Business Exit Planning

Exit sign

This week we’ll have a look at business exit planning. What are the things you should be discussing with your advisor? And what would you like to achieve? The main talking points will be

  • Meet Maeve O’Leary
  • How do I value my business
  • Tax efficiency
  • Future options

Maeve O’Leary

Maeve O’Leary, or Mol to her friends, is a successful businesswoman in the Southeast. All that CrossFit she’d doing makes her look more like 40 than 52 years old. She set up her company, O’Leary Enterprises [OLE], in 2006 at the height of the boom. A few years back she was fed up with how her business was going and decided to change with the times. She invested in technology, went after a niche in her market, and built a good team around her. Soon after things started to click into shape.

The numbers improved year after year. Her customer base grew as did her reputation and profits are now hitting €200,000 a year. And that’s after Mol’s salary of €100,000 and a company pension contribution of €50,000. OLE has a healthy cash balance of €600,000. Not being a lady to rest on her laurels she’s thinking ahead. What should I be thinking of now to plan my exit from this business? And what’s my business worth?


Mol wants to meet up and have a chat. A fact-finding mission to put a plan in place. The most valuable information we get is

  1. Her company pension is worth €500,000. The plan is to grow that to a million in the next 8 to 10 years.
  2. She has one daughter Jane starting business in UL. Her son Tom is going into 5th year of secondary school.
  3. Frank, her husband, is 57 and is a lecturer in DCU. He earns €85k per annum. His pension will be €50k when he retires.

Mol plans to keep working hard for the next 5 to 6 years until Tom finishes college. Drive the business on. Jane works part-time for the company and seems to like it. Mol thinks that she has a good way with people and is clever but can be a bit lazy at times. She has potential but let’s put that one to bed for a few years. College fun to be had first!

Her Options

We discuss her options and they include 

  • Selling the business
  • Pass on to Jane or Tom or both!
  • A combination of the two

A pension pot of €1,000,000 will give her a lump sum of €240,000.

Pension €1,000,000
Lump sum 25% €250,000
First €200,000 tax-free  
Next €50,000 x 20% €10,000
Net lump sum €240,000
Balance of pension fund €650,000
Annual 4% drawdown €26,000

She knows that they will have more than enough income down the line. Frank will get a lump sum too, the mortgage finished, and the two lads done with college. On the ball John Paul!

Mol loves work but sees herself taking more time off once the business is in safe hands when she’s not there. As in someone else gets the calls. The question comes up. How much is my business worth?

How do I value my business?

Three words. Future Maintainable Profits. Oh, and one other word. Multiple. You value most businesses applying a multiple to the future profits. Someone coming in to buy O’Leary Enterprises will look at the profits. What are the profits now? With Mol out of the way, what salary and pension would we need to run this business?

To look at future maintainable profits we look at current and past profits. In 2022 the profits were €200,000 but Mol’s package was €150,000. If Mol isn’t there the profits will be €350,000. But the business won’t be successful without a senior manager in charge. That senior person will cost €100,000.

Profit per accounts €200,000
Addback Mol’s package €150,000
Deduct salary – a senior person €100,000
Future maintainable profit €250,000

I would add that this is very simplistic, and I am doing a huge disservice to those who value businesses out there. This is only to give you a general idea.

A multiple for a smaller company is usually between 4 and 6. The multiple will be higher for a very well-run business, with good systems and processes in place. We’ll use 5 for this, so the valuation will be

Future maintainable profits €250,000
Multiple 5
Value €1,250,000
Add cash balance €600,000
Value of business €1,850,000

Tax efficiency

Tax efficiency is key when passing on or selling a business. Mol owns 100 shares in OLE. If she sells them or gifts them to her children, she is disposing of her shares. A disposal of an asset, like shares, results in Capital Gains Tax [CGT].

A proper company valuation is a must before a sale or transfer to children. A disposal to children is a connected party transaction. As such, market value rules apply. And, if Mol is going out to the market to sell, then she needs to know what it’s worth.

A buyer will pay Stamp duty at 1% when buying shares in a company, in most cases. There can be situations where property in a company could result in a higher stamp duty cost.

The main other tax of concern is Gift Tax if the children get a gift of shares. The current parent-child threshold for gift/inheritance tax is €335,000.

Tax reliefs

Mol doesn’t need to know the ins and outs of all the tax reliefs. Her main concern is if she qualifies for them or not. The two main CGT reliefs are Retirement Relief and Entrepreneurs Relief.

For the children, qualifying for Business Property Relief is a must for gift tax.

Let’s roll forward to 2030. Jane works full-time in the business and is progressing well. Mol would like to give her some shares, appoint her as a senior manager and reduce her own working week to 3 days.

Reg does a proper company valuation for her and values the business at €2,400,000. Included in that is cash of €500,000. Of the cash €150,000 is always needed to run the business so €350,000 is surplus. The cash balance reduced down as Mol put more money into her pension. She decides to give Jane 50%

Value of business €2,400,000
50% of that €1,200,000
Apply a discount of 25% €300,000
Net value of 50% €900,000

A discount applies for CGT and Stamp Duty purposes but not for Gift tax. The reason a discount applies is that with 50% of a business, you don’t have full control of that business. Higher discounts would apply when passing on smaller shareholdings.

Mol won’t pay any CGT on the share transfer to Jane. She’ll get Retirement Relief as she’s over 55 and has owned the share for more than 10 years. Plus, she was a full-time working director for the 10 years before the transfer.

Jane will pay Stamp Duty at 1% so that’s a cost of €9,000 for her. She doesn’t have the money to pay it, so they decide to give her a bonus of €20,000 and the net will cover the tax.

Business Property Relief [BPR]

We need to be careful about the excess cash piece. 

Total cash available €500,000
Cash to run the business €150,000
Excess Cash €350,000
50% of that €175,000

 For Gift tax, the value to Jane is €1,200,000 made up of €175,000 cash and €1,025,000 business assets. BPR will apply as follows

Value of business assets €1,025,000
Deduct 90% BPR €922,500
Net value of business assets €102,500
Add surplus cash €175,000
Total value €277,500
Deduct Gift exemption €3,000
Value of gift €274,500
Threshold Parent to Child €335,000
Tax to pay Nil

Future Options

Mol and Jane now own 50% of the business each. Between them the business runs like clockwork for the next two years. A bigger player approaches them and is looking to buy. They make an offer for €3 million. Jane is licking her lips at the thought of €1.5 million in her back pocket. Unaware of the tax hit this will be to her she isn’t happy when we break the news.

She’ll pay 33% CGT on her gain of €600,000 which comes to €198,000. But the real sting in the tail is she’ll pay CGT on her mam’s gain at the time of the transfer of 50% of the shares. The person getting the shares must hold onto them for 6 years post-transfer. Otherwise, there is a clawback of the relief. The tax on the clawback will be

Sales Proceeds Mol to Jane €900,000
Capital Gains Tax 33% €297,000
Add Jane’s tax on her gain €198,000
Total CGT for Jane €495,000

So, there will be a cool €1 million in her back pocket and not €1.5 million. If Jane owned the shares for 3 years, she could qualify for Entrepreneurs Relief on her gain. That would be a CGT bill of €60,000 on her gain and a saving of €138,000.

Given that Jane’s taxes are so high, they decide against selling. But they’ll revisit it in a few years once the 6 year clawback period is up.

Transfer to Jane

Frank is retired and loving life. Between the golf course and cycling holidays in France, he’s living the dream. Mol likes the odd G&T and if she has to play a few rounds of golf with the local ladies to have a few, she’s very happy to do that. And sure, why should Frank have all the fun?

She decides to pass her remaining shares to Jane and reduce her working week to 1 day. One day for now but in 6 months it will be no days. Her pension has kicked in and soon the state pension will appear in her bank account. This time Jane will have to pay Gift Tax and stamp duty. But at least she’ll own 100% of the company and she can take some cash out to pay Michael & Paschal.

After 6 months Mol comes off the payroll and Jane presents her with a carriage clock. Not blown away by the present but she’s very happy with the tax-free termination payment.

Need help to put a plan in place to exit your business? If so, start here

76 thoughts on “Business Exit Planning

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