Cashing Out – Part Two

What are the options?

Choosing how to ‘Cash Out’ depends on whether your business meets certain criteria.

Cashing out essentially goes down two distinct paths;
1. A sale of all or part of the business to a third party
2. A liquidation of the current value of the business back to yourself

Selling your business to a third party

Businesses that follow Path One have the following characteristics (this is not an exhaustive list but will help frame things).

  • They can be reliably valued by a third party often along industry norms
  • The valuation recognises the business is worth more than its component parts (its goodwill)
  • The business owner, while still a key player, is not central to its operations or ongoing profitability.
  • Their operations, systems and processes are documented, tested and are replicable. In short, they know what they do and how they do it.

Those choosing this option can look to cash out via the traditional well known routes of;
1. Whole or partial trade sales
2. Investment from private equity 
3. MBO, MBI and Employment Share trusts

In most cases these will follow the well trodden path of;

  • A lump sum down payment 
  • Deferred consideration with performance or time triggers to hit
  • An agreed service contract with the owner to stay on but transition away from the business 

In tax terms this is the easy one as many businesses, subject to meeting the requirements, will be able to take advantage of the generous Capital Taxes regime with the first £1M being taxed at 10% and the remainder at 20%

One major point to remember is that when cashing out, the value of the business that was excluded from Inheritance Tax under Business Property Relief, would now be included in your estate.  So selling the business for £5M brings a £2M IHT liability into play.  This is certainly one to think about and make plans for as overall your wealth may not have changed but the tax position brings with it a significant ‘Ouch Factor.’

Liquidating your business

Businesses that choose path two have different, but necessarily negative characteristics (again not intended to be an exhaustive list).

  • Valuations can be difficult and speculative as they often rely on valuing a mysterious X-factor or potential that makes the business perform 
  • The business carries assets (including staff & knowledge) that are only of value to the business in the way it currently uses it.
  • There is an over reliance on the business owner as the person who brings the magic and makes it all happen. We have all seen businesses created in the image of its owner.
  • Their operations are not codified and can be hidden behind words such as creativity, feel and collaboration which can be a smoke screen for winging-it (not in all cases)

Liquidation offers sellers the opportunity to cash out via two methods;
1. a members voluntary liquidation (or MVL). Where an insolvency practitioner formally closes the business for you and subject to meeting the requirements allows you to access the generous Capital Taxes noted above 
2. A slow drip feed of funds from the business so it is slowly run down to maximise allowance and flexibility of income to minimise taxes

Both methods can be fully costed and are dependent on a number of circumstances. As ever both options should be viewed as part of holistic business & family planning.

As business practice becomes more devolved. With newer options such as Crowdfunding, peer to peer lending and other quasi ownership models becoming the norm much of the above will need to be refreshed but in early 2022, this will capture most SME’s.

Choosing how to ‘Cash Out’ depends on whether your business meets certain criteria. If your’e not sure which model suits your own business, make an appointment with one of our consultants to discuss your options.