But what are the considerations for such owners looking to the future? How can they plan ahead and what are the core issues to apply thought to?

The subject needs to be examined from the legal and tax perspective. Printweek spoke to two experts for their advice and suggestions.

THE LEGAL PERSPECTIVE

It’s all about the why

According to Freya Summers, corporate partner at Wright Hassall, those looking to move their business on need to think about why they’re looking for change. As she says, “understanding the motivations for sale – retirement, de-risking or seeking additional funding for growth – will determine how to approach the project”.

From then on, as soon as discussion around the sale starts to take shape, Summers believes that engaging experienced advisers early in the process is essential so as to “allow plenty of time to assess an exit strategy and afford time for a thorough review of the business”. Experience has taught her that this will identify potential areas that may affect the valuation, type of purchaser, or funder for the transaction.

But who?

There are multiple routes to an exit. The first, as Summers highlights, is a trade or competitor purchaser. This, she says, is the most traditional method of sale where “the business is marketed and ultimately sold to a trade purchaser. They may be a competitor, an expanding company or an overseas operation looking for a UK enterprise”.

Next is a sale to private equity. This is a sale is made to a private equity group which acquires the shares in the company. Of this Summers says that “typically, private equity groups will buy mature proven businesses with demonstrable growth strategies”.

Then there’s the management buy-out, the acquisition of a company by its existing management team often supported either by private equity finance or by traditional institutional debt finance.

Another option that Summers points to is an employee ownership trust. Akin to a management buyout, it differs in that “an employee ownership trust transfers the shares in the company to a trust established for the benefit of all employees of the company”.

It’s also possible to pass a company to the next generation. However, Summers says that this requires meaningful thought and planning, including whether the company or business is set up for this, the children are actively working in the business, and whether there are any third-party shareholders who may be affected. She says that “where non-related parties have gone into business together it may be the case that those individuals are reluctant to agree to an automatic transfer to a child”. Beyond this is the matter of how the children will fund the acquisition.

How best to move the business on?

Changing ownership of a business is, in essence, about moving value to a new owner. Summers highlights that there are two mutually exclusive ways to do this: a share sale or an asset sale, with buyers and sellers take opposing stances. “They are,” she says, “very distinct transactions that result in different liabilities and tax positions which often have an impact on price.”

In a share sale a buyer is purchasing the entire entity, which includes all assets, liabilities and obligations, a ‘warts and all’ approach. But in an asset sale, the buyer ‘cherry picks’ only the assets they want.

Summers explains that “in a share sale, there would usually be far more detailed due diligence along with more detailed and lengthy assurances or ‘warranties’ provided by the exiting seller.”

Generally speaking, a seller is likely to prefer a share sale while a buyer may prefer an asset purchase.

The need for good advice

Since selling a business is often the result of a lifetime of work it’s important that sellers surround themselves with the right team of advisers. In Summers’ view it’s best to “appoint advisers that understand your marketplace, the type of business you have and have experience in similar successful exits”.

It’s possible, however, that the process starts after an approach from a buyer. In this situation Summers warns that the need for specialist advice should not be overlooked. She says: “The process may go straight to the legal advisers, but this can prove troublesome if the commercials of the transaction have not been finalised.” She explains that could leave much of the commercial negotiations – price for example – to the seller which can be difficult to manage. In her opinion, corporate finance advisers help the process through to completion and deal with sticking points.

Maintaining confidentiality

Of course, confidentially is critical, especially in early stages of the transaction, when one or more bidders may be interested in making an offer, especially when such a bidder is a competitor. This is the reason why Summers says that it is standard practice to put in place a non-disclosure agreement (NDA) that provides “stringent undertakings from potential purchasers that any information they acquire will be utilised solely for the purpose of analysing the transaction”.

Confidentiality also allows for reassuring conversations about the future of the business to occur when the time is right to introduce the new owners.

However, it needs to be recognised that a purchaser may want access to some employees or key customers and that this can be difficult to manage and so may need additional NDAs.

Establishing value

Lastly, when it comes to what a business is worth, Summers states that “understanding what the market may consider a reasonable price may influence the type of transaction undertaken.”

She points out that often in sales or investments an ‘enterprise value’ or ‘price to earnings ratio’ are used. This takes the profits of a business and seeks to determine an appropriate multiplier of that figure to land on a price. For example, using a price to earnings ratio of five for a business that makes £500,000 post tax profits would mean that the business would be valued at £2,500,000.

But determining what the appropriate multiplier is often tricky. Certain sectors, such as tech start-ups, have higher multiples due to the level of rapid growth expected. Similarly, en vogue sectors can carry higher multipliers – in 2023 there were good multipliers for ecommerce and professional services sectors.

And to this she adds that “proven annual profits can also realise a higher multiple as investors will give higher multiples to those business in which they can see scalability.” Known as a ‘buy and build’, she explains that private equity investors pay higher multiples for those businesses they believe can be grown quickly and then sold again.

Ultimately, Summers thinks that a combination of thought, early planning and good advice will make for a good sale.

THE TAX PERSPECTIVE

In-built complexity

Tax is a complex subject and Helen Thornley, a technical officer at the Association of Taxation Technicians says that there are two key taxes and associated reliefs – Inheritance tax (IHT) and Business Property Relief (BPR), and Capital Gains Tax (CGT) and Business Asset Disposal Relief (BADR) and gift relief.

In overview, BPR reduces IHT charges on gifts of qualifying business assets down the generations (and on business assets held at death), while BADR reduces tax rates on gains made following a disposal of certain shares.

Main tax implications

The starting point for Thornley is that “if shares in a family company are gifted to the next generation, it is necessary to consider both the upfront gains implications and the longer term inheritance issues.”

She says that when a gift is made to a connected party – the next generation – although the parent may not be receiving payment for the shares, for tax purposes they are deemed to be disposing of the shares at market value. And this can trigger a CGT gain.

It’s all rather difficult, but Thornley says that if shares are unquoted and over 80% of the company activities relate to a trade, the recipient and donor can make a joint election to ‘hold-over’ any gain. This means the donor does not have to pay CGT on the disposal.

But Thornley offers a note of caution: “While claiming holdover can help to facilitate a gift by reducing up-front tax costs for the donor, it has consequences for the recipient. They will effectively acquire the shares at the original cost to the donor – which could be very low if the donor founded the company – and will therefore have a much bigger CGT bill themselves in the future.”

And then when the donor dies Thornley points out that any gifts made within the previous seven years must be taken into account when calculating IHT.

However, there is help for business owners. As Thornley explains, “if the company shares qualify for 100% BPR, this reduces the value of the shares on which IHT is payable to nil. But to qualify, the company must be ‘wholly or mainly’ trading – which broadly means over 50% of the activities relate to trading – and the donor must have held the shares for two years before the gift”.

Further, if the donor dies within seven years of gifting the shares and the recipient has sold the business, and not used the funds to buy a replacement trading business, BPR on the gift is lost. This, says Thornley, “could have IHT implications for the recipient depending on the value of the donor’s estate and any other gifts they have made.”

And where shares are sold to a third party then Thornley advises that the shareholders pay CGT on any gain. She says that “the main CGT rate on gains on shares is 20% although any gains eligible for BADR will be taxable at 10%... once sold, the proceeds will not be eligible for BPR, and the seller will need to review how that affects their IHT position”.

Shares versus assets

When it comes to making an exit, there are two main options: sell shares or sell assets. But as Thornley highlights, they each are treated differently under tax law. Further, when selling assets, “if individuals want the cash themselves, they will need to wind the company up to extract the proceeds”.

But as to the first, selling the shares, Thornley says that this is simpler in that the proceeds go direct to the seller but they “will need to pay CGT and may benefit from a 10% rate on up to the first million pounds of the gain if the conditions for BADR are met”.

In contrast, selling assets is much more complex, and Thornley says leads to two layers of tax.

Firstly, “the company will pay corporation tax at up to 25% on the net gains on assets it has sold”. Secondly, “there will be tax paid by the shareholders if the decision is taken to wind the company up as the individuals are effectively disposing of their shares in exchange for the value in the company – but again BADR can reduce the tax”.

From the purchaser’s perspective there are risks in purchasing shares as they will be acquiring the company complete and potentially taking on undisclosed liabilities. However, if the company sells assets, then, as Thornley explains, “it will pay corporation tax on any gains. There are no specific reliefs for the company. And if the decision is taken to wind up the company to extract the remaining proceeds, then as before individual owners may each be able to claim BADR on the first £1m provided that company is placed into a formal, voluntary liquidation”.

It should be said at this point that BADR, previously known as Entrepreneurs’ Relief, only applies if the individual is also an employee or office holder such as a director. Also, as Thornley highlights, it’s a lifetime limit “so previous disposals by the individual could have used up some or all of it.”

Plan ahead

HMRC often places time restrictions on reliefs; indeed, both BPR and BADR have time limits placed on them. In this case, they both require shareholders to have held their shares for a minimum period of two years before disposal.

Beyond this, Thornley says that “some businesses will need additional planning in advance of sale may be needed as BPR does not apply to any ‘excepted assets’ held by the company”. She defines these assets as those “which have not been used for the purposes of the business for previous two years and are not needed for future use in the business”. An example might be reserves of cash in excess of what the business needs from day to day.

Take good advice

Tax law is a quagmire ready to swallow up all who go near it. A case in point is what happens if the business is run as a sole tradership or a partnership. And then there’s the matter of the business premises for Thornley says: “If the premises are owned and not rented, there is a good chance they are held personally, outside of the trading company and it is still possible to get BADR on the disposal of premises if sold at the same time as the company shares.”

Very simply, planning for a sale goes beyond the back of cigarette packet. The risks are too great to leap without looking.

In summary

Succession planning or rather, how to move the business on to another owner, is a tediously complex subject.

There’s no do-it-yourself option here, or at least, none if the seller wants to agree a deal with a buyer and be tax efficient. Planning ahead and taking good advice is the only way forward.