It is a common trait among business owners that they fail to properly plan for the future of their business. This can create significant stress and worry for business owners and can also bring about outcomes which are not very tax efficient for them. On the other hand planning for one’s exit from the business, if done in advance, can result in a much more seamless exit which can often be much more tax efficient.
We now look at the traditional way in which a business owner can exit from a business can be summarised as follows;
1. Sale of the business in the open market
2. An internal buyout by management
3. Transfer to a fellow member of your family
4. Winding up of the business/liquidation
We now look at each of these individually.
Sale of business in the open market
The most important aspect of selling on the open market is that the business owner will usually receive value not just for the assets of the business but also the goodwill. However, the goodwill very often arises because of the energy, enthusiasm and contacts of the business owner and it would be rare that the sale of any business would take place without the business owner remaining in place for a work out period which might be up to 3 years. Accordingly, if a business owner wishes to exit by selling the business he/she needs to be aware that he/she will need to stay on in the business for a period of time so as to copper fasten the existing clients/customers of the business. It will usually be the case that a significant amount of the purchase price will be linked to retention of key customers.
If there is cash in the business it may be necessary to the existing business owner to either draw out the cash or to extract the cash into a separate entity so that the purchaser is not paying for the cash element of the business.
Buyout by management
This can sometimes be a useful option if the business owner puts in place a very good, strong capable team who have the resources to be able to buy out the interest. This can sometimes be done by a buyback of shares either from an existing shareholder or if it can be structured correctly by the company itself. The latter option can only be availed of if there is sufficient distributable reserves in the company. Specific tax advice would need to be taken in this regard.
The most important advantage of a management buyout is that the management already are aware of the business, they know the employees and the transaction will usually be a much more seamless one and it might be more tax efficient as it may enable the exiting shareholders to possibly access any cash held tax efficiently in a share buy back situation.
Transfer to a family member
This option may attract CAT business relief if there is a gift element to the transfer and so can be very attractive from that point of view. Capital gains tax may arise but this may be mitigated by claiming entrepreneur relief for retirement relief . Specific tax advice should be taken in this regard.
If it is not possible for the existing shareholder(s) to exit or indeed if there is more than one owner and they cannot agree how the business is to be disposed of then it may be necessary to close down the business. If the business is operated under the vehicle of a limited company then it would be necessary to liquidate the company so that the shareholders can access any cash and other assets. The difficulty with the liquidation/wind up option is that the exiting shareholders will not get any benefit for the goodwill and it is likely that the assets of the business will generally be sold at a discount .It will also mean that the employees will more than likely lose their jobs and this can be very stressful and upsetting for all concerned.
The most important consideration for any business owner is to put in place a plan and take legal and tax advice. This will also give a focus to build up the business as efficiently and is possible to make it much more attractive for a prospective purchaser.
For further advice on any business/ company related matters please do not hesitate to contact either Brendan Dillon or Pauline Horkan on 01-2960666.