Life after business ownership

“Simon, we’re frequently helping clients in the run up to a sale and with the sale process itself, but we don’t often talk about that period afterwards. What are some of the common pitfalls?

Yeah, it’s a big change for our clients. Often, they have been owner managers, they may have founded the business, or inherited it from their parents and not known much different in their life than running the business. But when the next generation isn’t going to take over from them, and instead they’re going to sell the business to a third-party, it is a very difficult and different circumstance.

Often it can be the first time a founder is becoming an employee again, if he’s going to need to work with the buyer for a period, often through an earnout or a defer consideration period. And becoming an employee is really quite challenging from a mindset perspective when you have been your own boss, being somebody that people have been reporting to, and now suddenly you have a boss in the form of the buyer.

So that is quite a big transition. Added to that, the pressure often of an earnout, which could be a significant proportion of the consideration from the deal is locked up in an earnout where, for both financial but also non-financial purposes, you as the seller really wants to be able to maximise the returns for yourself, your family, but also for the business going forward in that earnout period. And yet again, you’re now no longer in control of all of the decisions because you’ve sold the shares to somebody else and they’re in control.

So it’s a tricky period from that perspective and I’ve often seen clients underestimate how big an impact that will have in their heads, frankly, of being in that transition to one of no longer being an owner but still being in the business that you’ve built, founded, had lots of heartache for and just selling the business. Signing that share purchase agreement on the day of completion is in some ways just a beginning, not an end, of another chapter.

So, Sarah we spend a lot of time in the run up to a sale of a business, talking about the taxation, the Capital Gain, what’s happening on the deal, but there’s a big Inheritance Tax implication of selling a business as well. Just fill it out for us.

Yeah, just speaking very generally you’re going from owning shares, which up until now have been an asset, often wholly protected from Inheritance Tax, to having cash, which is an asset that isn’t. And obviously the Inheritance Tax change is very topical at the moment, so that BPR (Business Property Relief) protection is going to be drawn back. But more than ever people selling their business, really need to think about what they are going to use those funds for, and if some of that is wealth to be passed down to generations – really thinking about that now rather than kicking it down the road.

Are opportunities even ahead of the sale to do some of that planning?

Yeah, certainly, and we would always recommend that.

Yeah. We’ve seen some good examples recently where clients have moved towards giving shares to their children before the sale, giving shares to charity before the sale, and I guess that’s just where the Inheritance Tax planning really kicks in very successfully and gets the Taper relief clock running early, or just taking a gain completely out of tax if it’s going to be given to charity anyway. Why not do it early rather than later?

Yeah, absolutely. The sooner you can start thinking about these things, the more options people have. Once the sale has taken place, those are much more limited. Once an owner manager has sold their business, what kind of roles do you see them moving into after that?

Often there’s that period of transition perhaps because of an earnout or a period where the buyer wants to ensure that all of the knowledge, the goodwill, if you like, of that owner manager is passing across to the new owners. So that’s the first thing that typically is happening for most of our clients. But alongside that, actually moving away from the mindset of a founder to, in the short-term an employee, but actually perhaps more importantly, towards a consultancy or advisory capacity. Not just for the business itself, but often it then becomes an opportunity to serve the industry. With some of that experience that the founder or businessman has had and for him/her also to actually have the opportunity to share some of the wider skills they’ve learned with their peer networks.

We see people become more involved in the Institute of Directors, or in their local trade groups, or take on roles in charities where they can use their leadership, their management experience in a different way. And there’s quite a number of different opportunities: Non-Executive Director (NED) roles are popular, where actually because of their experience, others will see that Mrs Smith who’s just sold her business, perhaps now might have the time to be able to advise some younger businesses looking at doing work in a similar field, and want her expertise and might invite her to join their board on a one day a month basis or something like that.

We very commonly see those kinds of opportunities, because the wealth of experience that one has, if you can successfully sell a business that you have founded or you have been actively part of, running and managing for many years, is hugely valuable to those that are much earlier in their careers.

Sarah in those opportunities of working in a different way post-sale, how might you again, advise from a tax perspective how that owner manager who has now sold out of his business might think about some tax planning either for what they’re going to do day-to-day in other roles or what they’re doing from an investment perspective?

Yeah, I think there’s a few things to pull out there. So, we’ve mentioned the earnout period a few times. Exiting shareholders always need to be aware of any tax liabilities that are still due to fall, and making sure they’ve got the cash set aside for that, unfortunately. You mentioned those sorts of individuals possibly taking on NED roles or broader consultancy roles. Something we quite often get asked to look at is structuring those agreements and those arrangements. You may well have heard of the IR35 rules, so particularly where it’s NED positions interposing a personal service company, are we actually going to see the tax advantages we’re expecting?

Something else, people once they’re kind of out of the earnout, or possibly even during it, might want to think about moving abroad. We spoke about work-life balance. That comes with its own tax issues, especially if they’re still working for the business. Potentially the risk of creating a permanent establishment overseas, but often also it’s just explaining to people if their intention is to become non-UK tax resident, for example, what that actually involves for a leaver. Often the days you can be in the UK is actually quite limited and quite difficult to achieve if you still have, for example, property and family and what have you over here.

I guess the final thing to mention is reinvestment. So often people will look to reinvest a portion of those funds on the business sale. Sometimes that might be in sort of tax efficient investments, so things that might allow a deferral of some of the Capital Gain from the sale, for example – EIS (Enterprise Investment Scheme) maybe.

I think it’s also important people understand the taxation of the return they’re getting from their investment portfolio. Quite often people will be advised by an investment advisor on the mix, and that’s obviously entirely appropriate. But what they don’t always realise is some of that is taxable on an arising basis, some on a realisation basis. Some isn’t taxable at all if it’s dividend income potentially. So, it’s complex and it has cashflow implications and I don’t think that’s always necessarily well understood.

Yeah. And I’ve heard this phrase of a family investment company as well. Is that something that we should be encouraging our clients to be considering?

I think it’s something they should be considering. It’s not necessarily appropriate for everybody. But where we see it working quite well is where there’s a desire to pass wealth down, but maybe we’re not quite ready to cede control yet. And it can be quite useful in that situation, which is quite common, especially I think, for people that sell their businesses relatively young.”