The introduction of the retail distribution review has largely affected the professional advice industry causing them to re-examine their business models while adjusting to increased compliance and more importantly, justifying their value to their clients. In my experience of selling businesses for six years, there is no better time to advise clients to sell their business.
I was not surprised by the results of a recent survey of 1300 adviser firms in the UK which concluded that over 40 per cent of adviser firms are concerned that the remuneration they are receiving through their post-RDR pricing model for ongoing servicing of clients and may not cover their costs.
Over the next 12 months a window of opportunity exists for business owners who would like to use this fruitful time to gain the best value for their business. Any savvy businessman who has structured the business skilfully will be able to benefit from the entrepreneurs’ relief aspect of capital gains tax. Currently a business owner is only obliged to pay 10 per cent tax on sale of the business up to a value of £20m (if his or her spouse or partner is involved), meaning that if you sell your business for £20m pounds you only pay £2m in tax.
This is a very generous tax bracket as historically capital gains tax has touched 40 per cent and with UK elections due in 2015, any rise in CGT is not expected to spell trouble at the ballot box for the major political parities as the tax is perceived to apply only to a minority of the population. Post election, if the CGT were to rise to 40 per cent, a seller may have to sell his business for £30m to realise £18m, that is, the value of their business would have to have increased by 50 per cent.
At the same time, large companies have been generating cash and hoarding capital and with low returns on cash, investing in an earnings-enhancing acquisition has become the favoured option once more. There are large numbers of corporates with cash looking to acquire small to medium-sized businesses.
Advising clients to sell their business this year or next is mutually beneficial to both parties. The reason this applies to financial advisers is that under the RDR it has become more difficult in earning commission, by advising clients to sell their business in 2013/2014, advisers are likely to grow the capital value in the business because clients are likely to invest more once they have liquid assets, therefore creating more funds under management for the adviser. This in return strengthens the core value of the business. Typically, an exiting business owner will put 33 per cent to 50 per cent with his or her trusted adviser.
Advisers have a strong database of clients that own successful businesses who at some point will consider selling. Advisers should strongly consider evaluating that database to discover the how they could yield more funds if clients did eventually sell their business. The most important thing is to approach clients with a very well prepared statement that should clearly address the benefits to the client. Advisers do a fantastic job of analysing a clients’ long-term cash flow and they are also in the best position to advise clients on the right timing to exit a business by taking advantage of a lenient tax option.