Exit, sale or succession

Navigating to exit in uncertain times

Personal financial plans and business plans need robust stress testing

Navigating to exit in uncertain times

Personal financial plans and business plans need robust stress testing

Navigating to exit in uncertain times

Personal financial plans and business plans need robust stress testing

Navigating 1200X700

There are three basic considerations for an entrepreneur when planning an exit:

  •  personal finance plans, with assumptions about the ‘pot of money’ needed to fund retirement
  •  a business plan, which will spell out how the value of the business will be built
  • how that value will be turned into cash (i.e. how and to whom the business will be sold)

These plans must be flexible enough to survive the uncertainties faced by entrepreneurs and their businesses – and in 2021, there is no shortage of those. The economic impact of coronavirus has been severe, while the recovery is expected to be unpredictable and full of bumps in the road. Add to that pre-pandemic uncertainties such as the Brexit fallout, US-China tensions and technological disruption, and the importance of properly planning an exit becomes clear.

Build in contingencies

When working with their financial planner, entrepreneurs should be trying to establish how much money they need for their chosen retirement lifestyle, which will, in turn, set a target ‘exit value’ for their business. This is often calculated using the current tax regime and prevailing financial conditions as a base case scenario.

No one has a crystal ball, but it is important that any personal financial plan considers potential changes to the tax environment. Rumours that Entrepreneurs’ Relief will be scrapped have so far proved unfounded; last year it was renamed Business Asset Disposal Relief. It allows you to pay 10% tax on the first £1m of gains when selling your business, rather than the standard 20% Capital Gains Tax.

When navigating towards an exit, scenario planning is important. Should the Business Asset Disposal Relief be removed, the entrepreneur’s projected assets might not be sufficient. If that is the case, changes will be needed – it may be necessary to relook at the target value of the business or retirement date, or increase tax-efficient savings.

With the uncertainty caused by the pandemic, it is vital to plan conservatively. If, for example, a 10% investment return is needed on pension savings to reach the target pension pot within the required timeframe, the chances are this assumption is too aggressive. More conservative assumptions will naturally lead to an element of contingency being built into the plan.

Revisit the business plan

With a target exit value and timeframe in place, entrepreneurs will need to revisit their business plan and make sure it is aligned to their personal finance plan. With the disruption to businesses caused by coronavirus, it becomes even more important to ensure these two plans are aligned.

It can be difficult to maintain focus with so much going on in the world, but entrepreneurs should channel their energy towards those controllable factors that impact their business rather than become distracted by the daily twists and turns of the pandemic. There are several ways to achieve this.

First, seek out certainty. It is easy to get panicky about the factors that dominate the news, but there are opportunities emerging as lockdowns are eased and the vaccine rollout gathers momentum. Some analysts have suggested the UK is heading for its strongest year of economic growth since the Second World War, fuelled by consumers spending the cash they have saved since the start of the pandemic.

Meanwhile, China’s economy grew a record 18.3% in the first quarter of 20211 as its recovery took hold, and the world’s largest economy, the USA, is also recovering strongly.2 All of these offer opportunities to entrepreneurs and mean it is worthwhile for them to go back to their strategic plans and see if they can pivot their businesses towards less uncertain environments.

Second, take stock of which uncertainties will, or will not, have an impact on the business. Brexit uncertainties might have forced a revision to the terms of trade with European customers or suppliers. The pandemic might have altered the way staff members work and plans for office space. But it’s best to be proactive in effecting your own change, rather than reacting to circumstances. For example, a very small rise in market share or winning one or two new key accounts can have a far bigger impact on a small business, so focus on those practical, controllable things.

Third, look for opportunity arising from uncertainty. The coronavirus fallout has seen an increase in workers leaving London and other big cities to live in less populated areas.3 This presents an opportunity for firms to hire talent to which they previously would not have had access. Similarly, there is likely to be a glut of cheap workspace available as the dust settles and businesses return to the office.

Lastly, be agile and challenge the sacred cows. Some businesses, especially family ones, can be too wedded to their traditional business models, leaving themselves vulnerable to changes in the business environment. In times of uncertainty, it is useful to question the fundamental modus operandi, which might not have happened before. It is often most helpful to have that thinking challenged by an outsider to bring a fresh perspective.

There are three basic considerations for an entrepreneur when planning an exit:

  •  personal finance plans, with assumptions about the ‘pot of money’ needed to fund retirement
  •  a business plan, which will spell out how the value of the business will be built
  • how that value will be turned into cash (i.e. how and to whom the business will be sold)

These plans must be flexible enough to survive the uncertainties faced by entrepreneurs and their businesses – and in 2021, there is no shortage of those. The economic impact of coronavirus has been severe, while the recovery is expected to be unpredictable and full of bumps in the road. Add to that pre-pandemic uncertainties such as the Brexit fallout, US-China tensions and technological disruption, and the importance of properly planning an exit becomes clear.

Build in contingencies

When working with their financial planner, entrepreneurs should be trying to establish how much money they need for their chosen retirement lifestyle, which will, in turn, set a target ‘exit value’ for their business. This is often calculated using the current tax regime and prevailing financial conditions as a base case scenario.

No one has a crystal ball, but it is important that any personal financial plan considers potential changes to the tax environment. Rumours that Entrepreneurs’ Relief will be scrapped have so far proved unfounded; last year it was renamed Business Asset Disposal Relief. It allows you to pay 10% tax on the first £1m of gains when selling your business, rather than the standard 20% Capital Gains Tax.

When navigating towards an exit, scenario planning is important. Should the Business Asset Disposal Relief be removed, the entrepreneur’s projected assets might not be sufficient. If that is the case, changes will be needed – it may be necessary to relook at the target value of the business or retirement date, or increase tax-efficient savings.

With the uncertainty caused by the pandemic, it is vital to plan conservatively. If, for example, a 10% investment return is needed on pension savings to reach the target pension pot within the required timeframe, the chances are this assumption is too aggressive. More conservative assumptions will naturally lead to an element of contingency being built into the plan.

Revisit the business plan

With a target exit value and timeframe in place, entrepreneurs will need to revisit their business plan and make sure it is aligned to their personal finance plan. With the disruption to businesses caused by coronavirus, it becomes even more important to ensure these two plans are aligned.

It can be difficult to maintain focus with so much going on in the world, but entrepreneurs should channel their energy towards those controllable factors that impact their business rather than become distracted by the daily twists and turns of the pandemic. There are several ways to achieve this.

First, seek out certainty. It is easy to get panicky about the factors that dominate the news, but there are opportunities emerging as lockdowns are eased and the vaccine rollout gathers momentum. Some analysts have suggested the UK is heading for its strongest year of economic growth since the Second World War, fuelled by consumers spending the cash they have saved since the start of the pandemic.

Meanwhile, China’s economy grew a record 18.3% in the first quarter of 20211 as its recovery took hold, and the world’s largest economy, the USA, is also recovering strongly.2 All of these offer opportunities to entrepreneurs and mean it is worthwhile for them to go back to their strategic plans and see if they can pivot their businesses towards less uncertain environments.

Second, take stock of which uncertainties will, or will not, have an impact on the business. Brexit uncertainties might have forced a revision to the terms of trade with European customers or suppliers. The pandemic might have altered the way staff members work and plans for office space. But it’s best to be proactive in effecting your own change, rather than reacting to circumstances. For example, a very small rise in market share or winning one or two new key accounts can have a far bigger impact on a small business, so focus on those practical, controllable things.

Third, look for opportunity arising from uncertainty. The coronavirus fallout has seen an increase in workers leaving London and other big cities to live in less populated areas.3 This presents an opportunity for firms to hire talent to which they previously would not have had access. Similarly, there is likely to be a glut of cheap workspace available as the dust settles and businesses return to the office.

Lastly, be agile and challenge the sacred cows. Some businesses, especially family ones, can be too wedded to their traditional business models, leaving themselves vulnerable to changes in the business environment. In times of uncertainty, it is useful to question the fundamental modus operandi, which might not have happened before. It is often most helpful to have that thinking challenged by an outsider to bring a fresh perspective.

There are three basic considerations for an entrepreneur when planning an exit:

  •  personal finance plans, with assumptions about the ‘pot of money’ needed to fund retirement
  •  a business plan, which will spell out how the value of the business will be built
  • how that value will be turned into cash (i.e. how and to whom the business will be sold)

These plans must be flexible enough to survive the uncertainties faced by entrepreneurs and their businesses – and in 2021, there is no shortage of those. The economic impact of coronavirus has been severe, while the recovery is expected to be unpredictable and full of bumps in the road. Add to that pre-pandemic uncertainties such as the Brexit fallout, US-China tensions and technological disruption, and the importance of properly planning an exit becomes clear.

Build in contingencies

When working with their financial planner, entrepreneurs should be trying to establish how much money they need for their chosen retirement lifestyle, which will, in turn, set a target ‘exit value’ for their business. This is often calculated using the current tax regime and prevailing financial conditions as a base case scenario.

No one has a crystal ball, but it is important that any personal financial plan considers potential changes to the tax environment. Rumours that Entrepreneurs’ Relief will be scrapped have so far proved unfounded; last year it was renamed Business Asset Disposal Relief. It allows you to pay 10% tax on the first £1m of gains when selling your business, rather than the standard 20% Capital Gains Tax.

When navigating towards an exit, scenario planning is important. Should the Business Asset Disposal Relief be removed, the entrepreneur’s projected assets might not be sufficient. If that is the case, changes will be needed – it may be necessary to relook at the target value of the business or retirement date, or increase tax-efficient savings.

With the uncertainty caused by the pandemic, it is vital to plan conservatively. If, for example, a 10% investment return is needed on pension savings to reach the target pension pot within the required timeframe, the chances are this assumption is too aggressive. More conservative assumptions will naturally lead to an element of contingency being built into the plan.

Revisit the business plan

With a target exit value and timeframe in place, entrepreneurs will need to revisit their business plan and make sure it is aligned to their personal finance plan. With the disruption to businesses caused by coronavirus, it becomes even more important to ensure these two plans are aligned.

It can be difficult to maintain focus with so much going on in the world, but entrepreneurs should channel their energy towards those controllable factors that impact their business rather than become distracted by the daily twists and turns of the pandemic. There are several ways to achieve this.

First, seek out certainty. It is easy to get panicky about the factors that dominate the news, but there are opportunities emerging as lockdowns are eased and the vaccine rollout gathers momentum. Some analysts have suggested the UK is heading for its strongest year of economic growth since the Second World War, fuelled by consumers spending the cash they have saved since the start of the pandemic.

Meanwhile, China’s economy grew a record 18.3% in the first quarter of 20211 as its recovery took hold, and the world’s largest economy, the USA, is also recovering strongly.2 All of these offer opportunities to entrepreneurs and mean it is worthwhile for them to go back to their strategic plans and see if they can pivot their businesses towards less uncertain environments.

Second, take stock of which uncertainties will, or will not, have an impact on the business. Brexit uncertainties might have forced a revision to the terms of trade with European customers or suppliers. The pandemic might have altered the way staff members work and plans for office space. But it’s best to be proactive in effecting your own change, rather than reacting to circumstances. For example, a very small rise in market share or winning one or two new key accounts can have a far bigger impact on a small business, so focus on those practical, controllable things.

Third, look for opportunity arising from uncertainty. The coronavirus fallout has seen an increase in workers leaving London and other big cities to live in less populated areas.3 This presents an opportunity for firms to hire talent to which they previously would not have had access. Similarly, there is likely to be a glut of cheap workspace available as the dust settles and businesses return to the office.

Lastly, be agile and challenge the sacred cows. Some businesses, especially family ones, can be too wedded to their traditional business models, leaving themselves vulnerable to changes in the business environment. In times of uncertainty, it is useful to question the fundamental modus operandi, which might not have happened before. It is often most helpful to have that thinking challenged by an outsider to bring a fresh perspective.


 

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. The value of any tax reliefs depends on individual circumstances.

Exit strategies may include the referral to a service that is separate and distinct to those offered by St. James’s Place.

Sources:

1 National Bureau of Statistics of China, National Economy Made a Good Start in the First Quarter, 16 April 2021

2 US Bureau of Economic Analysis, Gross Domestic Product, First Quarter 2021 (Advance Estimate), 29 April 2021

3 PricewaterhouseCoopers, UK Economic Outlook, January 2021


 

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. The value of any tax reliefs depends on individual circumstances.

Exit strategies may include the referral to a service that is separate and distinct to those offered by St. James’s Place.

Sources:

1 National Bureau of Statistics of China, National Economy Made a Good Start in the First Quarter, 16 April 2021

2 US Bureau of Economic Analysis, Gross Domestic Product, First Quarter 2021 (Advance Estimate), 29 April 2021

3 PricewaterhouseCoopers, UK Economic Outlook, January 2021


 

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. The value of any tax reliefs depends on individual circumstances.

Exit strategies may include the referral to a service that is separate and distinct to those offered by St. James’s Place.

Sources:

1 National Bureau of Statistics of China, National Economy Made a Good Start in the First Quarter, 16 April 2021

2 US Bureau of Economic Analysis, Gross Domestic Product, First Quarter 2021 (Advance Estimate), 29 April 2021

3 PricewaterhouseCoopers, UK Economic Outlook, January 2021