A key part of your preparations for selling your business is being ready for the windfall that’s coming your way.
Ideally, you’ll have taken the time to work out how much it is that you’re going to need to live your lifestyle in the future, and have targeted this amount when finding a suitable buyer for your company.
But just as important is to have a cohesive plan for exactly how you intend to use that money, especially as it will likely be a large lump sum.
Here are a few things to think about to help you prepare for the lump sum you’ll receive when you sell your business.
Negotiating a deal that suits your needs
The first thing you should think about is the amount of control you have in knowing how much you’re going to receive from a buyer.
This is because you’ll be the one setting the price of your business, so you can decide how much you actually want to receive from the sale.
In fact, you may have read our other blog all about working out how much you need to live the kind of lifestyle you want, in which we talked about how you can tailor your sale to your target lifestyle.
Remember to negotiate a deal that suits your needs, giving you value for your business that will allow you to achieve your future goals.
Putting your money to work in the markets
A key part of managing a business lump sum is in knowing where to save and invest it once you have it. After all, you’ve suddenly gone from having a great deal of your wealth tied up in your company to needing a variety of homes for a sizable chunk of liquid assets.
While you may be adept at navigating the sector your business operates in, you may now find yourself having to operate in broader financial markets, potentially for the first time.
So, think about what you’re going to do with this money now that you have it. For example, you could look to find a high-interest savings account to keep your money in so that you can earn a bit of interest on top of your lump sum.
Of course, your sale is likely to exceed the Financial Services Compensation Scheme (FSCS) limit of £85,000. So, it may be worth spreading your money out across institutions to maximise the amount that’s protected in the event that your bank or building society becomes unable to pay out to you.
You’ll also likely want to consider investing at least a portion of it so that you can generate some more significant returns. This will involve designing and managing an investment strategy with the right amount of risk and reward to suit your needs and your personal risk tolerance.
If you feel entirely inexperienced in managing this, make sure you speak to an expert before you put your money in the stock market.
Have you considered any potential tax liabilities and opportunities?
A big issue you may want to consider when dealing with this money is tax.
Firstly, holding all this money as part of your estate may make it liable for Inheritance Tax (IHT) when you pass away. This could put your family in the position of having to pay 40% tax on it if you don’t do anything to address this liability.
Any money that you save or invest may also be liable for tax. For example, you may need to watch out for Income Tax and Capital Gains Tax (CGT) if you aren’t saving and investing your money in ISAs.
Income Tax may be payable on interest you earn on your cash that exceeds your Personal Savings Allowance, which limits how much interest your money can generate tax-free. In the 2022/23 tax year, the Personal Savings Allowance is:
– £1,000 for basic-rate taxpayers
– £500 for higher-rate taxpayers
– £0 for additional-rate taxpayers.
Meanwhile, CGT may be due if any investments you make increase in value by more than your CGT exempt amount of £12,300 in the 2022/23 tax year.
On the other hand, there may be opportunities to reduce your tax bill at the same time.
For example, by applying for Business Asset Disposal Relief (BADR), you may only have to pay 10% CGT on gains made on qualifying business assets when you come to sell them.
Tax can be complicated, especially when it comes to your business. Make sure you speak to an expert so you can be confident that you’re only paying as much tax as you really need to.
Leaving a legacy – for both the business, and your family
More than anything, you should try to keep the legacy of your business in mind at this time.
This money is the proceeds of your life’s work, and so you no doubt want to make the best decisions for it. The reason you put all that effort in throughout your working life is to provide an income later down the line, so remember to put some serious thought into how you can best do this.
You’ll likely be reliant on this money for the entirety of your retirement, which will probably be at least 20 years and could be as long as 40 years. So, the decisions you make need to have longevity in mind, too.
Similarly, you should give some thought to your family and how they can make the most of this money, too.
You may have children or grandchildren who are beneficiaries of the sale. In that case, you may want to take steps to ensure that they’re ready for the responsibility that receiving a large amount of money can come with.
This could involve putting assets in trust for them so an individual can oversee this money to help and guide them in making decisions with it.
Additionally, you should give some serious thought to your IHT position if you haven’t already. Otherwise, your family may find themselves facing a bill when you pass away.
As a result, it may be prudent to consider methods that can reduce how much IHT you’ll owe, so that the next generation of your family are ultimately the biggest beneficiaries of your sale.
There may even be some crossover between these two points if you have family working in the business. For example, your partner may work in the business, or your children may be in line to inherit control of it.
In this case, securing the legacy of the business and your family is practically the same thing. Make sure you give these considerations just as much energy as how you’ll manage a lump sum, as they matter just as much.
You need a plan that lets you target your goals
Clearly, what you really need to do is create a comprehensive plan that ties all these elements together.
At this stage, arguably the most sensible choice you can make is to work with a professional financial planner who can guide and assist you throughout the process.
If you’d like help creating a plan for selling your business, please do get in touch with us at Cordiner Wealth.
Email firstname.lastname@example.org or call 0113 262 1242 to speak to an experienced adviser.
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.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.