains Tax liability is 20% on sale of a business.

Business Asset Disposal Relief (BADR), however, can reduce your CGT liability to just 10%; however, a lifetime limit of £1,000,000 applies.

To qualify for Business Asset Disposal Relief, you must be an employee or director of the trading business, owning at least 5% of shares 24 months before disposal. It is recommended that you spread shareholdings around the family to maximize your £1,000,000 limit.

Selling a business - How consideration is taxed

There are lots of different ways you can receive consideration on a transaction, and each is taxed differently. Here are some examples of consideration types:

  • Cash (up front or deferred) – this is subject to Capital Gains Tax.
  • Loan notes / shares – with the choice whether to tax now or later (generally, later means higher rates)
  • Earn out – This can be taxed as income at up to 47% but can be subject to CGT.

It is important that you seek advice when planning to sell your business with these considerations in mind. They are all taxed differently and no two deals will be the same.

Learn more about Business Exit Strategy

The Shorts team recently ran a special and exclusive Tax & Economic Update webinar event, featuring James Martin, Director of Policy at British Chambers of Commerce. 

As part of this event, members of the Shorts team discussed other key tax saving ideas, including business exit strategies, corporate finance, corporation tax efficiency and more. You can recap the entire event through our website.

Seek expert advice today

This article covers just a few of the factors that must be considered as part of a business exit strategy. The Corporate Finance team at Shorts are at the very cutting edge of exit strategy, and are ready to help you maximise the benefits of your business sale. For a free and no-obligation chat about your business and circumstances, speak to us today.

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