Whether you’re selling and fully divesting yourself of your business or you’re handing it over to your children to run in the future, successful business transitions come from careful and diligent planning.
Read on to discover five effective steps you can take to help ensure a successful business transition in your company.
1. Start planning early – and for different outcomes
The key to a successful business transition is to start planning sooner rather than later.
By giving yourself more time, you can consider what you want out of your business transition and implement strategies that drive you towards those goals.
Additionally, having more time allows you to plan for different outcomes. Indeed, while you may plan to fully divest yourself currently, you may find that you wish to stay on in some capacity come retirement age.
Similarly, you never know what the world and financial markets will be doing in the future. As a result, planning for different contingencies in the event that the market is uncertain at the time you sell is a sensible and prudent choice.
So, by planning for various scenarios, you can be confident that your business transition will still provide you with what you want from it in later life.
It can be tricky to gauge exactly when it’s the right time to start planning but, as a general rule of thumb, try to give yourself at least five years to carry out your transition plan, and ideally no less than two years.
The sooner you have all your ducks in a row, the more confidence you can have that the transition will work for you and your family as well as the business, no matter the circumstances.
2. Know what you’re planning for
Of course, early planning for multiple outcomes is only useful if you know what you’re planning for. So, at this stage, it’s important to give some thought to your actual future: what do you want out of life?
Is your goal to sell up and use the proceeds to fund expensive holidays when you retire? Or would you rather just reduce the responsibility you have everyday so you can keep working in some capacity while getting a few extra rounds of golf in?
Knowing what you’re planning for creates a seamless shift for both you and the business, giving you the confidence that you’ll be able to live the kind of lifestyle you want in later life.
3. Decide on future ownership of the business
One of the most crucial decisions you’ll need to make is on the future ownership of the business.
Do you want to appoint a successor, such as a child or a trusted employee, so you can influence the direction of the business or perhaps even remain in some form of advisory role?
Or would you prefer to sell to a third party, targeting a sale that will supply you with a lump sum to live on now that you’re fully moving on?
This will partially be defined by what you’re planning for; after all, if you need the income from a business sale to fund your retirement plans, it’s likely that you’ll need to find a separate buyer.
Whatever you decide, make your intentions clear to everyone in the business so they all know where they stand and what to expect.
4. Plan for tax to save yourself a bill
A highly important step of planning for your business transition is comprehensive tax planning, ensuring that the transition is as tax-efficient as possible.
Selling all or part of a business can land you with a hefty tax bill. In particular, Capital Gains Tax (CGT) may apply when disposing of certain assets within it. For higher- and additional-rate taxpayers, that could be a rate of 20%, or 28% if you’re disposing of property.
Early planning can again pay dividends here, giving you the opportunity to find available tax breaks and reliefs that could save you a bill.
For example, Business Asset Disposal Relief (BADR), which replaced Entrepreneur’s Relief in 2020, can reduce your CGT rate to just 10% on qualifying assets, even if you pay higher- or additional-rate Income Tax.
BADR applies up to a lifetime allowance of £1 million. So, by using it, you could save up to £100,000 in CGT when you come to dispose of certain business assets such as machinery, property, and even unlisted shares.
Steps like these can make a significant difference in how much tax you ultimately owe on your business sale, making you the biggest beneficiary of all your hard work.
5. Include estate planning alongside your business
When you’re planning for your future after your business, you’re essentially planning for your personal future at the same time.
That’s why it can be convenient to start planning for your estate at the same time, putting structures in place for a time after you pass away.
Firstly, you may want to update your will with details of what you’d like to happen to your wealth in the future.
Additionally, you may now be sitting on a potential Inheritance Tax (IHT) liability if you’ve sold your business, if you make no preparations for what will happen to your wealth once you pass away.
So, consider methods that can reduce an IHT bill. For example, you might:
- Gift money or assets to your family to reduce the size of your estate
- Put money or assets in trust
- Give a portion of your estate to charity in your will
- Create a life insurance policy and hold it in trust so that your family can easily settle an IHT bill on your death.
IHT is notoriously complex, so make sure you speak to an expert before making any concrete plans.
Work with us
If you’d like to start planning for a seamless transition from working in your business to later life, please do get in touch with us at Cordiner Wealth.
We can help you to develop a plan for your business so that there are no surprises when you finally decide to down tools and retire.
Email firstname.lastname@example.org or call 0113 262 1242 to speak to us today.
The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.