If you have been at the helm of your own business for some years, nurturing it from germination to becoming a fruitful concern, your thoughts will, at some point, turn to passing it on – and enjoying the rewards of your hard work.
Long before you start to dream about a relaxing retirement sampling the verdant golf courses of the world, you have another very important duty to perform in order to safeguard the long-term vitality of your business – and to safeguard your nest-egg.
Exiting a business, whether you chose to pass it over to a family member or colleague, or to an unknown buyer, is a complex legal process. But there is much you can – and must – do to prime your company for the handover. And the earlier in the life span of your business you do this the better the outcome is likely to be for you.
A business primed for sale can be worth considerably more than one where the owners don’t have a plan in place for smooth succession.
Of course, this blueprint can be tweaked over the years, to accommodate changes in the business. But your plan should include:
– Your research on any potential buyers. This list might include local competitors, colleagues or employees, or family members.
– The value of the sale. Clearly, this figure will be subject to shifts over the years depending upon the fluctuations of the economy, the reputation and standing of your company, and the value of competitor firms. But there are set formulae you can use to reach a realistic figure. These include; profit multiples, the value of separable assets, the entry valuation – how much how much it would cost to purchase assets, acquire and train staff, build a customer base and develop services. Discounted cash flow – an estimate of future cash flows adjusted for inflation – is another method.
– Potential obstacles to the sale. This is the most important part of your plan and you mustn’t shy away from it. With professional help, bumps in the road can be pre-empted and dealt with ahead of time. These might include; issues with transferability of licences and rights and of legal status of your client contracts, or any pending litigation or unfair or onerous warranties in the share purchase agreement. Knotty problems can also occur if either the buyer or seller fails to engage professional advisors before or during the handover process.
– Company structure considerations. As part of the regular annual tax planning we carry out with our clients, we consider potential future sales. So we may adjust our advice to ensure the company ownership style matches the needs of the shareholders. This is a vital part of your planning process, since there are vastly different tax consequences attached to different ownership and sale methods, as well as very important ramifications for you around Entrepreneurs Relief.
Succession is a complicated process and we can’t overstress the importance of engaging a professional to guide you through it. But by making a clear-eyed appraisal of your business and by creating a detailed plan, way ahead of time, you set yourself up for succession success, so you can move on to the next chapter of your life knowing you have done your best for the business you value, and for any staff who remain there.