Reading Time | 3 mins

Back to the future

Share this article

The total profits generated by the Top 100 SMEs in our 2014 survey comes to a staggering £177 million, an increase of over 14% on the previous year.  

Our normal role as the leading advisor to companies in the Top 100 is generally to assist them in managing the tax liabilities attached to these profits, and yet actually where we can really add value is in enabling management and shareholders to step back, see the wood for the trees and to come up with a strategic plan not just for now, but also for the future.

For example are the current shareholders looking to retire at a certain age? Will they want to exit completely or retain a role within the business? Having this discussion now will enable both management and shareholders to set goals and objectives which meet their future aims.

The company may need to be “groomed” for sale

From a tax perspective, grooming a company for sale includes a review of the business structure. For example, if there is more than one business or a mix of business and investment assets, it may be better to split the businesses, or to split the business from the investment assets.

Who will buy the company?

There is no ready market for shares in an SME whether you’re in the Top 100 or not! Options could be a trade sale, a management buy-out or family succession. Whichever route you choose, there will be tax implications and planning now can ensure that tax reliefs are maximised and tax is minimised.

Most certainly Capital Gains Tax is likely to be an issue since any profit made on the disposal of your business will be subject to Capital Gains Tax. Entrepreneurs’ Relief is currently available to reduce the tax rate on gains on the disposal of certain business assets to 10% for gains of up to a lifetime total of £10,000,000, but with an Election on the horizon in 2015 this may not always be the case. In addition Entrepreneurs’ Relief is only available on shares in trading companies and groups. Any investment assets within the company may therefore endanger the availability of Entrepreneurs’ Relief and can lead to additional tax of up to £1,800,000 on a disposal. 

As there is no market for shares a sale to management has many advantages, but also brings with it a number of issues. After all, a management team will have the advantages of knowing the business and appreciating the value it has. However, they will usually require finance which may well only be met by the shareholders deferring some of their proceeds. This in itself can have unwanted tax consequences.

As a management team buy-out is a particularly well-trodden route for the sale of privately-owned businesses it may be that that management should be incentivised and retained now by introducing some kind of share incentive scheme. A HMRC approved share option scheme which is frequently used and has distinct tax advantages is the Enterprise Management Incentive Scheme. This works particularly well in incentivising employees to increase a company’s value in anticipation of a trade sale or in helping them to acquire a proportion of the shares in anticipation of an MBO. 

And finally…

If all else fails what about a Company Purchase of own shares as a means of enabling shareholders to exit tax efficiently? The Companies Act permits a company to buy back its own share capital and as long as certain conditions are met the exiting shareholder receives his value as capital proceeds taxable to capital gains tax.

So plenty to think about, and to think about now – profit generation and cash management may currently be “king” but a strategic plan for the future can ensure that all that is won now is not simply lost in the future.