Exiting a business?

Valuing the business for sale

If you are thinking about exiting a business, then one of the most important requirements is to calculate the value of your business. This ‘value’ will serve as a good starting point in any negotiations with the prospective buyers. Exiting a business can take time and proper preparation in advance will leave you more organised and ready for what lies ahead. Any buyer that has a serious interest in your business will want to carry out full due diligence and you should prepare as much as possible in advance.

Valuing a privately held business is difficult but there are a number of methods that can be used such as earnings multiples, discounted cashflow and asset valuations. There are also certain norms that have been established in various industries that can help guide a valuation. Valuing a business is a specialist area and there are professionals that can help you to get an educated estimate.

Tax on selling a business

If you exit a business and make a profit, there can be a substantial amount of Capital Gains Tax (CGT) to pay. However, there are a number of tax reliefs available that can help.

These include claiming Business Asset Disposal Relief (BADR). BADR applies to the sale of a business, shares in a trading company or an individual’s interest in a trading partnership. BADR used to be known as Entrepreneurs’ Relief before 6 April 2020. The name change does not affect the operation of the relief. Where this relief is available CGT of 10% is payable in place of the standard rate, usually 20%. This can significantly reduce the amount of CGT due. There are a number of qualifying conditions that must be met in order to qualify for the relief.

You can currently claim a total of £1 million in BADR over your lifetime. The £1m lifetime limit means you can qualify for the relief more than once. The lifetime limit may be higher if you sold assets before 11 March 2020. There is also a sister relief called Investor’s relief which has a separate £10 million lifetime cap. This is useful for investors who do not meet the officer or employee requirements for BADR.

Another valuable relief is Business Asset Rollover Relief. This relief allows for the deferral of Capital Gains Tax (CGT) on gains made when taxpayers sell or dispose of certain assets and use all or part of the proceeds to buy new business assets. The relief means that the tax on the gain of the old asset is postponed. The amount of the gain is effectively rolled over into the cost of the new asset and any CGT liability is deferred until the new asset is sold.

Where only part of the proceeds from the sale of the old asset is used to buy a new asset a partial rollover claim can be made. It is also possible to claim for provisional rollover relief where the taxpayer expects to buy new assets but hasn’t done so yet. Interestingly, rollover relief can also be claimed if taxpayers use the proceeds from the sale of the old asset to improve assets they already own. The total amount of rollover relief is dependent on the total amount reinvested to purchase new assets.

There are qualifying conditions to be met to ensure entitlement to any relief. This includes ensuring that new assets are purchased within 3 years of selling or disposing of the old ones (or up to one year before). Under certain circumstances, HMRC has the discretion to extend these time limits. In addition, both the old and new assets must be used by your business and the business must be trading when you sell the old assets and buy the new ones. Taxpayers must claim relief within 4 years of the end of the tax year when they bought the new asset (or sold the old one, if that happened after).

Closing or selling a business

If you are selling your business, there are some important actions you must take in order to properly finalise your affairs. We have summarised below some of the main steps you need to take if closing your business. Please note that this is not an exhaustive list, and it is important to check what else may be required.

Self-employed sole trader

• Notify any staff about when and why you are selling your business.
• Keep staff informed about redundancy terms or relocation packages and be mindful not to breach your employees’ rights.
• Notify HMRC. There is an online form that can be completed to tell HMRC you are closing your business. The form covers both Self-Assessment and National Insurance.
• Cancel your VAT registration or possibly transfer to the new business owner.
• Consider your liability to Capital Gains Tax and whether you can benefit from reliefs including BADR.

Business partnership

• Your responsibilities when selling a partnership will depend on whether you’re selling your share of the partnership or the entire partnership.
• Keep staff informed about redundancy terms or relocation packages and be mindful not to breach your employees’ rights.
• Cancel your VAT registration or possibly transfer to the new business owner.
• Consider your liability to Capital Gains Tax and whether you can benefit from reliefs including BADR.

Limited company

• Your responsibilities when selling a limited company will depend on whether you’re selling your entire shareholding or the company is selling part of its business.
• Keep staff informed about redundancy terms or relocation packages and be mindful not to breach your employees’ rights.
• If you are selling your entire shareholding you should appoint new directors before you resign as a director yourself.
• Consider your liability to Capital Gains Tax and whether you can benefit from reliefs including BADR.
• If there are charges against your company, for example, a mortgage on your house to secure a business loan, you must let the provider know within 21 days of the sale.
• You may want to transfer your VAT registration to the new owner.