Next act: Planning to sell a business?
31st January, 2019
For many business people, their business is their lifetime’s work, consuming all their time, energy and focus. At the point of selling a company, wealth which had previously been concentrated in one asset is realised and the focus moves from the management of the company to the financial implications of receiving the cash proceeds and establishing a plan to invest the capital for the future.
In this article, we explore some of the most important financial considerations for those who are planning to sell or have recently sold their business, or as it is also known Next Act investing.
Use it or lose it
In the months leading up to a business sale minds are naturally concentrated on achieving the best consideration and terms for the deal.
In our experience, relatively little attention is given to the significant personal financial implications the sale will have or the need for an investment and financial plan to be put in place to invest the sale proceeds.
As with all aspects of financial life, early planning yields rewards. Before a business is sold, consideration should be given to including wealth advisers as part of a pre-sale team. Incorporating wealth management advice early in the sale process should help ensure any potential sale opportunities can be availed of while the business is still in personal ownership.
As an example, using available pension saving allowances may attract tax relief. Following the sale of the business, this may no longer be the case, so a potentially valuable planning opportunity like this should be considered and advised upon in advance of the business sale.
Mind the gap
The area which is often most important and overlooked in selling a business is the inheritance tax consequence of the business sale.
Generally, shares of a private company qualify for Business Relief, meaning they are exempt from inheritance tax if the shareholder passes away.
This relief is very valuable as it allows businesses, especially family businesses, to pass through generations without incurring any inheritance tax liability. Broadly, inheritance tax is payable at 40% on assets over the nil rate band (£325,000), subject to some potential additional reliefs for a main home. So shares in a business worth, for example, £1m would be exempt from inheritance tax on passing away if they qualify for Business Relief.
On selling a business the cash proceeds will, in principle, be subject to inheritance tax when the owner passes away unless another relief applies (such as spousal relief). Assuming no other relief is available and the nil rate band is fully used, the same £1m now in cash rather than company shares would be taxed at 40%, or £400,000 of inheritance tax, in the event of passing away.
In practice, the risk of the proceeds falling liable for inheritance tax shortly after the sale of the business may be low but were the eventuality to arise, the impact could be significant. In light of this, consideration should be given whether a plan should be put in place to address the risk well before the business is sold, as its implementation can take several months. The options to address the risk are broad, from simply insuring the liability to establishing more sophisticated trust structuring, but understanding both the implications of receiving the sale proceeds and the options to mitigate the underlying inheritance tax risk is sensible well in advance of completion.
For many of our clients the sale of their business represents the crystallisation of many years work and will be the single largest sum of capital they will receive in their lifetime.
As we look to the future with clients beyond the sale of their business, two key areas need to be addressed – first, an investment strategy which aligns with the objectives and risk profile of the client needs to be established and secondly, consideration needs to be given to the structure in which the investments are to be held.
The investment strategy will have at its core the investment objectives of the client. For those who have sold their business these vary considerably – some clients want to adopt a relatively cautious approach to investing whereas others want to actively grow their investments or use their investment portfolio to replicate the income they received before the business was sold.
As well as considering a client’s investment objectives, consideration needs to be given to their wider risk profile, which includes factors such as a client’s willingness and desire to take investment risk, as well as their wider asset base. For clients who have sold their business, the sale provides an opportunity to transition their wealth from being concentrated in one asset to being invested on a multi-asset basis; with an investment portfolio specifically aligned to their personal investment objectives and holistic risk profile.
In addition to implementing the right portfolio of investments, when selling a business, professional investment advice should also cover the structuring of the investments. As an example, one of the primary concerns of many clients on selling their business is to share their wealth with children or grandchildren but in a controlled, tax efficient way. The use of trusts, gifts and other strategies for passing on wealth to future generations (now or in the future) is something we incorporate into our holistic wealth management for clients who are planning to sell or have recently sold their businesses. Investment structuring advice should be considered an essential part of any post-sale investment and financial plan.
The Next Act
The next act of life following a business sale should be exciting as opportunities, both financial and personal, open up and are able to be explored and enjoyed. The development of an investment and financial plan for a post business future should form a key part of life following a business sale. This plan is able to be most effective when developed in anticipation of the sale being completed or, put another way, as the first act closes and the Next Act is about to begin.
The information contained in this document is not a recommendation, individual advice or investment research and is classified as a marketing communication in accordance with the European Union (Markets in Financial Instruments) Regulations 2017.
Warning: Past performance is not a reliable guide to future performance. The value of investments and of any income derived from them may go down as well as up. You may not get back all of your original investment. Returns on investments may increase or decrease as a result of currency fluctuations.