How Rewarding Can Planning your Business Exit Be?

A case study:

Derek owned a very successful consulting firm. He has two children. At 62 he decided that he wanted to exit his business within the next 3 years. He had owned his business for 18 years. He had no strategic business plan, no exit plan, and no tax plan!

A review of the business and personal assets revealed that:

  • The revenue of the  firm was  £ 1 million
  • The restated EBITDA was  £170k
  • The owner was taking out of the business £ 180 k per year.
  • The company was valued at £ 600 k (3.5 times the restated EBITDA)
  • He had other personal assets of £ 325 k

A strategic analysis of his business showed that Derek needed to:

  • Develop a stronger mid-level management team
  • Increase formal sales training
  • Change reporting and accountability
  • “Package” their services to capture market share

24 months later:

  • The turnover increased to  £ 1.8 million from 1 million
  • The cash flow increased to £ 300 k from  £ 170 k
  • He received several offers for his business, the lowest from the management team for £ 720 k and the highest from a strategic buyer for £ 1.8 million

The results:

The firm’s value increased from £ 600 k to £ 1.8 million a value added of £ 1.2 million.  The professional planning and implementation almost tripled the value of Derek’s firm in 24 months!

Derek was liable to capital gain taxes and his business assets qualified for business property relief. Liquidating them would have meant moving them into non-qualifying assets and exposing them to a potential inheritance tax liability (IHT). He decided to invest the gain into an Enterprise Investment Scheme (EIS) solution which allowed him to defer the gain. If the investment is held until his death the gain is totally eliminated. An EIS investment qualifies for BPR so will be IHT free. Derek also benefited from the 30% income tax relief on investment.

The business started from nothing and sold for £ 1.8 million so was liable to £ 180 k capital gains tax liability. Other assets had used up Derek’s 325 k nil rate band. The remaining 1. 6 million was taxable at 40 % inheritance tax (IHT)  = £ 648k.

Without planning Derek would have passed to his heirs only £ 1,297 k: £ 1,800 K + 325k – 180 k capital gain – 648K IHT.

As he invested into an EIS £ 600 k for this tax year and £ 600k for the previous year he received £ 70 k income tax relief for 2013 and £ 70 k for 2012 which he reinvested in the EIS.  His heirs will receive, £ 2,209K:  1,800 k+ 325 k + 140k tax relief – 56k IHT. This is 70% more than without this planning approach.

During the Exit Planning Process Derek:

  • Saved £ 180 k in capital gains taxes
  • Developed an estate plan that saved £ 912 k in estate taxes
  • Dramatically increased the value of his company £ 1,200 k
  • Spent £ 76 K in various advisors fees.

That’s a 30 to 1 return on his investment!!!

Derek is based in the United Kingdom but the case can be replicated anywhere in the world applying relvant  tax laws in vigour in the country you are in.

Are you curious about how sellable your company is and what you would need to tweak to sell it when you’re ready? Then it’s time to get your Sellability Score via the questionnaire on our website. It takes about thirteen minutes and your responses are kept confidential. Click on the following link to complete the Sellability Score Test now!

If you have a question or disagree with me please leave a comment on this blog.  I will respond promptly so we can have a fruitful discussion

If you like this article please share it with your friends on social media, your Blog or by e-mail

If you envisage to transition out of your business in the near future and would want to explore what you should do please do not hesitate to call Jean-Bertrand de Lartigue on +44 1656 766 363 or e- mail him at JB@macint.co.uk

Be the first to comment

You may also like...

What Has Culture to Do with Selling a Business?

The answer to that question is in the “value pyramid” below: An owner driven business. In this type of business, the owner makes it all happen. Because this level of …Read more  »

Process Optimisation to Enhance the Value of a Business Before Sale.

Is your business positioned to take on the challenges of facing a potential buyer? If you put your business for sale, when you want to exit, the chances that you …Read more  »

Selling a Business a Choice that May Be Regretted for 20 Years or More

Every day we are faced with choices that will affect us over the long term. Selling our business is a crucial choice, it will impact the rest of our life …Read more  »

Should You Plan Your Succession or Your Business Continuity?

You well know that running a successful business is more than just meeting the requirements of the moment and the coming year. You have to plan for its long term …Read more  »