You have spent years toiling away at your business: early starts, late finishes, arguments with colleagues and disputes with rivals. But it has all led to moments of great success and fulfilment. Now the time has come to sell up and move on to the next chapter in your life.
Whatever you decide to do next, it’s more than likely that, given the number of eager buyers knocking at your door, you will do it with hundreds of thousands, or even millions of pounds, nestling in your bank account. It is potentially a life-changing sum. Andrew Anderson-Dixon, Head of Private Client Advice at St James’s Place, has six financial tips which will help you not just cope with your new fortune, but flourish.
1. Maximise your sale value
It is vital, says Anderson-Dixon, for entrepreneurs to build as much value as possible in their business in the lead-up to a sale. “Business owners need to ensure that their business is structured in the most tax-efficient way,” he says. “With one client we identified an opportunity to add value to their business by re-structuring ahead of a sale, which saved them a considerable amount.”
Anderson-Dixon adds: “It’s equally important that the business is moving in the right direction, with healthy current and future profit forecasts, a diverse range of customers and cash on the balance sheet. If not, it will have a huge impact on how a potential buyer will value the business. And, a word of caution – ensure you always have adequate share protection and key person cover because the value of this should not be underestimated. I’ve known the sale of successful businesses to collapse and the value plummet because there was no protection in place.”
2. Effective tax planning
Anderson-Dixon urges selling entrepreneurs to “leave no stone unturned” when it comes to utilising tax advantages, for example corporate pensions which could be left to your family. This also includes ensuring you qualify for Entrepreneurs’ Relief, which will allow you to pay a lower rate of 10% of capital gains tax (CGT) on sale proceeds. He recommends that you take expert tax advice as this could mean the difference between paying 10% and full-rate capital gains tax.
He says: “Individuals have an Entrepreneurs’ Relief lifetime limit of £10million. If it’s likely that this limit will be exceeded when the business is sold, and the sale is, say, one or two years away, you could consider transferring 5% or more of the shares and voting rights to your spouse or civil partner to utilise their available relief, thus minimising CGT. Holding too much cash can jeopardise this relief, so consideration as to what should be done with this prior to sale is highly important.”
3. Estate planning
As Anderson-Dixon explains, another important element is Business Relief since shares in an unquoted trading company are exempt from inheritance tax (IHT). However, once the business sale proceeds are capitalised, IHT comes into play. To avoid a huge bill on death and to protect the “value that has been created and the entrepreneur’s family’s financial security”, further advice and planning is needed.
“Even before a sale you could transfer business shares into trusts* which can also help to secure your child’s or grandchild’s future,” Anderson-Dixon says. “After the sale you could also invest some of your proceeds into tax-efficient investment solutions.” In the longer term, careful and robust planning early on could save one’s estate hundreds of thousands of pounds, possibly more, in IHT. Entrepreneurs also need to remember the basics, such as ensuring their Wills are up-to-date and that they have Lasting Powers of Attorney in place*.
Entrepreneurs are risk takers and they generally manage risk by exclusively focusing on it, but understandably many entrepreneurs want to keep investing in new companies (they are entrepreneurs, after all!) and this can lead them into loss-making situations. Therefore, having capital safe and managed in a different way, by professional advisers skilled in diversifying risk across markets, asset classes etc, is a really good counterbalance.
Anderson-Dixon says: “When investing, you need to ensure that you do it in a tax-efficient way and that you have a clear understanding of your risk appetite and capacity for loss. I’ve met many entrepreneurs and building businesses is in their blood. Many are keen to start a new company or venture even before they have sold the last one! That’s understandable, but you must set aside a fair proportion of your wealth as a contingency in case the new business is not as successful as the old one.” As well as investing, getting the best rates of return on cash is also key. That, Anderson-Dixon states, may also mean developing relationships with private rather than high-street banks. “Private banks might understand your situation more clearly and can ensure your deposits are better managed and your banking requirements are met,” he explains.
Entrepreneurs may be keen to use their wealth to give something back to society. Anderson-Dixon applauds the intentions of setting up charitable foundations or even new social enterprises, but again stresses that everything should be done in the most tax-efficient way possible. “Be aware that you can get tax relief from charitable donations,” he explains.
6. Understand the psychology of wealth
Suddenly you have more cash than you have ever seen before. The temptation may be to spend it on a Ferrari or a gloriously never-ending Barbados holiday, but you need to ensure that you have enough capital to meet your expenditure and future needs. “You will face the psychological pressure of having materialised such wealth and wanting to spend that money. You may see your friends’ or family’s perceptions of you change. You must enjoy your wealth, but be sensible,” cautions Anderson-Dixon.
“An entrepreneur can be vulnerable with their new fortunes and may need to be protected from themselves through good professional advice and a duty of care.” He adds: “Financial education of the next generation is also highly important. Entrepreneurs typically understand the value of money because they have worked for it. But what about the next generation which is handed it on a plate, so to speak? The advantages of a carefully planned financial education and intergenerational transfer can ensure that beneficiaries value the huge gift they will be receiving in the future, and careful advice and support will ensure that they use it wisely. A strong professional financial adviser can work alongside you and give you the guidance, support, freedom and flexibility you need to enjoy your hard-earned wealth into the future.”
An investment with St. James’s Place will be directly linked to the performance of the funds selected and the value may therefore fall as well as rise. You may get back less than you invested.
An investment in equities does not provide the security of capital associted with a deposit account with a bank or building society.
The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on inidividual circumstances.
*Will writing and Powers of Attorney involve the referral to a service that is separate and distinct to those offered by St. James’s Place. Will writing, Powers of Attorney and Trusts are not regulated by the Financial Conduct Authority.