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Entrepreneurs’ Relief – the latest blow for UK business owners?

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Selling your business in 2020: some perspectives

What a time to be a business owner. You’re already dealing with the uncertainty surrounding the UK’s withdrawal from the EU, when along comes the Coronavirus (Covid-19), affecting everything from the goods we buy to the way we work. Like us at BCMS, you’re probably already changing how your business operates, encouraging (where possible) working from home, and relying on technology to communicate.

You’ll be worried, no doubt, about your customers, your staff, your cashflow and your forecasts for the financial year. You’ll be wondering what the future holds, and selling your business might have just slipped down your list of priorities.

And then came this week’s budget, which will directly and immediately impact anyone looking to sell their company. Ever get the feeling you’re being picked on?

In a much-trailed move Rishi Sunak, Chancellor of the Exchequer, has announced that the lifetime allowance for Entrepreneurs Relief (ER) will be slashed from £10m to £1m with immediate effect.

While we have never known a client sell a business purely to take advantage of ER, it has obviously been a benefit for our clients: overwhelmingly entrepreneurial SME owner-managers. But far from being yet another reason not to sell – this could actually have the opposite effect. We’ve already spoken to entrepreneurs today who are reassessing their options. One of them told us, rather memorably, “It is what it is. Maybe it’s a sign I should sell!”

Why ditch ER?

The rationale is that ER did not encourage business start-ups nor business growth. It was for the few, not the many. The chancellor cited that a majority of the benefit was enjoyed by just 5,000 individuals. Framed that way, it was an easy target for him. It affects relatively few people each year and Sunak is probably right that it will not deter entrepreneurs from starting, growing and selling businesses. In our experience – over 1000 deals in our 30-year trading history – that’s in your DNA.

A slight consolation is the fact that the benefit has not been entirely abolished. But there is no denying that some business owners will pay more tax when they sell. So, what can business owners do?

The value in your business

It is firstly important for you as a business owner to know that selling a business does not have a pre-determined value outcome. Put simply: your business is only worth what someone is prepared to pay for it. Classic formulaic valuation models based largely on bottom line performance are misleading in the context of selling, although still used widely today.

The value range achieved by apparently same or similar businesses is actually very wide indeed – there is still a typical 2.5 differential between the lowest and highest offers on our clients’ businesses. This is caused not only by the differences when you look below the surface of each business, but also by the way a business is prepared for sale, and the marketing approach adopted to find and engage with the best acquirers – those with compelling motives to acquire.

In fact, poor preparation and a poorly executed selling process could be significantly more costly than the tax implications of today’s announcement. You’ll lose more from a bad deal with the wrong acquirer than any taxman can ever take away from you.

Although it is not possible to turn back the clock on ER, we would argue strongly that you can offset the impact through the right preparation: preparation that adds value and drives the very best outcome for you and your company.

Choosing your advisor carefully just became even more important. Now, more than ever you need an effective selling process so that financial security and lifestyle goals post-sale can still be met. That is, after all, still the most important outcome – whatever the world throws at you.

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Jonathan Dunn's picture
Posted Mar 2020
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