TIG / A9 Exit Strategies V4
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Exit Planning - Tax Efficiently!

Exit Planning - Tax Efficiently!

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  • My Biography Thanks to Stuart for his presentation on how to create and manage investments to ensure you get the lifestyle you want when you retire. But there are other things you can also do to help you live that lifestyle when you retire. Can I ask who in the room is a business owner? And who is not? And who wishes they had never started a business? The presentation I will give you tonight is aimed at those who are running their own business but I would ask, those who are not, to think about what their life and retirement might be like if the did run a business? It is never too late? At the Infinite Group just now we work with nearly 30 franchise businesses and we are seeing a very high growth in them as the recession sees more and more people wanting to take control of their future! Long gone are the days where you are safe in a large corporation or in a public sector bodies! Running your own business or franchise business is becoming more attractive.
  • Pause for reflection... Briefly silent to hold their attention then click next slide.
  • Ask the question then look at the examples on the slide. Ask the room – business owners what was the reason for you? Those who are not business owners what was your reason for not starting a business?
  • Let’s get down to business tonight! What we will cover…
  • Anyone in the room know???? From day 1 in your business! The day you start!
  • Does anyone know why now is the time to start? 1 To get the maximum value from your business you need to start as early as possible. Too often people wait till the are close to their 65 birthday before they think abou this – too Late! 2 And Start Planning your tax strategies early. Speak to an expert in this area so that when you take you money out of the business you limit the amount that goes to the tax man! And speak to a financial advisor on your wealth management – Stuart? And 3 I suppose there is a third reason there as well? So you can retire earlier in life?
  • How much money is your business worth? Like most people selling a house they always think it is worth more than it actually is… this is because of the time, love and attention they have put into it over the years.
  • Now… If you are a sole trader, the only value in the business is your customer list and some goodwill, but given that most of your customers are likely to be your customers because of the personal service you give them (and if you are not around to deliver them, will the customers migrate elsewhere?) don’t expect to get a huge sum of money for that. And yes you may have some assets if you own your shop, a van or machinery? But, in pension pot terms, the phrase ‘diddly squat’ springs to mind.
  • If you’re employing people to help you deliver your product or service, however, then you have a real chance to build something of genuine and substantial value. But as I am sure you know… people = problems, risk and financial commitment . And without going into the principles of franchising in any detail here, do bear in mind that franchisees can bring all the kudos and financial benefits of having employees, without the financial outlay or risk.
  • This is very much a dark art, and they say beauty is in the eye of the beholder. You need to consider your average profits over last 3-5 years . And what your projections are for the next 2-3 years. Where are your prospects and future customers coming from? Assuming you have such projections and can justify them? Your market sector – is it a growth industry or a dinosaur? Is it flooded with competitors fighting for every bit of business? Or is there plenty to go around? Sentiment . And of course I am sure you are aware of the differences from where we were in the 90’s to present day! There are significant differences in business value from good times to bad times! Value Paid: But just as important is the question of succession management: assuming you are selling because you have other plans - retirement, other ventures - any buyer is going to want reassurance that once you’ve made a sharp exit, there’s someone around who can keep everything on track. OK, the sale may include a 2 - 3 year earn-out to ensure you stay at the coal face during an initial period, but the better you plan your successors in advance of any sale, the easier such a process will be and probably the higher the value of the business to begin with.
  • So what is your business worth right now to a willing buyer in a commercial and competitive market? Let’s look at some examples… Well we have just spoke about a sole trader. Quickly take audience through this example. What about a company with employees? Well that is pretty good? And with a niche Engage audience – what do you think?
  • So what are your options, what direction do you go?
  • The first route people often think about is to sell to someone else, another company. Acquisition! Another popular route is to sell to your management team MBO or an outside management team MBI A variation on this is to allow your management team to gradually earn their way in. If they are not in a position to raise funds up front they can accumulate shares over a period of time to earn their way in. Stock market listing is a highly complex route where you have to meet many accreditations. The cost of this can often cripple companies trying to do this. Let your kids take the reigns! But beware, you need to have clear instructions in place for them or they might end up fighting over shares and responsibilities? And we have all heard of a business that slowly dies. Not a route I would recommend, staff get resentful and start to leave as you bleed the business and customers leave as quality drops. You might find that a few hours a week is not enough to generate a sufficient salary during your retirement?
  • And for most for these routes you need to think about how you let people know? How do you publicise your business? Now before you go rushing out there tell everyone so you can get a quick sale,…have a think about this? What will be the impact on your staff if they know the business is for sale? This needs to be managed and delt with carefully. What will your customers think? Is it the case that they bought in to your business in the first place because of you – what will they think and more importantly do if they know you are leaving?   It is better to be ‘found’ than overtly advertise yourself. Your options, and I would suggest a tentative approach with all of these in light of what I have just said. Brokers/agents: think of them as a sort of dating agency - there will be fees Trade associations: if you’re in with the committee members, inside knowledge can be a powerful tool Discreet word of mouth: networking works at every level of business, none more so than when you want to sell it Competitor contact: there may be one or two looking to grow their own businesses by acquisition. The more suitors the better: Dutch auction = better price. (Start with a high price! Then lower till someone bites!)
  • Which ever route you choose you must think about who you need to help you along the way.   I would recommend you do not try and do it on the cheap, this can cost you dearly in the long term! You will need some essential expertise: Top M&A lawyer: (mine saved me a potential half million liability over ten years by inserting one clause in the sale document). Pay the money and get the best. Buying cheap could cost many times the so-called savings. Accountants: not just any accountant: one that has done these sorts of deals on a regular basis: you don’t want someone cutting their teeth on the biggest and most important deal of your life Objective advisor: especially if you are the biggest or sole equity holder and you don’t have equal partners to act as a sounding board and play devil’s advocate.
  • If you are running your own business you might be wondering how you maximise the value of your business?
  • Now it’s time to start them thinking, get them to see why what they’ve been doing is what’s the problem, how just a few things you suggest tonight will completely change the way they do business. Your main aim here is to get them relating to the fact that they could be working less and getting more. Remember, you’re selling and to make the sale you’ve got to highlight their NEED for you and your service. They have to know that they MUST get some of your advice ... So why is this important in your exit strategy? Next slide….
  • Could I ask in the room of the business owners Who has a business that runs without them! Who has a business that runs with them in it for less than 40 hours a week? At a previous seminar someone told me the worked over 100 hrs a week in their business!
  • Did you know that if: BUSINESS UTTERLY DEPENDENT ON YOU:   VALUATION - £X00,000   BUSINESS OPERATES EFFICIENTLY WITHOUT YOU IN IT: VALUATION - £8X00,000 I hope that gives you pause for thought. Says who? Says an organisation called Sunbelt, with whom we often work closely, whose business is selling small businesses and who have developed a model for putting a fair value on any business (and incidentally, a means of highlighting the particular aspects of it that are depressing that value, such as the owner/manager’s over-arching importance to it). This figure is not based on luck or market sentiment; it is based on the amount of planning (or lack of it) that has gone in to developing the enterprise.
  • Because… Surely I need to be there to manage my staff? I don’t trust anyone else with my accounts. I am sure some of the reluctantly give them to your accountant! And what about the customer care? They are my customers. And the business will not continue to grow and dvelop without me. And so on….
  • There is one common theme we apply to businesses we work with at the infinite group whether they are looking for Organic Growth, Franchising or Exit Strategy. It is to create a successful profitable business that works without the business owner. This is how we get you that 8 times profit effect. I might add that in the process we tend to significantly increase your profits! We all have different areas we focus on to make our business a success and I would love to know some of yours today. Get audience involved and thinking. Then present what we believe are the areas. Make sure you give them practical examples of each and every one of the concepts. Keep getting participation and keep asking them the questions ... People – giving them opportunities and trusting them to take responsibilities. Empowering staff to not only deliver to your high standards but to better them! Systems - We need to systemise workflow within the organisation so that doing things become easier. Look at McDonalds, have systems in place to trust 16years old kids to sell a burger and how to up sell a coke and fries as well, Oh and do you want to make it large! Technology – Almost every business onwer I know has a CRM system, but most only use about 20% of it’s capibilities! Do you know many of your clients/customers have bought from you in the last 2 months? How many haven’t? Is there anything you want to do about that? Money - How often do you do financial reporting, daily, weekly, monthly, annually..! Who has made a management decision lately based on accounting data? Affordability of new staff. Investment in equipment. Who carries out cashflow forecasts? Sales and Marketing – Who many businesses cut their sales and marketing budget when times are not good? If it is not working you should not be using it even in good times! If it is working you should be spending more in tough times! And it is important to realsie that it is all these areas combined that make the big difference in increase your: turn over Profit Ability to step out of the business And ultimately it’s value at the point of sale! Sales and marketing: What’s the difference? Is marketing scientific or artistic? People: Your team and people you surround yourself with is your greatest asset. How you choose your staff and who you surround yourself with will determine how successful you will be. (talk through each bullet point)
  • EXITING A BUSINESS PROFITABLY REQUIRES   PLANNING FORETHOUGHT EXPERT ADVICE     And a slice of lady luck   RIGHT TIME/PLACE/OPPORTUNITY So where do I come in?!

TIG / A9 Exit Strategies V4 Presentation Transcript

  • 1. Jeff built a very successful manufacturing business with substantial revenue. He had a deep desire for his son, Frank, to join him in the business and continue the tradition. Jeff was in his mid-sixties when he finally convinced Frank to join the company. Frank entered the company as a vice-president of operations and quickly developed a strong affinity for the business. After two years on the job, Frank loved the company and was a great salesman but he demonstrated no aptitude as a senior level manager. Jeff received several nice offers on his company but elected not to sell because of his desire for his son to carry on his legacy. Three more years passed and it became painfully clear Frank was not going to make it. Frank had become increasingly unhappy and left for another job that was sales oriented. Jeff was seventy and facing the prospect of no successor generation and an increasingly competitive business climate. He eventually sold his company for 40% less than his offer of three years prior. © 2009, The Infinite Group
  • 2. © 2009, The Infinite Group
  • 3. © The Infinite Group 2009 Gerry Forristal
  • 4. © 2009, The Infinite Group
  • 5. © 2009, The Infinite Group
  • 6. © The Infinite Group 2008
  • 7. © 2009, The Infinite Group
  • 8.
    • NOW!!!
    © 2009, The Infinite Group
  • 9. © 2009, The Infinite Group
  • 10.
    • £?
    © 2009, The Infinite Group
  • 11. © 2009, The Infinite Group
  • 12. © 2009, The Infinite Group
  • 13. © The Infinite Group 2009 Tim Dew
  • 14. © 2009, The Infinite Group
  • 15. © The Infinite Group 2009 © The Infinite Group 2009 Turnover Profit Value Sole Trader Company with Employees Company with Employees & Niche £300K £1M £1M £75K £300K £300K Nil £1M £1.5M
  • 16. © 2009, The Infinite Group ?
  • 17. © 2009, The Infinite Group
  • 18. © 2009, The Infinite Group
  • 19. © 2009, The Infinite Group
  • 20. © 2009, The Infinite Group
  • 21. © The Infinite Group 2009 What is a Successful Business?
  • 22. © 2009, The Infinite Group
  • 23. © 2009, The Infinite Group
  • 24. © The Infinite Group 2008
  • 25. © 2009 The Infinite Group
    • People
      • They are your greatest asset
    • Systems
      • They are your key to leverage
    • Technology
      • Automate the routine, humanise the exceptions
    • Money
      • Makes it all happen
    • Sales & Marketing
      • The best mousetrap doesn’t always sell the most
    5 Keys to increase the value of your business
  • 26. © 2009, The Infinite Group
  • 27. Exit Planning Richard Baird
  • 28.
    • Tax implications of sale
    • Sale to a third party
    • Transfer of business to family
    • Purchase of own shares
    • C16 wind up
    • Calculations
    Summary
  • 29.
    • Gain subject to Capital Gains Tax
    • Capital Gains Tax up to 18%
    • Entrepreneurs relief for individuals
    • Non business assets
    • Substantial shareholding exemption
    • Potential balancing charge
    • Income Tax up to 50%
    Tax implications of sale
  • 30.
    • Cash consideration
    • Share exchange
    • Deferred consideration/Loan notes
    • Asset/Share sale
    • Stamp duty
    • Inherent Capital Gains on assets
    • Business splitting
    Sale to a Third Party
  • 31.
    • Capital Gain on valuation
    • Hold over relief available
    • 100% Business Property Relief
    • Value re-set on death
    Transfer of business to family
  • 32.
    • Retained profits
    • Advance clearance
    • Surplus cash
    • Limited future involvement
    Purchase of own shares
  • 33.
    • No buyer for business
    • Property requires to be transferred
    • Potential Capital Gains Tax @ 21%
    • Double tax charge
    C16 Wind up
  • 34.
      • Proceeds £2,000,000
      • Less costs £ 1,000,000
      • Capital gain £1,000,000
      • Entrepreneurs relief £ 444,444
      • Net chargeable £ 555,556
      • Annual Exemption £ 10,100
      • Net taxable £ 545,456
      • Tax @ 18% £ 98,182
    Example
  • 35.
      • Proceeds £2,000,000
      • Less costs £ 1,000
      • Entrepreneurs relief £ 888,444
      • Net chargeable £1,110,556
      • Annual Exemption £ 10,100
      • Net taxable £ 1,100,456
      • Tax @ 18% £ 198,082
    Example – Hold over Shares transferred 18 months prior to sale when value was £1.5m Beware if sold< 1yr
  • 36.
    • Fixed Assets £ 60,000
    • Current Assets £100,000
    • Current Liabs £ 60,000
    • Net Assets £ 100,000
    • Within Fixed Assets
    • Property worth £900,000
    Assets or Company Asset sale Property £900,000 Cost/index £100,000 Gain £ 800,000 Tax @ 21/28% £ 203,000 Revised net assets Net Assets £ 100,000 Prop uplift £ 840,000 Tax £( 203,000 ) Total £ 737,000 Offer £1m for assets or £800,000 for company
  • 37. Any Questions?