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Business exit strategy - should I stay or should I go?

06 October 2014

Few business owners actually have an exit plan, something that details what will happen when they finally decide to call it a day.

It is extremely important to have an effective Exit Strategy in place for you and your business.

For tax reasons alone, it is essential that every owner of a privately run business should have an exit strategy plan. Yet surprisingly, few business owners actually have one.  Normally, they are too busy just to stop and think about what will happen when they finally decide to call it a day.

It takes a great deal of hard work and commitment for someone to run their own company, and the day-to-day pressures naturally mean that the financial health of the business takes priority over the time spent on planning their own financial objectives.

As a result, very few owners have given serious consideration to the ultimate question – the final realisation of all that they have worked for. Even if a business owner does not have plans to leave the company in the foreseeable future, the consequences of failing to plan ahead can be both considerable and expensive.

That is why all owners and businesses need an exit strategy, which allows the shareholder director to leave the company in the most efficient way possible, consistent with personal and business objectives and with minimal disruption to the long term stability of the business.

It makes good sense to consider an exit strategy sooner rather than later. It is almost always less expensive and less disruptive to develop a strategy over a period of time; a small outlay at the outset can remove risk from the balance sheet, while proper planning can avoid large capital outflows in the future. And tax planning now is likely to be easier and less disruptive than paying tax later. What is more, planning an exit strategy gives confidence to co-directors, employees, family and clients – not to mention the bank.

Strategic planning is vital if owners want to ensure that they end up with the maximum cash in hand after taxation. With proper advice and planning, taxes can be substantially reduced, deferred or even eliminated in some cases. A well-planned strategy should embrace the owner's personal and business objectives, the value of his or her share in the business, the ability to realise this share when required, and to cope financially should the exit be forced.

The issue facing owners of small to medium sized enterprises (SME's) is that they have worked hard to build up the business and have become fairly indispensable. This poses something of a dilemma if something happens to them or they want to leave the company in the future.

If they were able to put a value on the company shares, they would probably find they have created an asset that's worth a great deal of money. The problem is how to unlock that value from the business and minimise the impact of leaving the company.

There is a range of financial planning tools, which can be applied to the development of an exit strategy. These include international investments, cashflow injections to support the balance sheet and facilitate exit plans, retirement planning, corporate protection and capital tax planning which, planned effectively, can reduce or remove the twin threats of Capital Gains Tax and Inheritance Tax.

As part of the strategic plan, it is vital that owners examine both business and personal issues including estate planning, retirement plans, financial requirements, and tax planning, as well as heirs, liabilities and the capabilities of existing management. Owners should decide who the most likely buyer of the business might be, ranging from family members, employees or partners to investors or competitors.

With the right professional advice, owners could unlock some of the wealth currently tied up in the business, allowing it to continue to thrive once they have left. At the same time, it is important to protect the business from the impact of death in service of key people, an important issue often overlooked by SMEs.

All privately owned businesses will one day end up being sold or transferred, and owners have to do what is right for themselves. If a person has worked hard over the years to build up a successful business and is 50 or over, now may well be the right time to start thinking about how to enjoy that success in a way that best suits the individual.

The days of a 'set in stone' retirement age of 60 or 65 are long gone and these days, all kinds of options are open. Early retirement may be part of the game plan. Or the owner may be enjoying the work so much that they want to carry on. Perhaps the owner would like to continue working, but at a slower pace, maybe with some voluntary activities thrown in. He or she might possibly want to help someone set up their own business with the benefit of their experience, or they might fancy a spell as a non-executive director or chairman.

Whatever demands and pressures are placed on your time today it’s important to start thinking about putting that strategic plan in place.

Exit Strategy Key Questions:

  • How do I intend to leave my business?
  • Have I set myself an exit date?
  • What are my chances of surviving to that date?
  • What will happen to my shareholding if I survive until then (and what will happen if I do not)?
  • Will my absence cause the company to lose customers?
  • What is my projected income and expenditure likely to be after I leave?
  • How much can I expect to realise from my shares?
  •  What will be the tax implications of selling?

The value of an investment with St. James's Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation and reliefs from taxation can change at any time and are dependent on individual circumstances.

 

Some of the products and investment structures documented within this article will not be available to our clients in Asia. For information on the funds that are available please get in touch.

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