The owners of every small to medium sized enterprise need to consider what they will do with the business, when they come to retire. Options might include a trade sale, management buy-in or buy-out, family succession, floatation, merger or liquidation of the business.

Whatever is likely to be the chosen option, early planning is essential if the business is to have the right value at the time. It is not just a question of maximising your value; in the case of family succession, this might be the last thing you wish to achieve, in case you should die within seven years of making a transfer, as inheritance tax would then apply.

There is also the important factor of capital gains tax. Thanks to changes introduced in April 2008, there is no longer taper relief with its lower effective rate of tax on business assets. Instead everyone pays tax on capital gains at 18%. The introduction of Entrepreneurs Relief of 4/9ths on the first £1 million of lifetime gains reduces the effective rate to 10% on this relatively modest amount. But it is important to note that this relief may not always apply to commercial property, depending on how it is owned.

Planning efficiently in advance allows you to consider all the implications of your intended strategy and ensure that necessary processes and plans are in place to facilitate a smooth transition.

Clarifying objectives
When you come to retire, you may wish to retain an interest in the business, rather than selling up altogether. In this case, you need to consider how you will be able to retain some degree of oversight over the new management, to ensure that the value you have built up is not lost altogether.

It is also important to consider the impact of whatever you decide on various interest groups. These could include ‘external’ shareholders, to whom you owe a special duty of care, as well as customers, suppliers and staff. This last group is vital, because in most businesses they are the greatest resource and need to be husbanded.

Understanding your business
However well you know your business, it can be very difficult to stand back and understand what it is really worth. Many of us will naturally perceive the business we have built up as having a greater value than is necessarily the view of a purchaser; after all, both have the objective of maximising the value of their investment, but this means a vendor’s value is likely to be higher than that of potential purchasers!

Having an independent valuation at an early stage could act as a firm foundation that allows you to plan more effectively for the future.

Mechanisms
Having a dedicated, capable and reliable workforce is one factor that is likely to increase the value of your business. Investing in such issues as training, retirement benefits, group sickpay, private medical insurance and death in service benefits will not just help you to secure workforce loyalty. It can also – provided the remuneration package is flexible enough to reflect the needs of each individual employee – encourage greater dedication and productivity that can be perceived by a potential purchaser as increasing the value of the business.

The value of investments is not guaranteed; you may get back less than you put in. For help. contact Robert Bruce Associates.

NOTHING CONTAINED IN THE ARTICLE SHOULD BE CONSIDERED AS GIVING INDIVIDUAL FINANCIAL ADVICE. PLEASE NOTE THAT THERE MAY BE VARIATIONS FOR THOSE LIVING IN SCOTLAND AND NORTHERN IRELAND. YOU SHOULD BE AWARE THAT THE FINANCIAL SERVICES AUTHORITY DOES NOT REGULATE TAXATION ADVICE.