The financial press would have entrepreneurs rushing to sell their businesses before 5 April 2008 to benefit from the current Capital Gains Tax (CGT) regime. But should this be a major consideration in determining the right time to sell your company?
It was not that long ago that CGT was payable at a significantly higher rate than today’s effective rate of 10%. Previously, many sellers took actions which often drastically affected their personal lives in order to avoid tax liabilities. Reducing the tax payable has meant that many entrepreneurs have been prepared to pay, stay and invest. Will, as the papers are fond of quoting, this 80% increase in the tax cloud all the other selling issues?
When considering selling a business there are numerous matters to consider, tax is one of these but rarely is it the overriding priority. Jonathan Perrin, Head of the Hospitality & Leisure Group for the AIM listed accountancy, business and tax advisory firm Vantis, discusses.
So why do owners sell and when is it the right time?
Running and growing a successful dynamic business operation requires a significant level of dedication and commitment. Rarely can owner-managers take extended breaks or make time to pursue other interests and activities. After living with such constraints business owners often yearn for a more relaxed lifestyle.
The current trend is for the development of a brand or known product to get to a stage where it has perceived value that can be realised. Many of those who create businesses in this way, have a strong entrepreneurial spirit, and although time consuming and extremely hard work, the early stages of development are an exciting time. However, as the enterprise grows the need for more sophisticated internal procedures and delegation of responsibility means that the owner spends less time on the aspects he or she enjoys, often resulting in the growth rate beginning to slow. Many consider that this is time to sell and look to pastures new.
An approach from a potential acquirer, be it from an external trade buyer or the internal management team, may act as a catalyst for change in how the business is run. The business owner’s focus can change from running and developing the enterprise to realising a capital value and enjoying the proceeds of a sale.
Some companies can be regarded as lifestyle businesses designed to provide a long-term income for the founder and future generations. Assuming that this is not the case, then no matter what stage of development your business has reached, the owners should have an exit plan. One should consider all scenarios and not just the preferred option. However, in some instances, such as ill health, one may have no choice as to timing. To remain in control of the exit strategy, a close eye should be kept on the market in preparation for when an opportunity arises so one can react quickly.
Owners may intend to run their businesses until they are ready to retire but situations and circumstances can change. The market must, therefore, be monitored to identify any emerging trends that may impact on the business value and on the timing of a potential sale in order to maximise value. It is worth noting that growing companies are more attractive to buyers and those funding acquisitions, than static operations.
Entrepreneurs know their industry; selling when it is enjoying an up swing will generate much greater interest and a more favourable price than when the sector is perceived to have peaked. Low funding rates also make acquisitions more attractive to purchasers who can justify an adequate return despite an increased price.
An increased tax cost will result in a reduced net realisation, but this must be balanced against a greater gross realisation by selling when the time is right.
Whilst minimising the tax paid on a gain is obviously an important factor in a disposal it should not be the primary reason. Owners need to give careful consideration to their business and personal objectives in light of the new legislation and gauge the right time to sell.
It is important to understand that markets are fluid and moving continuously. Therefore, having a developed exit plan and keeping your eye on the market will allow you to make the most of any opportunity that arises.
If you decide a sale is optimal then advice should be sought from professional advisers to ensure that all aims from the sale are realised.
For more information on this issue please contact Jonathan Perrin using the form below.