Financial planning tips for life after a business exit

When business owners, entrepreneurs or company executives exit a business – be that through an IPO, a management buyout, or a sale to private equity or a trade buyer – it usually results in a major liquidity event. Indeed, it’s a time when many individuals come into a significant amount of wealth for the very first time.

Before they reach that point, however, there are basic but quite existential questions that need to be asked – even before thinking about if the business is ready to go up for sale. “How much do you intend to sell for? Would you accept a non-compete? Do you want to stay in the business or leave completely? Do you have a succession plan in place? And who are you selling to?” asks Duncan Chandler, head of Financial Services, M&A, BDO UK. “An exit can be very protracted, and, ideally, you should be looking at a minimum two-to-three-year timeframe, as that gives you the most amount of comfort and a nice ‘glide path.’”

As business exits can be complex, it’s not surprising that many going through the process focus solely on the business rather than on what to do with the money once the deal has been completed. But putting aside personal wealth planning matters can prove costly.

“It’s vital to have conversations about wealth planning as soon as you can, to both financially and emotionally prepare for how your life will change when you exit a business and come into considerable wealth,” explains Adam Turner, associate director of Wealth Planning at RBC Wealth Management in the British Isles. “For instance, you may shift from living off a substantial income with limited capital to having no income and relying on the capital realised from the business.”

When a client is ready to discuss their situation, it’s best to start by trying to understand their plans for what comes after the exit. For example, do they intend to retire, to travel? Or do they hope to launch another business? From there, it’s possible to build a wealth “road map,” working out the income level they need and structuring wealth appropriately.

“At the very least, we’d expect people to be having these conversations 12 months ahead of an exit,” says Daniel Cordery, director of Relationship Management at RBC Wealth Management in the British Isles.

What to think about before a business exit

An individual’s long-term wealth plans when a business exit is realised can typically be broken down into three areas of focus:

• Securing the family’s financial future – knowing they’ve got enough money to cover the everyday expenses and provide for everyone. What does this look like?
• Enjoyment – spending money earned from the business exit and reaping the rewards of all that hard work
• Creating a legacy – be that for the next generations through estate planning, investing in other people’s businesses, establishing charitable structures, supporting local endeavours and so on

Such planning, however, can create worries. A recent RBC Wealth Management survey of 600 high-net-worth individuals in the UK revealed that their three main concerns were inheritance tax (IHT), gifting without giving away more than they can afford and knowing how much is enough to maintain a lifestyle in retirement.

When it comes to a business exit, here are some ways to allay those concerns:

Earmark funds for future generations

“Unlisted, private company shares usually benefit from Business Relief, which essentially gives an exemption against inheritance tax,” says Turner. “Before a sale is agreed, there’s an opportunity to settle a portion of those qualifying shares into trust to earmark them for future generations whilst retaining control. After a sale, this benefit is lost and only a limited amount of funds can be settled into trust without incurring entry charges.”

Explore share-related limitations

Depending on the nature of the exit, an individual’s shareholdings may be subject to certain limitations. For instance, they may be subject to a lock-in period, which means they may not be able to access some of the value until well after the exit.

Similarly, for IPOs, custody and transaction fees impact the value realised on disposal of shares. Building an effective disposal strategy can prove valuable.

Plan ahead for deferred compensation

Just as with share lock-in periods, if an individual has deferred compensation, they may not actually realise some of the liquidity until years later – and it may not be the amount they originally expected. Cashflow modelling ahead of the exit can help an individual plan for various scenarios.

Preserve the value of the business

Once the decision has been made to sell a business and, potentially, an initial offer is on the table, it’s essential to try to cement the value of the business. “Continuity is key,” explains Chandler. “If this isn’t being sold to another business with a strong management team in place already, is there a strong succession plan in place? Are all key contracts nailed down? And are existing systems, products and processes all tried and tested? Can this business pass forensic due diligence?”

The value of the business has a direct impact on what an individual will realise on exit, so shoring this up is essential. One way is to ensure that protection policies for all key people are in place. Losing such individuals to either illness or premature death prior to a sale or an IPO can dramatically impact the business value. The presence of the policy gives buyers confidence, as it’s an extra layer of protection for their investment.

What to think about after a business exit

“When clients come and see us after a sale, they’re either very excited about the future or they’re terrified because they’ve just received an amount of money much bigger than they’ve ever had before,” says Cordery. “If we’ve had those early conversations with people, this is the point at which they can take a step back. This may involve putting a large part of the money on deposit into bonds for six months so they have time to breathe.”

For people receiving significant wealth for the first time, this can be a particularly fraught occasion. Results from the RBC survey show that 89 percent of those new to wealth would benefit from further guidance on the responsibility of having wealth, compared with 63 percent of those with established wealth.

Proportion of high-net-worth individuals that need further guidance on the responsibility of having wealth

Taking financial planning advice before, during, and after a major liquidity event, such as selling a business, can help pave the way to a secure financial future.

“In a way, when someone comes into a large cash holding, it really is a case of going back to basics from a wealth-planning perspective,” explains Turner. “It’s here that we look again at that goal-based conversation – what do you want to achieve and how can we help you achieve that? And there are certain things we would typically look at.” These include:

Diversifying investments

The value of a single stock holding can be extremely volatile. If an individual is subject to a lock-in period or intends to retain stock, hedging and investment strategies can limit the impact of price fluctuations.

A diversified portfolio is a commonly recommended investment approach, and this can be executed both before an exit and on an ongoing basis.

Structuring proceeds and mitigating tax exposure

It’s essential to maximise the growth of investments and minimise exposure to income, dividend and capital gains tax (CGT) drag by structuring the net proceeds efficiently.

The UK has a high tax burden on investment income and gains, especially for large portfolios held outside of tax wrappers, such as individual savings accounts (ISAs) and self-invested personal pensions (SIPPs). There are a number of structures that can reduce the tax drag for larger portfolios – for example, international bonds, family investment companies and private funds.

It’s also possible to defer CGT due on a business sale through the tactical use of tax-efficient investments. By investing the gain into an Enterprise Investment Scheme (EIS), for instance, the gain is deferred until the EIS investments are exited (but can be deferred again if reinvested into another qualifying EIS investment).

Other benefits of EIS include a 30 percent reduction in an income tax bill, an IHT exemption after two years and CGT-free gains, provided conditions are met. It’s important to note, however, that these are high-risk, illiquid investments, so should typically form only a small portion of a wider portfolio.

Protecting realised value from inheritance tax

Coming into considerable wealth may ultimately lead to a significant exposure to IHT. A whole-of-life insurance policy can be taken out to provide a lump sum to cover any IHT liability based on the expected assets at the time of death, which will often largely be comprised of illiquid assets, such as property, that will take time to sell.

Term assurance policies can complement this to provide an “umbrella” of protection. Unlike whole-of-life policies, these expire after a set period but can “buy time” to implement wider planning such as gifting or restructuring to reduce the estate. It’s essential the policies are set up in an appropriate trust, so that the proceeds stay outside of the estate for IHT purposes.

The benefit of ongoing wealth-planning advice

Because there are so many potential moving parts from a business- and personal-wealth perspective, the value of ongoing reviews throughout the entire exit process (and beyond) can’t be overstated.

“It’s very rare that a business exit goes 100 percent to plan, not least in the final figure that is realised,” notes Cordery. “So having the ability to be flexible as things change can really help deliver the best possible outcome.”

Ongoing financial planning for business owners helps ensure their goals remain relevant and the right balance is struck across multiple objectives, including income requirements, estate planning, tax structuring, adapting to changing personal circumstances and evolving legislation.

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