Selling your business

Providing a pension is only one aspect of this stage of your business career. The other aspect, which may have more personal implications, is the actual process of retiring. You may have mixed feelings about selling the business and retiring. Indeed some people find that they cannot face retiring, and so just go on, until they die ‘in harness’.

But most people want to enjoy a rewarding retirement. Once you have built up your business, you have a valuable asset which you can sell. It is often true that the goodwill of the business rests with you personally. You have built it up over a number of years. The contacts you have made with your suppliers, competitors, and most of all, your customers, make it very personal. Despite all that, people realise that you have to retire, and most will go with your business successor.

Planning ahead

It is always good to plan as far ahead as you can. Make plans for selling the business at least ten years ahead. Decide whether you want to phase in your retirement, or make a clean break.

Very often, you may have a good idea of who you would like to take on the business when you retire. It may well be a member of your family – perhaps the next generation. It may be someone who has worked for you – you may even have trained the person to do the job.

Planning in advance gives you and your successor the chance to smooth out the problems that might otherwise arise. Working with the person who is taking over means that you are able to show them all the aspects of the job – the administration, and book keeping as well as the technical side. You are also able to make sure they build up a good relationship with customers and suppliers.

Handling the negotiations

Even if you have known and worked with your successor for a long time, you must handle the negotiations for sale in a business-like manner. Get a solicitor to draw up the agreement for sale, and suggest that the other party gets an independent solicitor.

You will have to negotiate a price for the business, how it is be paid, what is included in the sale and what is not, and the terms of the hand-over. It is quite usual to have a clause restricting the seller of the business from setting up in competition within a certain time period and within a certain geographical area around the business, (say, a five mile radius).

You will also have to be prepared to supply information, such as the business accounts for the last five years.

Advertising the business

It may be that you do not have a buyer ready to take over your business. If so, you will have to advertise it for sale. Some estate agents deal with business sales as well as property sales. There are also specialist business transfer agents who deal only in business sales. They will, of course, take a commission, but they can often get a better price, and have access to a larger base of people looking to buy businesses. They will have specialist knowledge of the issues involved in selling a business.

Paying tax on the business sale

The sale of a business is a disposal of an asset for the purposes of capital gains tax. Retirement relief was replaced by taper relief. This works by reducing the gain liable to tax by reference to the amount of time the asset has been held since 5 April 1998. The taper is more generous for business assets than for personal assets. The maximum time for taper relief is ten years (for personal assets) or two years (for business assets). The table below shows how this relief works for business assets.

Number of whole years asset is held	Percentage of gain chargeable to tax
Less than 1	100%
1	50%
2	25%

Thus, the tapering relief can never cover the whole of the gain – the most it will reduce it by is 75%.

My book Small Business Tax Guide (How To Books Ltd.) gives more details on this and other aspects of business tax.

Passing on the business to your family

You might want to pass on the business to the next generation of your family. The best advice is to start preparing for this as soon as possible. First of all, make sure that the next generation actually want to take on the business. There have been many family arguments caused by a parent’s incorrect assumption that a child will want to take over the business.

If the child does want to take over the business, they should do all the training they can, and you should support them in it. It may mean some kind of vocational training, or university course. This could take them out of the business for several years. Be prepared for that.

Creating a partnership

One way of preparing the ground is to bring your child into partnership with you at a point when you feel they are ready for it. Their share of the profit can be determined, giving them an incentive to work for the benefit of the partnership business which will one day be theirs. That way, they learn the responsibilities of self employment, and you can eventually pull out without too much disruption. It also makes a phased retirement easier. You can gradually reduce your involvement in the business, while also reducing your share of the profit.

There still remains the financial settlement, and you will no doubt have some capital in the business which your successor must make provision for paying out to you. It is still a good idea to have a solicitor to look at any agreements made, including drawing up the actual partnership agreement.

Limited Company format

Another way of preparing for business succession is by forming a limited company. The key element in this format is that the ownership of the business is vested in the shareholders. Thus, a typical small family business might start with husband and wife as shareholders. Then, later, as the next generation of the family starts to become involved in the business, shares might be issued to them. The parents, however, still retain control.

Control of a limited company

Control of a limited company is a matter of simple numbers. The shares which have voting rights hold the control of the company. Thus, if one person has 51% of the shares with voting rights, that person has control of the company. It is therefore typical of a simple husband and wife limited company that one spouse holds 51% of the shares, and the other spouse holds 49%. However, when shares start to be issued to the next generation, the shareholdings are said to be diluted. This can best be explained by an example:

Thus, when shares are issued to the next generation, the original shareholders must ensure that they only surrender control when the time is right. This problem of dilution can be solved by:

• Issuing further shares to the original shareholders at the same time as the shares are issued to the next generation to ensure that the original shareholders’ control is not diluted, (see example 2 below), or
• The original shareholders selling some of their shares to the next generation rather than issuing new shares (see example 3 below), or
• Issuing a different class of shares with no voting rights to the next generation (see example 4 below).

Different classes of shares

A further benefit of issuing different classes of shares is that different rates of dividend can be declared on them. Ordinarily, if a dividend is declared on ordinary shares, it would have to be paid on all shares issued. Thus, in examples 2 and 3 above, if dividends are declared on ordinary shares, dividends would have to be paid to all the shareholders, including John and Mary. However, if different share classes are issued, dividends could be declared on the ordinary shares only.

Getting the paperwork right

In order to carry out share transactions, the legal basis of the company – called the Memorandum and Articles of Association – must provide for it.

Authorised capital

The main provisions are to ensure that the authorised capital of the company allows the issue of further shares, and the different classes of shares needed. The definition of the authorised capital of the company is stated in terms of the amount in money and the number and amount of each share. For example, the authorised capital may be expressed as ‘10,000 ordinary shares of £1 each’. This means that the total nominal capital is £10,000. The nominal amount must always be expressed for all shares.

Issued capital

The shares do not all have to be issued. Thus, of the total share capital of 10,000 shares, there may only be 1,000 shares issued. This means there are a further 9,000 shares which could be issued. Shares do not have to be issued at their nominal value. Private companies often issue shares at a premium. That is, the people buying the shares, pay more than the nominal amount. If, for instance, shares with a nominal value of £1 are issued at £1.50 each, there is a premium of 50p on each share. This premium must be accounted for in special ways, and is only available to the company for certain restricted purposes.

So, if the authorised capital of the company is, say, £10,000, in 10,000 ordinary shares of £1 each, and 9,000 shares are issued, only 1,000 extra shares could be issued. Thus, in example 1 above, if the authorised share capital of ABC Ltd. were £10,000, then Mr. and Mrs. Smith could not issue any further shares. The Memorandum and Articles of Association of the company can be amended, but it is better to have the right provisions in the first place.

The Memorandum and Articles of Association must also provide for shares of different classes, and the rights and duties of those classes must be defined, such as the voting rights, or absence of voting rights, and the rights to dividends. The most common classes of shares are ordinary shares, giving full voting and dividend rights, and preference shares, giving voting rights, but a restricted dividend (usually a fixed dividend). There are also often deferred shares, or B shares, giving limited dividend rights or voting rights. In theory, there is no limit to the number of classes of shares, and the different rights attaching to them.

Phasing retirement

Thus, any combination of share issues can be made, and the shares held by the next generation can be gradually increased as the parents gradually reduce their shareholdings. This provides a way to achieve a phased retirement. The control of the company is gradually handed over to the next generation. The parents can determine the period over which this operates, as long as they have overall control. In the examples above, Mr. Smith is shown to retain overall control by retaining more than 50% of the shares with voting rights. However, it may also be arranged in such a way that, although one spouse does not have overall control, the crucial 50% of shares with voting rights is still held by the husband and wife.

At some point, however, overall control will be handed over.

Phasing can be arranged in this way to coincide with actual working arrangements of the parents. Thus, the phasing of the control of the company by the shareholdings may be the same as the period over which the parents gradually reduce their working hours. On the other hand, the phasing of the working hours does not have to be on the same basis.

Retaining a consultancy

The business does not have to pass to the family, and it may be sold to an outsider, or as we have suggested above, to someone within the existing workforce, who is being groomed for succession. In these circumstances, there is more likely to be a ‘clean break’. Rather than phasing out the actual control of the business, it is sold outright.

However, even in these circumstances, it is often a condition of the sale that the previous owner retains a consultancy agreement. This enables him or her to continue to provide advice and assistance over a period of time, often gradually reducing over that period. This provides another way to achieve the phasing in of retirement. It is invariably a help to the new owners, and it also provides an extra income for a short period.

Retaining the business property

We have seen in Chapter 6 how business property can be included in a SIPP or an SSAS. However, business property can be used in a retirement situation to provide an income, even if it is not part of the ‘official’ pension fund. You could look on the property as at least a part of your pension fund.

In most circumstances, the business rents or owns the property in which it operates. This is true whether the business is in the form of a partnership or a limited company.

However, the property can be owned by the proprietor, or a partner in the business, or a director of the company. The property is then rented to the business. The rent paid is a valid tax deduction by the business, but it is taxable income in the hands of the owner of the property (i.e. the proprietor, partner or director). When the business is sold, under this arrangement, the former owner retains the property, and continues to let it out to the new owner of the business. This provides income during retirement.

In this situation, it is frequently the case that the new owner will want an agreement under which they have the option to buy the property at a specified time in the future. Thus, the income provided by the rent is temporary, but it is replaced by a lump sum realised when the property is sold. However, this will attract Capital Gains Tax.

What this arrangement also provides is some sort of protection against the new business failing. If the new business fails within the period during which it is paying rent, the owner still retains possession of the property, and can either relet it or sell it, as the opportunity arises.