Planning for Scale, Sale & Beyond has made for interesting reading. At its centre is advice from The Supper Club’s high-growth, entrepreneurial members on how to prepare for an exit. But it’s insight from a particular partner that proves invaluable to SME owners that have yet to get their taxes in order.
Sorting your tax affairs is a priority, says Smith & Williamson’s Peter Ball, especially if you’re looking to sell your business.
“Any concerns or identified shortfalls could endanger the sale,” he explains. “Even if a company has paid its taxes on time, poor record-keeping is a red flag for HMRC and investors.
“So UK companies must make sure their income tax, National Insurance, VAT, corporation tax and business rates are paid on time.”
This should also reduce the potential issues that might arise in the due diligence process. It could likewise allow entrepreneurs to access the tax reliefs available that encourage enterprise and enable them to plan in advance for their financial future.
“Any offers received should really be reviewed by your tax adviser,” Ball maintains. “This way they can identify opportunities and confirm your net of tax proceeds from the sale.
“They should help you in your negotiations on the terms of any deferred payments, earn-outs, loan notes or shares in the purchaser, as the tax consequences for each of these can vary depending on how they are structured.”
Much more is at stake though. In the worst case scenario, tax issues could cause the buyer to reduce their purchase price or delay payment of part of the proceeds.
Tax issues can sometimes also result in an entrepreneurs’ exit proceeds being subject to income tax, at much higher rates than those applying to capital gains.
“Entrepreneurs’ relief may also not be unavailable if the precise rules are not met, where it was assumed they would be,” Ball adds. “The recent changes announced at the Budget to entrepreneurs’ relief are likely to impact a number of entrepreneurs, particularly those whose businesses are private equity backed.”
Tax breaks, incentives and liability
The sale of a company can have a significant impact on a founder’s inheritance tax liability.
“They will no longer qualify for business property relief on their shares,” Ball says. “Tax advisers can help you to determine whether the transaction should be structured to help with future family succession plans.
“And Entrepreneurs’ Relief is a tax break that halves the amount of Capital Gains Tax (CGT) paid by individuals on the sale of business assets. Each person has a £10 million lifetime gain for this relief. It can be used by shareholders of a firm focused on trading or the holding company of a trading group.”
If you haven’t already done so, one of the best times to implement an incentive scheme is before an exit. This way you can see which one works best from a sales perspective.
There’s the Enterprise Management Incentive (EMI) share scheme, which Ball suggests can help build a senior team and scale a business.
“The offer of share options here can attract managers and directors who recognise a fast-growth firm with great potential,” he says. “It can also motivate them to drive that growth as they have a stake in its success.
“Employees on EMI schemes pay no income tax or National Insurance when the option is exercised, as long as the shares are bought for at least their market value when granted.
“A company also receives a corporation tax deduction when staff exercise their options, which the founder should seek to be treated as a tax asset, to be reflected in the company’s value and sale price.”
These are but a few considerations that need to be made. It sounds like a lot, which is why preparation to get your taxes in order need to be made way in advance of selling your business.