If you’re a business owner then your business is not just a place to work or a means of generating income, it’s also potentially your biggest asset. So what are you going to do with it?
If you can’t imagine parting with your business and intend to keep it for the rest of your days, then you need to consider what will happen to your business after you’re gone. If, on the other hand, you envisage one day selling your business and handing over the keys to your business for some cash to spend, invest and/or retire in comfort, then a sale is on the cards at some point.
If you expect to leave your business within the next five years, then you should start planning now to maximise its sale price. A sale could involve selling to another business (a trade sale) or to your management team (a management buyout) which may include the next generation of your family.
Deals can be structured in many different ways and could involve you keeping a reduced stake and playing a decreasing role. Some of the sale proceeds may be paid to you at a later date (deferred consideration) and this may depend on how the business performs, known as an earn out.
A key part of your preparation for selling a business should be conducting a full audit of your business to ensure there are no issues which could reduce its value in a sale process when the buyer undertakes its due diligence.
The most common legal issues to look out for are:
- Customer/supplier contracts – ensure all major customers/suppliers are subject to robust contracts with the business. Check these contracts for ‘change of control’ clauses which may allow the other party to terminate on a sale
- Property – assess whether there are any potential liabilities such as dilapidations, asbestos, or environmental issues and consider what actions are available to you to mitigate those liabilities. Property issues are a very common cause of sale processes being delayed, sometimes for a number of months
- Intellectual property (IP) – ensure the business owns all the IP it needs to operate. If a consultant has created any IP, ensure they have correctly assigned it to the company. Where IP is particularly valuable to your business, it may be wise to protect it by registering it
- Employees – ensure key staff are on proper contracts. A buyer will often want the comfort of knowing that when you leave the business, there is a management team in place which will continue to work in the business
It is also important for you to take tax advice on the proposed structure of any sale. You may, for example, qualify for Entrepreneur’s Relief on the proceeds of the sale. This currently reduces the Capital Gains Tax rate down to 10% although it will only apply on proceeds up to a lifetime limit of £10m.
Not to Sell
If you don’t want to sell your business, consider whether your next of kin are willing to take up the mantle after your death. One advantage of passing your business to the next generation is that it may qualify for Business Property Relief (BPR) which provides up to 100% relief from Inheritance Tax (IHT) on the value of relevant business assets. If, however, you sell your business in your lifetime, then the cash you receive for it will not qualify for BPR so would be counted in the value of your estate for determining any IHT due. This effectively means the proceeds are taxed twice: once in your lifetime at Capital Gains Tax rates, and again in your estate at IHT rates. There are strict criteria for BPR to apply, so you should always take advice if factoring this into your succession planning.
If your business is not going to pass to your family, then who do you want it to go to? If you have business partners, then they are likely to be the natural choice, but you probably still want your family to receive value for your share of the business. In these circumstances, you and your business partners may wish to have an agreement which includes taking out life insurance so that the surviving party/parties can afford to buy the deceased party’s share from their estate.
If you would like any advice in relation to your business or selling a business, you are welcome to get in touch with Richard Moran, one of our partners. You can call Richard on 0113 222 3212 or email firstname.lastname@example.org. Please visit www.clarionsolicitors.com for more information.
Disclaimer: Anything posted on this blog is for general information only and is not intended to provide legal advice on any general or specific matter. Please refer to our terms and conditions for further information. Please contact the author of the blog if you would like to discuss the issues raised.