It’s a nice calm day in Tramore. Although there is a lonely wave or two creeping over the prom wall. Waiting to engulf an unsuspecting passerby. The Metalman is visible and surveying the bay for early morning swimmers. All that is missing is a whistle and a warning light to assume the role of an enthusiastic lifeguard.
On this day last year, I was on the way to Malaga. Someone asked me would I not be a bit worried about what was going on over there. My answer was not at all “sure I could get THAT over here”! Little did I, or the rest of us, know what was to unfold at that time. It’s been such a horrible year for so many here and all around the world. Many of us have been very lucky as we remained healthy and working. My dad, who is 95 in April, got his first vaccine on Tuesday and has an appointment for his second dose at the end of the month. His doctor was very excited that he, and many of his elderly patients, were coming out the other end of this. It was brilliant to see Dolly Parton getting the vaccine that she had contributed $1,000,000 to fund. A true example of a music legend using her money for the greater good.
Anyway, enough of my ramblings! Last week we spoke about areas that will be the focus of Revenue this year. In case you missed it See here
This week we are going to switch our focus to exiting your business. Often business owners are so focused on the here and now they don’t plan to exit the business. Also, many are not aware of the options that they have. The purpose of this blog is to give some understanding of the options to exit your business.
Close Your Business
You have enough and want to do something else or wind down. You have enough put aside for retirement and no longer need to work. Your skill is such that it is not transferable. You may not have employees that you worry about and so you decide to close. You inform your customers of your decision and confirm the date that you will stop the business. You collect the money your customers owe you and pay what you owe. The complexity of the business will determine how easy or difficult this is. Also, the structure, if you are a sole trader or operating your business in a company. For this blog, we will focus on companies. The main areas of focus will be;
- Employees what are your responsibilities like statutory redundancy and funds to pay
- Pay all your business debts including taxes
- Taxes – what ones to cancel and when
- What to do with surplus funds in the company
- What would be a suitable date for customers and taxes
- Banking – cancelling all business payments on time
- Getting rid of the company
Good planning with your advisor will help ensure the process is as smooth as possible. If you are fortunate that there are excess funds left in the company then your main concern is how to get that money. The answer will very much depend on the amounts and circumstances but some options are;
- The company pays money that it owes you
- Salary or bonus
- Termination payment
- Pension payment
Sell Your Business
Is there a potential suitor for your business? This could be a competitor, the existing management in your business, or even a family member. The key here is to get the best price you can for the business. The starting point is to know what your business is worth. It would be a valuable exercise to know what your business is worth some years before selling. When you know this, you can work on the areas that will increase value and have enough time to do that. Click here to see our blog on company valuation. Many things will add value and we will talk about that in future blogs. You have a figure and a valuation report to back up that number. You can now talk to potential suitors to see what interest there is. You have two options open to you;
- Sell the shares in the company
- Sell the assets of the company
The preference for the seller is to sell the shares.
Jorge Buendia sells his shares in his vegetable supply business Anythingwithapulse Ltd. He sells for €600,000 to a competitor Tom Greengiant. Tom pays Jorge the money so Jorge now has €600k in his back pocket as his bank wants to charge him to hold the money! Jorge will pay Capital Gains Tax [CGT] on the disposal at 33% unless he can avail of CGT reliefs. Click here for our previous blog on Retirement Relief and for our blog on Entrepreneurs Relief see here. The other tax on the share purchase is Stamp Duty at 1%. Tom would pay €6,000 stamp duty as the purchaser.
The preference for the purchaser could be to buy the assets and not the shares. Looking at the above example let’s assume that Tom doesn’t have the funds to pay Jorge but his company does. Greengiant Ltd buys the equipment, vans, and goodwill of Anythingwithapulse Ltd. The value of the equipment and vans is €100,000 and the goodwill or customer list is worth €500,000. They do the deal and Greengiant Ltd transfers the funds to Anythingwithapulse Ltd. Jorge now has €600k in his company, so he has to get this out.
The equipment and vans pass between the two companies at tax written down value so there is no CGT. There is CGT on the sale of Goodwill. There was no cost, so the gain is €500,000. Anythingwithapulse Ltd will have a CGT liability at 33% which comes to €165,000. Jorge is very annoyed when his accountant tells him this. His friend Javier, from two doors down, sold his business 2 years ago, paid no tax, and was boasting about it in the pub. Bloody accountant he thinks. I never liked him! After paying the tax there is €435,000 left in the bank account of Jorge’s company. He needs to get this out. The 5 options mentioned above could be open to Jorge but he also needs to get rid of the company.
As you will see it is easier and more tax-efficient for Jorge to sell his shares. As Tom didn’t have the funds to buy Jorge’s shares the easiest option for him was for his company to buy the assets.
Transfer Your Business
Most business owners would like to see their business pass to the next generation. If the owner has no children, then there could be nephews or nieces who work in the business. Or even a management team that wants it and has the skills to continue to grow it. This way the business continues, jobs are secure, and the wheels of the economy keep turning. The new owners will have the opportunity to put their stamp on the business, grow it and extract wealth. The sellers can gift the shares but need to know that a gift or a sale is a disposal and has CGT implications for them. If gifting, they will look to see if they can avail of Retirement Relief to reduce the CGT to nil. If that doesn’t work, then Entrepreneurs Relief is the next best option. If gifting to a child Retirement Relief should work but you need to ensure you meet the conditions. It is also possible to claim Retirement Relief when passing to a nephew or niece once he/she works in the business.
A valuation is important as you need to know what the market value is. The market value applies to sales or gifts to connected persons like family members. This is vital for taxes too which are CGT, Gift Tax, and Stamp Duty.
Billy O’Toole passes on all the shares in his business to his daughter Mary. He is 65 and has worked full-time in the business for the last 30 years. It is worth €3,200,000. As he meets the conditions for Retirement Relief there is no CGT to pay. Mary will have to hold onto the shares for 6 years or else she could end up paying the CGT that Billy didn’t pay. There is no gift tax due to Business property relief. Click here to find out more info
|Value of Shares||€3,200,000|
|Business Property Relief||90%||€2,880,000|
|No Tax as Parent to child threshold is||€335,000|
The numbers will go on various Tax returns to Revenue, so they have to be right
- Income Tax return of the seller – CGT section to claim Retirement Relief
- Income Tax return of the purchaser – Chargeable Assets Section
- Gift Tax Return to claim Business Property Relief
- Stamp Duty Return
Given the very high numbers and the limited amount of tax payable, you must assume that Revenue will take a look. So, a proper valuation is a must as well as ensuring you meet all the conditions for the tax reliefs.
There are more options which we will explore next week. We need to look at how to get the money out of the company and will delve deeper into other options. I liked this quote from Ryan Allis a US Tech entrepreneur and one for all business people to bear in mind
“Have the end in mind and every day make sure you are working towards it
Want to know how much your business is worth? Do you qualify for the tax reliefs? To find out more call Deirdre on 051396703 or start here. Tell us a bit more about you and what you need help with.