Adam Benskin, CEO at Strabens Hall
“Fundamental to selling businesses is for founders to actually plan their own exit”
- How important is it for a founder to plan his own exit rather than just the exit/sale of his business?
This is fundamental when selling a business. At Strabens Hall, we see that founders often forget about themselves when conducting a deal. Founders must plan ahead and consider what they wish to do following the deal. Life does not end with the sale of a business. For many, the proceeds from a business sale ignite a new lease of life. Consequently, one of the most vital steps when planning the sale of a business is to crystalise ideas of what you aim to do post-exit in order to structure a financial plan to suit those goals.
- What does a founder’s own exit strategy involve?
A founder’s exit strategy largely involves considering the personal tax structuring of the deal and where they want the capital to end up. For example, those looking to exit can make gifts. In these cases, it is often sensible to set up trusts prior to exit. Shares in an unquoted trading company can often be settled into a discretionary trust without tax consequences. Once you have sold the business, the cash cannot be placed into a trust as easily as there is a cap on the amount that can be transferred without triggering an immediate charge to Inheritance Tax. It is also important to think more personally about what you want to do following your exit in order to plan accordingly.
- Is the starting point for any post-exit planning exercise for an entrepreneur to decide what kind of lifestyle he wants post exit?
Yes, this is a large part of financial planning post-exit. Key points to consider are if there are any items of capital expenditure that are required, whether the founder wants to make gifts, where they want to live post-exit and what they want to do. Some may want to continue working but others may wish to take time to travel. Their financial plan will be tailored depending on the answers to these questions.
- How important is it for an entrepreneur to take advantage of entrepreneurs’ relief in his planning?
Entrepreneur’s relief is important in reducing the amount of tax that is paid on exit. However, the relief is not nearly as valuable as it once was, having been reduced from £10m to £1m earlier this year. Despite this, there are still ways to optimise entrepreneur’s relief. For instance, when selling a business one can make a spouse a shareholder and, providing they meet the relevant criteria for entrepreneur’s relief, they can also receive £1m bringing the total to £2m of relief. To do this, one would need to take action more than a year in advance of the transaction.
- What are the options that an entrepreneur should consider when he is planning his own exit?
Firstly, it is important to question whether you are exiting at the most optimal time for you. Other good questions to consider are how long you will be tied into an earnout, what you are required to do during that earnout and what the risks are in terms of the valuation metrics of the earnout. Essentially, considering how much can be extracted at an early stage in the transaction will give founders more control. It is also important, when conducting a deal, to think about how much is enough. Many founders have an overinflated view of how valuable their business is. In terms of getting a deal done, it is crucial to consider, ‘how much am I willing to accept as an exit price and is that enough?’ Rather than, ‘how much do I want?’ At Strabens Hall, one of the tools we use to help entrepreneurs is cashflow planning to help them understand what they can do with the proceeds of a business sale. Cashflow planning can help provide a framework to develop a strategy.
- Is putting the funds generated in a trust worth examining?
While there are limits on the amounts of cash that can be settled tax-efficiently onto trusts, trusts are still worth considering. Benefits of trusts include asset protection, and the ability for a settlor to maintain control over the investment and use of capital held in trust. With a discretionary trust, there is no need to choose individual beneficiaries at outset, and so the trustees have flexibility in their choice of future beneficiary (which could include unborn grandchildren of the settlor).
- Should he consider establishing a family company or a private OEIC or both?
Whether a founder establishes a family company or private OEIC is entirely dependent on their objectives. These are just two ways in which wealth can be structured tax-efficiently while also allowing a founder to retain some control over the proceeds from a sale which are intended for the benefit of other members of their family. A family investment company can be used instead of a trust to help control and protect assets that can grow in the hands of children and grandchildren. A private OEIC, on the other hand, gives the means to defer capital gains tax. The key point, however, for someone selling their business is taking the time to decide on their course of action. Making sure not to rush into any plans can ensure the proceeds of the sale are handled in the correct manner.
- What steps should an entrepreneur take to ensure any charitable giving he does is as tax effective as possible, should he consider a donor advice foundation?
It really depends on the quantum of the donation the individual wants to make. It also depends on whether they want to be engaged in the charity themselves or if they simply want to make a gift to the charity. At Strabens Hall we have seen clients set up their own charities when making a sale. This can be a great way of getting children involved in making decisions about not only giving away capital, but also managing the portfolio that sits in that charity. Depending on the quantum, this will determine how they will fund the charity. Founders can receive gift aid but also leave a bequest to the charity in their will. This all depends on the individual’s objectives.
- Has Strabens Hall seen an increase or decrease in entrepreneur´s thinking about selling/exiting their business over the past 10 months?
We saw a large spike in interest at the start of the year prior to entrepreneur’s relief being reduced from £10m to £1m. Since then, many entrepreneurs have been focussing on managing and protecting their businesses during the Covid crisis, although some are now beginning to explore exit options.
- How does Strabens Hall support founders both on selling their business as well as in preparing their own exit strategy?
Having an early conversation is very important, specifically to understand what an individual wants to do post-exit. Following this, we can map what the individual should do at each stage of the transaction from a personal perspective. Breaking things down into manageable stages can help make things as stress free as possible by allowing clients to focus on their deal, as well as on their post-exit financial planning strategy.
