Retiring is one of the commonest reasons for selling a business according to Duncan Macpherson, Chartered Financial Planner at Punter Southall Wealth, who says that after the challenges of dealing with the pandemic many business owners may be motivated to sell and retire in 2022.
Data from the National Federation of Self Employed & Small Businesses highlights that at the start of 2021 there were 5.5 million small businesses, but this was down by 6.5% on the previous year[i]. Also, Aviva[ii] recently revealed that one in four (25%) of Brits who aspire to retire aim to do so at 60, and that 60 is the most popular age for early retirement among those who have already retired.
Duncan Macpherson says, “The existential challenges of the pandemic may prompt more business owners to want to enjoy the fruits of their labour and consider selling up this year. However, it’s a big decision to make, both emotionally and financially, and we recommend people take their time planning.”
“People will need to ensure their business is financially stable and that the profit from the sale will be enough to provide them with the retirement they have always dreamt of, as well as taking care of their loved ones. A good approach is to consider three simple questions linked to the key stages of the business ownership lifecycle as they will provide useful and important insights and help owners formulate a clear plan for sale.”
Duncan suggests business owners ask themselves the following questions:
Will I be able to make my money last? – A primary concern of most business owners is losing their main source of income. Many are also concerned about the size of their pension pot, with research last year suggesting 45% of small business owners are expecting to outlive their retirement funds[iii].
It’s therefore essential to understand how much money from the sale is needed to achieve all their plans, especially if they are relying on this to fund their retirement. Cashflow modelling forms an integral part of this process, as it can help business owners understand where they are and better visualise the future.
Once it’s established that a sale is viable, the initial pre-sale stage is all about getting the business in the right shape, so it is sensible to engage a solicitor to 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 considered.
How will the sale of my business impact my tax position?
Moving onto the selling stage, it’s important, prior to the sale, to ensure that all relevant tax allowances are used, so for example consider 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.
Once all exit taxes have been covered, business owners make the transition from the world of Corporate Tax to Personal Tax. Matters such as inter-spouse exemptions and Inheritance Tax (IHT) will need to be considered.
Can I take care of my loved ones and live the kind of retirement I would like?
Finally, in the post-sale stage it’s vital to structure investable capital to maximise the opportunity to provide the level of income required to maintain a client’s desired lifestyle. One key element of this is establishing attitude to risk. The appropriate approach to risk in respect of invested capital in retirement may well be quite different from the approach taken when building their business. Cashflow modelling will support this part of the journey too. Ongoing financial advice in retirement will also be important, to constantly fine-tune plans to address changes in circumstances, legislation, and investment markets, which must be considered, year on year.
Duncan adds, “One of the commonest business sale pitfalls is not planning far enough ahead. Taking a forward-looking approach will help business owners understand what is possible and to proactively bring about the sort of retirement they want, at the time of their choosing.”
“They shouldn’t do this alone and our collaboration with solicitors and other professional specialists is vital to work through the stages, ensuring the very best outcome for their retirement.”
For more information about Punter Southall Wealth visit: https://www.puntersouthall.com/wealth