To exit or not to exit: that is the question.
In this exclusive article, Guy Lachlan, Senior Associate Corporate Commercial Solicitor at Clough & Willis, offers advice for business owners who might be considering an exit post-pandemic.
As we begin to emerge from the pandemic, the thoughts of some will be turning to decisions that have been postponed over the last couple of years including, for business owners, whether it is a good time to hang up the office boots and don the walking boots instead.
The combination of pressures now with us is an interesting one: the Office for National Statistics estimated GDP was up by 0.9% last November, raising GDP above its pre-pandemic level from February 2020 by 0.7%. But increasing inflation, tightening of the jobs market, supply chain difficulties, and increased input costs also combine for economic uncertainty.
The government’s need to increase taxes in order to repay the huge borrowings which supported business and individuals during the worst of the pandemic means that many commentators wonder how long the generous tax regime on exiting from a business will continue – it was widely speculated last year that business asset disposal relief would suffer a hike from the present rate of 10% in the budget. It didn’t. As it happens, the lifetime cap had been slashed from £10m to £1m in 2020, which will continue to net additional tax for the government.
But many will still see a tax take of only 10% on £1m chargeable gains as very attractive and even the 20% general rate for gains above that figure as being pretty decent compared with 40% for IHT and 40/45% for income tax.
There is evidence that the pandemic is bringing about changes in our behaviour (beyond just mask-wearing and baking bread), which could not be foreseen two years ago: approximately 506,000 working-age people have left the employment market. The House of Commons Library report “Coronavirus: Impact on the Labour Market” published on 20 December last year reported that young workers and 65+ had been the groups most affected with employment in the latter category reducing by 5%.
Given the tightening of the labour market, that would suggest that many older workers have “voted with their feet” and that retirement plans have been accelerated. Perhaps working from home has literally “brought home” the advantages of not slogging through the Monday morning commute – although given the present traffic levels, you could be forgiven for thinking that no one has foregone that delight.
Are you thinking about joining the ranks of those who have sold up? If so, why should you?
Quality of life
It is a truism that few say on their deathbed “If only I’d spent more time in the office.” Perhaps spending more time at home during the pandemic has helped many of us appreciate that there is life beyond the office. For others, the pandemic has provided the impetus to take up new pastimes and hobbies. Or even to speak with their spouse and children!
As mentioned above, the unique (in our lifetime at least) combination of factors seems to be producing trends as people re-evaluate their lives and make new priorities. Those nearing retirement age, who may otherwise have continued to work, are viewing an exit as more attractive than they did pre-pandemic.
The much-quoted epithet about the two certainties in life has been a reality in many families. Tax is, of course, the other one, and it is difficult to see the 10% tax rate remaining in place indefinitely.
Planning for succession
If you are indispensable in your business (and which business owner does not think that he or she is?), then the type of exit must be chosen carefully: a trade sale where your business can readily be absorbed by the acquirer’s management is ideal, especially if the buyer is a competitor or in the same supply chain.
A MBO is only likely to succeed if some serious long-term planning has already been put in place. But even if not, then a buy-in or a buy-in-management buy-out can still be a good way around that problem.
Funding an exit
The historic extremely low rates of interest make funding an exit or acquisition far more attractive than years ago when rates were much higher. You may have noticed the presence of new funders such as Funding Circle, which at the time of writing is running a TV advertising campaign.
Ultra-low interest rates for savers combined with lockdowns which reduced household expenditure have resulted in money in search of a better return than traditional lenders can offer. Provided the business model is solid, then there is plenty of liquidity in the market.
Share or business sale?
Ideally, the business dynamics should decide this, rather than purely being tax-driven for one side’s benefit. If only part of the business is being sold, then it is likely to be a business sale unless a restructuring can be justified. But tax advice will be needed to ensure that the disposal will still qualify for BADR and/or capital treatment.
Besides a seller looking forward to the delights of retirement and the indulgence of new-found hobbies, there will be some for whom the pandemic has brought on a relationship break up. It would be well to remember that inviting or agreeing offers for the business, or negotiating the sale of a shareholding, will put a value on a director’s assets for financial settlement purposes, compared with an illiquid shareholding beforehand.
If a premium over net asset value is likely to be received on exit, then it may well be sensible to resolve the relationship in a final financial settlement before turning attention to an exit.
If inflation takes hold – the Bank of England forecasts it to be in excess of 5% – then expect to see hikes in interest rates and a tightening of M&A at the OMB end of the market as higher import costs and wages feed through to dampen enthusiasm for M&A. Now is, therefore, a good time to plan for exit.