What you need to think about before selling your business to retire

Before any sale, a business needs to be in the best financial shape, so at the pre-sale stage, engage a solicitor to help.

They can ensure that their Articles of Association are up-to-date, employment contracts are in place and any health implications that could affect the seller are taken into consideration. It is also important that wills and Lasting Powers of Attorney are in place, and even keyman insurance and directors’ shareholder protection.

When someone sells, their main concern is losing their main source of income. Another worry is whether their pension pot is sufficient, with research last year suggesting 45% of small business owners are expecting to outlive their retirement funds[i].

Anyone selling needs to understand how much money from the sale is needed to achieve all their plans, especially if they were relying on these funds for retirement.

Understanding their current lifestyle and what they want to do in the future is key and this is where a financial planner can prove invaluable support.

A financial planner will help with cashflow modelling and budgeting and enable business owners to understand their financial situation and visualise their future. This can provide useful insight into how much they might need. It may show that they could sell for less, or earlier, and still be comfortable, allowing them to make an informed decision when an offer comes in.

At the selling stage but before the sale, ensure that all tax allowances are used. This includes maximising pension contributions and carrying forward any contributions that exceed the annual allowance and still benefit from tax relief. This may be an opportunity to reduce cash held on the balance sheet.

Capital Gains Tax (CGT) may need to be paid on any profit. This can include anything involved with the business, such as land and buildings, machinery and even shares, but it may be possible to reduce the potential tax bill using Business Asset Disposal Relief (BADR).

To qualify for BADR, which replaced Entrepreneur’s Relief in 2020, a business must have been owned for at least two years. If applicable, BADR can be used to reduce the CGT owners pay on qualifying assets down to 10%. This can be applied to the value of the business and its assets up to a lifetime threshold of £1 million.

Any gains that don’t qualify for BADR, or are above the £1 million threshold, will be charged at 10% or 20% for higher rate taxpayers, subject to any annual exempt amount and depending on the availability of the individual’s basic rate band.

Once all taxes have been covered on exit, it is time to transition business owners from the world of Corporate Tax to Personal Tax.

Post sale, a financial planner can ensure that all allowances are used to provide the most tax-efficient income in retirement. If we take a married couple, for example, then we have two sets of allowances to work with, covering their personal allowances, dividend and savings allowance in addition to annual capital gains tax exemptions and potentially tax-free cash entitlement from pensions. When looked at in combination, the gross income required to achieve the desired net income in retirement, may not need to be as high as they may think.

Another tax to consider is Inheritance Tax (IHT). Once the business is sold, all the proceeds, without any planning, would normally fall back into their estate for tax.  Although we can often arrange life policies in trust as a useful way of providing liquidity in the short term, we work with our clients to make longer term plans for this, with a range of options including qualifying reinvestments and gifting, either outright or into trusts.

Once the sale is complete, the post-sale stage involves structuring investments to make sure they provide the level of income required to maintain a client’s desired lifestyle. One key element of this is establishing their ‘attitude to risk’. At this point it will be based upon how much risk they need to take rather than the risk appetite they had when building their business.

Cashflow modelling will support this part of the journey too. This is the time when they may consider gifting, whilst at the same time securing their future needs. Ongoing financial and legal advice is important as there may be changes in circumstances, legislation, and investment markets, which must be considered, year on year.

One of the most common business sale pitfalls is failure to plan well. With this step by step planned approach and the support of a financial planner and a solicitor, the sale of a business can be plain sailing and enable the business owner to finally focus on the future and enjoy a great retirement.