With the news that the Government intends to increase Capital Gains Tax, we are having more conversations with clients who are considering a swift sale of their company. Managing Director Mark Grewer discusses what the best strategy is likely to be, for any business owner considering their exit.
The UK’s changing Capital Gains Tax regime has had a profound effect on business owners over the years, influencing their decisions on investing, holding, or selling assets.
While lower CGT rates and reliefs have traditionally encouraged entrepreneurship, recent reductions in reliefs have also led other business owners towards alternative exit strategies.
Introduced by a Labour Government in the 1970s, there have been ten changes to those Capital Gains Tax rates and reliefs which specifically affects business owners, by various Governments, until 2024. This equates to one major impact every five years. Taxation policy does not stand still for long!
If you are considering taking urgent action to change the ownership of your company, we would always advise that the ‘tax tail’ should not wag the dog!
Embarking on a business sale is not a decision to be taken likely. It involves many steps and a hasty transaction can lead to financial, legal, and operational risks which are taken unnecessarily.
Here are 8 reasons why taking time to prepare and execute a business sale is essential:
- Maximising Valuation – a rushed sale may prevent you from achieving your best price and deal structure. Exit planning allows you to identify and resolve the risks which affect the attractiveness of the company to potential purchasers, hence increasing the likely value of the business.
- Finding the Right Buyer – rushing through a sale to the first available purchaser may result in choosing a buyer who isn’t a good fit for the business, whether due to financial constraints or misaligned business goals. The right buyer may take time to find but can ensure smoother transition and better long-term outcomes for employees and customers, something with most founding business owners rank as important to their legacy.
- Stronger Negotiating Power – A rushed sale often puts the seller in a weaker position, as buyers may sense urgency and push for lower prices or more favourable terms. Likewise, if you can reach more potential buyers, you create competitive tension, which possibly leads to a higher sale price. Rushing may limit your buyer pool or negotiation process and may result in a lower offer.
- Due Diligence Preparation – buyers will conduct thorough due diligence after their initial offer and before commencing the legal process. If the seller is unprepared, potential red flags (such as unclear or worrying financial results, operational weaknesses or ongoing disputes) can reduce the sale price or cause the buyer to walk away.
- Legal Contracts – asking a lawyer to rush through a legal process may mean that contractual terms, warranties, indemnities or disclosure is not through and discussed thoroughly and will mean that the deal structure of the legal documentation does not protect your interests as much as they might otherwise. Similarly, asking a purchaser to rush their legal process may lead to them asking for concessions with affect your financial outcome overall.
- Tax and Financial Planning – whatever the tax regime is in place at the time, tax planning is not something to be rushed, when there are usually overlaps with other taxes and considerations, before a final decision can be made. You will want to ensure you have planned with your advisors how you are going to structure the proceeds effectively for your retirement, reinvestment, or other financial goals.
- Market Conditions – sectors often go through cycles where there is consolidation and more purchasers looking to acquire, and then quieter periods. Understanding that cycle for your sector, along with the wider economic market, is a key consideration of knowing when to take a business to market. Rushing to sell at the wrong time may result in a significantly lower price, or a marketing process which ultimately fails, causing rapidly changing plans which affect your motivation and energy levels.
- Emotional Readiness – selling a business is a life-changing decision. Rushing can cause emotional stress, especially if you are not fully prepared for the implications of letting go of the business. Taking time to make plans for your life post-sale, allows for a smoother emotional and psychological transition, whether that’s a consultancy, a part-time role or retirement.
Avoid post-sale regret by being ready to sell your business at the right time for you and the company, not because a Chancellor’s announcement has rushed you there prematurely.
As part of The Corporate Finance Network, we have access to Exit Planning processes, some of the best available for owner-managed businesses.
After two to three years of exit planning to build your company’s valuation, the post-tax proceeds should mitigate the impact of the fiscal policy changes we’ve seen during this first Budget from a new Government. You will have achieved a much more successful (and calmer) exit.
For information about our Exit Planning services, please contact us at 01904 655202 or email enquiries@hghyork.co.uk
