Buying a Business Owner out

[Digger]

Which is the most tax advantage way of buying a business, of which you are the "employee", from the owner?

Especially in relation to any CGT due.

 

[Digger]

To give this a hoof.

I have been looking SIPs - which on the surface appears a route to take.

Just to put a little meat on the bones.

We had discussions some years ago about me buying him out ( after he had a health scare) - I had been on the verge of moving on ( around the time I joined this forum).
So stayed - some time passed and nothing happened - or further talks.

As the cost of living continued to rise,and the subsequent arrival of my young son - I felt that it was a now or never time to move on and strike out on my own.

I told the MD - he understood and was sympathetic, he said he would have a chat with the new company accountants about a buy out.

He came from that with the news that because of the CGT it wouldn't be worth his while......"hammered" was the expression used.

Now,I'm no tax expert by any means - so really have to take it as given.

I'm wondering if the accountant might of painted a more dire picture than it might be , I ony say that as these accountants had literally only just won the account ( < 2 months ) , and not knowing me from Adam - thought perhaps I would prefer my own accountants and lose the gig.

I don't know,just musing.

I would have loved to have taken over, having invested a lot of time and energy building up a strong clientele-( mayor TV companies etc ) by re focusing strategy away from previous ( and shrinking) areas.

The last 3- 2 years the benefits are coming in,with our best years ever, and even this February being far and above previous Febs ( from 2004 on).

Over these years he has spent less and less time at work,and since last Sept has done one fullish day.

I was intending to pay a lump sum,and then an annual sum (pension/consultancy??).

Anyway, I thought I would have a little dig to find out a little more.

Anyone have any ideas how I could tempt him?

 

[Tom McClelland]

A business owner-manager being "hammered" on CGT after a trade-sale seems a bit unlikely. Entrepreneur's relief ought to apply, which means he'd pay only 10% on the first £1million, and 18% on the balance, if memory serves.

That is considerably better than almost any other means of extracting cash from a company into the owner's pocket.

Maybe there are other factors that push the CGT up in his case. I don't know what those would be. A specialist might be able to suggest reasons.

It occurs to me that if really he doesn't want to sell to you, maintaining that his accountants have advised against it for unspecified "tax reasons" might seem a gentler way of letting you down than just saying, "No".

 

[Digger]

It occurs to me that if really he doesn't want to sell to you, maintaining that his accountants have advised against it for unspecified "tax reasons" might seem a gentler way of letting you down than just saying, "No".

I had such thoughts - but not being an expert in tax found it just as likely as not.
And also the original suggestion ( to sell ) being initiated by him was to the fore front of my thinking.

Just thought I would have one last crack at it - by putting a solid financial suggestion/exit strategy on the table rather than a "how about if...".

If after that it's knocked back then I'll move on to another business to buy/invest.

 

[Tom McClelland]

I'd maybe suggest that you and he sit down with his accountant to see if there is a way round the CGT problem. If you're confident that the company's current turnaround has been achieved largely by your efforts then an alternative to outright purchase by you is that a structure is put in place where ongoing the current owner has to do minimal work, you make a financial commitment to the business (so that you're risking your capital too) and ongoing you get rewarded "appropriately" for whatever business growth you can achieve.

 

[AccountancyStudent]

Entrepreneurs' relief is £5m lifetime rate now - but higher rate taxpayers suffer CGT at 28%

edit: it is reduced by 18% for HRT so 10% aswell

 

[Rhodes100]

I think that the suggestion that it wouldn't be worth his while and he would be hammered due to tax was his way of saying no to you.

He has to exit his business sometime either he gets paid to exit it and pays tax, or he gives it away for nothing and pays no tax.

Sometimes however business owners have very deep roots in business and they do not sell when they actually should do. They perhaps have not thought about what they might do when they retire.

The fact is that the chancellor could increase tax rates to 50% in a future budget and he WILL be hammered. That might change his mind. The fact is that everyone has their price, maybe you have not met it yet.

 

[Digger]

Well,yesterday, there was an opportunity to broach the subject again - I managed to put the exit route option via Entrepreneur's Relief as suggested ( and I had looked it up to see more details) -

he was genuinely surprised with regards to this option ( I know him very well,and can tell when a porkie is in the offing).

He said he would have a look into it next week ( it is in fact very busy this week- a lot of off site work).


I think the main obstacle to him having any strong links after any "takeover" is that when we discussed it initially - he wanted a clean break.

Which is why we didn't go the route of shares and a being a Director as we really do have quite different ways of working - The original "partner" cost him a lot of money to remove and this experience was one he didn't wish to repeat - I don't blame him.

 

[CabSave]

The structure of company, and the terms of the sale are the most important issues you need to review. Because of the intricacies of the tax codes, hiring a knowledgeable tax advisor can be invaluable in this process. Following is an overview of what you will encounter in terms of taxes when buying any business.

 

[cws accounting]

It definitely sounds like you buying out his shareholding in full would be the best solution for both of you. As mentioned he should be able to claim Entrepreneurs Relief to reduce his CGT bill.

Have you given any thought to how you will value the business? And as to how you will raise the capital to buy him out?

 

[RhysLucas]

It is not so easy. You must have a lots of experience.

 

[Digger]

It definitely sounds like you buying out his shareholding in full would be the best solution for both of you. As mentioned he should be able to claim Entrepreneurs Relief to reduce his CGT bill.

Have you given any thought to how you will value the business? And as to how you will raise the capital to buy him out?

I have - I was hoping that a part "cash" from house sale and some kind of yearly "pension.consultancy" for X years - with a perhaps a final payment.
Though how that would work in practice I have no idea.

This being in the absence of funding from an institution (seeing how tight they are at the moment ) and money from house.


I haven't gone into in great detail as the 1st hurdle hasn't been cleared- namely him agreeing to sell.

As far as valueing goes - there are parts that's are of no interest to me ( too time consuming for little reward),a vast amount of stock that is next to useless ( though not without considerable value).A large amount of specialist kit that would need pruning - all in all it would be a much slimmed affair from that which currently operates.

 

[cws accounting]

I have - I was hoping that a part "cash" from house sale and some kind of yearly "pension.consultancy" for X years - with a perhaps a final payment.
Though how that would work in practice I have no idea.

This being in the absence of funding from an institution (seeing how tight they are at the moment ) and money from house.


I haven't gone into in great detail as the 1st hurdle hasn't been cleared- namely him agreeing to sell.

As far as valueing goes - there are parts that's are of no interest to me ( too time consuming for little reward),a vast amount of stock that is next to useless ( though not without considerable value).A large amount of specialist kit that would need pruning - all in all it would be a much slimmed affair from that which currently operates.

Earn out schemes, where the owner gets paid a lump sum and then further payments from future profits, are quite common, so this could be a good solution for you.

Valuing the business isn't just down to the stock and assets you are buying. Normally there is an element of "goodwill" which you are buying as well, which will mean that the value of the business is higher than the sum of the parts. Depending on how long this business has been going, the levels of profit and cash it is generating, and a number of other factors, the actual price could be much higher than the value of the stock and assets alone.

 

[robindunne]

I have - I was hoping that a part "cash" from house sale and some kind of yearly "pension.consultancy" for X years - with a perhaps a final payment.
Though how that would work in practice I have no idea.

This being in the absence of funding from an institution (seeing how tight they are at the moment ) and money from house.


I haven't gone into in great detail as the 1st hurdle hasn't been cleared- namely him agreeing to sell.

As far as valueing goes - there are parts that's are of no interest to me ( too time consuming for little reward),a vast amount of stock that is next to useless ( though not without considerable value).A large amount of specialist kit that would need pruning - all in all it would be a much slimmed affair from that which currently operates.

There are a number of ways to value a business. if you do get to the negotiation stage it may be best to enagege the use of a suitably qualified accountant to formulate a suitable valuation.

The method of valuation does effect the amount - so advisable to use the method that suits you as a starting point for negotiation.

 

[Digger]

Thank you for the comments so far.
just a quick update.

He has finally got back to the Accountant - who confirmed the details re: Entreprenuers Relief.
he has asked them to produce some figures for discussion this week.
I'm intrigued by exactly what these might be other than turnover/gross/net profit - as he has no idea of stock.Though I know there has never been any debt carried.
I fully expect a mark up for the "goodwill" - seeing as it's a relatively known name within the market.

Fingers crossed.

 

[Digger]

LOL - he made me redundant !!!

Oh what a merry carry on. you got to laugh haven't you
He did tell a whole host of porkies leading upto this - only to be expected really.

So for the last month I have been reviewing my options.

 

[fattony]

Can you set up as a competitor?

 

[Digger]

Not interested in setting up in the same business - I wouldn't do that to him regardless.
No time to move on and utilise available skills in a new area.