Over recent years, we have increasingly become involved in assisting business owners to plan their exit from a business years in advance of their anticipated exit.
With the correct planning and advice, it is possible for business owners to not only maximise the income they receive from an exit but also to mitigate potential tax liabilities.
There are lots of options available to a business owner but the central point for each of these is to ensure that the business owner plans their exit well in advance and that appropriate professional advice is sought because planning the nature of your exit will potentially dictate how the business in managed in the period leading up to an exit.
What are the options for succession planning?
There are numerous ways in which a business owner can exit a business depending on the nature of the business, the size of the business and the aspirations of the business owner.
Some of the common options include:
- Selling the business to a third party, often called a ‘trade sale’. This may include using the services of a business broker or corporate finance specialist to find a suitable a buyer or it may involve approaching a competitor in the industry who may have an appetite to acquire your business. A ‘trade sale’ may involve a more rigorous due diligence process than some of the other options.
- Selling the business to an existing management team or individual in the business. This is often referred to as a Management Buy In. One of the advantages of this is that the managers will already be involved in the business and know the way the business operates. The possible disadvantage is that the buyers are unlikely to be able to fund the purchase price in full so the consideration may need to be paid over time.
- Setting up an Employee Ownership Trust (‘EOT’) is increasingly used as a tax-efficient exit avenue for a business owner as the business owner can sell the business without paying any tax (subject to compliance with certain conditions) and the business is acquired by a trust set up for the benefit of all the employees. The employees will benefit from the success of the business in the future and they will receive a proportion of the profits as tax-free payments. This can be a permanent solution to succession planning for the business in the long term as it will not be necessary to sell the business again in future.
- For some business owners, particularly small businesses which may have valuable assets or significant cash reserves, it may be appropriate to consider a solvent liquidation. This is a tax-efficient mechanism by which a business owner can close the business and receive the financial benefit of the assets owned by the business.
- Passing the business down a generation to a family member. Family-owned businesses are an integral part of the UK economy but succession needs carefully planning to balance the needs of the outgoing family member, who may need to realise the value in the business or derive a long-term income from the business, with the needs of the other family members taking into account matters such as Inheritance Tax.
- A Company Purchase of Own Shares. This may be the route to proceed with where only one business owner intends the exit the business but other business owners will remain. Subject to strict rules under the Companies Act 2006, a limited company can essentially buy out one of its own shareholders utilizing funds within the business. There are tax considerations around this and expert advice should be obtained.
These are just some of the structures available and sometimes a combination of structures may be utilised but devising and understanding your potential exit strategy can take time to develop.
Our Director and Head of Corporate & Commercial, Richard Coulthard, specializes in advising business owners on these issues and will be speaking further on this topic, and in particular on the topic of Employee Ownership Trusts at Brand Yorkshire on 6th October 2022.
As Ison Harrison Solicitors are an EOT, we have a unique insight into the process of becoming an EOT and the advantages of this.
If you would like to discuss your options around succession in your business, please contact Richard Coulthard on 0113 2845095.