Welcome to our new blog series all about MBOs and succession, written by Steve Plaskitt, our Corporate Finance Partner. As it is such a large topic, Steve has broken down the topics into four episodes. We hope you find this series useful and informative!
Episode Four – How soon is now?
This is the fourth and final blog in our succession series! Today we explore the best time to start planning your exit and retirement.
Let’s start with the extreme…
There is an argument that you don’t need to plan as it is a distraction from doing what you love, which is running the business and servicing your customers. But this makes it difficult for the day when you have to retire through incapacity or death.
One of the many problems with this approach is that it means that your loved ones have to sort out the mess that may ensue. If there is a forced sale of the business at this stage there will be a big reduction in any value attributed to goodwill. At the very least, if you do follow this ‘head in the sand’ approach, then take out critical illness cover or a life policy to make up for the loss in goodwill.
Is one year before your retirement date sufficient time to start planning?
Probably not. Most business valuations are based on the last three years accounts, so one year only allows for minimal planning and business improvement. For example, any new recruits will need a period of time to be found and settle in before they make improvements to profit.
What about two years?
That is more like it, but some matters need more that two years to address. For example, the recent budget announced that shares would have to be held for a minimum of two years before Entrepreneurs’ Relief would apply, and so allow a 10% rate as opposed to a 28% rate of tax on the capital gain. Even that is an over simplistic summary of the relief!
Surely three years must be enough?
In short, this is probably the right amount of time in most situations. The serial investors and those in private equity who buy and sell businesses many times over always start to plan their exit before they even purchase the shares in the first place. Any MBO team looking or private equity funding needs to consider the eventual exit in their business plan.
Conversely, if you are approached by a potential buyer and you are unprepared, you run the risk of either missing out and the buyer invests in one of your competitors or of being attracted to sell at a price that is below your true potential.
How about starting to plan your exit strategy now? Take advice on tax, corporate finance and private wealth management early to ensure you are well prepared and your business is resilient!