Rush to lock in favourable tax rates no match for carefully planned exit

By the time that new Chancellor Rachel Reeves delivered the Labour government’s first Budget in late October, most had generally come to terms with the fact that there would be significant tax increases for businesses – and so it proved.

For entrepreneurs and business owners, the most notable change was an increase in Capital Gains Tax (CGT), which will rise from 10 per cent to 18 per cent at the lower rate and 20 per cent to 24 per cent at the higher rate. These changes came into effect immediately, meaning that the new rates apply to any disposals made on or after October 30 2024.

These announcements largely provided confirmation of something that business leaders have feared for some time. Even under the previous, apparently more “business friendly” Conservative government, CGT increases were seriously considered while the lifetime limit for tax relief on disposals was slashed from £10 million to £1 million.

As a result, it was always likely that a Labour government seeking to balance the books would make this one of their early steps. Still, the move will be a bitter pill for owners planning or considering an exit and will immediately make many wary of the new government.

Seemingly in an attempt to provide some mollification for owners and entrepreneurs indignant at the increase, Reeves also announced that the lifetime limit for Business Asset Disposal Relief (BADR) would be kept at £1 million.

However, even here, there was a sting in the tail, with the announcement that the rate of CGT charged on BADR, as well as Investors’ Relief, would increase twice over the next 18 months. Firstly, the rate will increase from 10 per cent to 14 per cent from April 6 2025, then from 14 per cent to 18 per cent for disposals made on or after April 6 2026.

For an in-depth breakdown of what this means for different business sales, read our analysis of the small print of the Autumn 2024 Budget. Safe to say, however, the various changes add up to a significant tax hike for many owners disposing of their businesses.

Paying such an increased rate when selling a business that you have worked so hard to build is, of course, a pretty considerable kick in the teeth. However, perhaps a more pressing risk posed by the increases is that some owners may feel pushed to sell their business before they are exit ready.

As we have previously warned, the CGT changes may drive some more unscrupulous business advisers to urge [otherwise not exit-ready] clients to sell their businesses prior to the increases coming into effect in 2025 and 2026.

For an owner who has not already undertaken a full process to prepare their business for sale, rushing to market simply to lock in a slightly more favourable tax rate would be a serious mistake.

While there would, naturally, be some savings gained by selling prior to the increases, these are essentially insignificant in comparison to the far greater value that owners can unlock by de-risking their business, adding revenue streams and growing profits.

Ideally, a business exit should be planned out over the course of at least three years and, in order to extract the most profitable sale, it must necessarily be a meticulous process involving tough decisions and, of course, a great deal of hard work. The result – a ‘de-risked' business, operating at a ‘best-of-breed’ level that will secure a far stronger price when brought to market than a buyer would be able to attract through a rushed sale.

The benefits of proper preparation
While favourable tax rates are, of course, hugely attractive when selling your business and, in many ways, serve as a just reward for the years of hard work that have gone into building a company, they should not be the sole reason – or arguably even a major reason – to seek an exit.

Of course, if you and your business are exit-ready now, then you should by all means be motivated to seek a sale while the rates are at their most attractive. However, rushing into a sale process simply to make the most of rates before they increase would not deliver even close to the value that can be unlocked through a proper sale process.

Selling a business after extensive preparation will typically yield considerably higher returns than relying solely on favorable rates of tax such as CGT. Arguably a far bigger problem for SME owners considering an exit is an overall lack of preparedness.

A recent survey suggested that around a third of UK SME owners think that their business is currently undervalued – meaning they are unlikely to command a valuation that they feel reflects the true worth of their business should they go to market.

Perhaps even more alarmingly, the same Marktlink survey found that a third of UK SME owners (33 per cent) did not know the value of their company. Jonny Parkinson, managing partner at Marktlink’s Manchester office, commented: “Having an accurate business valuation is key for business owners and step one if they’re considering a sale.”

Chris St Cartmail, Exit Planning Advisor at Celestus, says that “a third party valuation is a key component of an initial appraisal of a business. This will serve as a quantified starting point in the journey to first de-risk the enterprise, and secondly to benchmark the results of strategies to accelerate value over the next two years.” “The aim of every business owner should be to get exit-ready and stay exit-ready even if selling is not an immediate objective.“

Ultimately, favourable rates should be viewed as a secondary (although valuable) bonus to the value attained through a thorough exit preparation and the numerous benefits that being fully exit-ready will offer. Here's a breakdown of some of the benefits of being fully and prepared, as well as why and how these factors affect your outcome:

Value creation through preparation
Undertaking a process of preparing a business for sale enables you, as the owner, to boost two key things: the value of the business and its attractiveness to potential suitors. By taking two to five years to identify and address areas of your business where value can be added, you will be able to attain a significantly higher valuation.

Addressing factors such as the financial, operational and structural elements of your business can help you to build more resilient, documented systems and processes and generate stronger revenues and profits – all things that are attractive to buyers and will help your company command a higher multiple.

Taking the proper time to prepare your business for sale is also crucial in de-risking. Again, working with an exit adviser can help you to identify potential risk factors within your business and then work on resolving these. A common risk, that we will explore in greater detail later, may be that the business is overly reliant on yourself or other key stakeholders or that too much revenue is reliant on one or two clients.

Risk factors such as owner dependence, legal liabilities or weak financials are often described as being “deal killers”, in that potential buyers will often choose to walk away from a deal if they are present.

A thorough process of identifying and either mitigating or remedying the risks that are inherent – and potentially hidden – in your business will help to build long-term resilience and ultimately prove more attractive to buyers.

Having properly prepared your business for sale will also give you a stronger negotiating position when it comes to market. Adding value and mitigating risk will enable you to enter negotiations with a stronger hand and be more assertive in arguing the case for buyers to pay (or approach) your valuation of the business, as well as to exert more influence over the terms of the deal (e.g. how much of the total consideration is paid upfront rather than deferred).

It will also mean that buyers are less likely to find areas of weakness or liability that could cause them to demand a discount on the purchase price. Furthermore, building a higher value business – one that is profitable, scalable and efficient – means you are also likely to attract higher quality buyers, ones who may be willing and able to pay a premium.

Combine readiness with timing
Getting your business ready for sale doesn’t necessarily mean that you sell once the process is complete. A business that has undergone a thorough pre-sale process will attract a higher valuation, but, crucially, it’s about being prepared to go to market when the timing is right.

For some, that time may have been when CGT rates were more favourable over recent years. However, for the majority of these sellers, getting their business to the point where it was primed for a valuable sale would have taken priority over simply capitalising on low rates.

Even in high-tax years, selling a well-prepared business at a higher price can net more profit than rushing a sale for tax reasons. Furthermore, while some will not be ready to sell prior to rates increasing, a well-prepared sale (and expert tax planning advice) provides the opportunity for you to implement strategic tax planning, which can help reduce tax liability independent of the prevailing CGT rate.

Ultimately, preparedness and timing are the keys to a successful exit. Low taxes make a difference, but they do not necessarily dictate when the best time to sell is. Market demand and trends within your industry are a far more important barometer for determining when is the most advantageous time to sell your business.

As a result, we once again see the importance of preparedness in taking advantage of good conditions for a sale. Favourable conditions can emerge unexpectedly and pass quickly, and if your business is unprepared then you will find it difficult to capitalise on the opportunity to sell at the right time.

Being well prepared and positioned to sell at the right time also means that you may be able to attract strategic or synergistic buyers willing to pay a premium for the business due to the prospect of the acquisition being immediately earnings accretive or strategically valuable.

Rather than rushing to lock in favourable tax rates, owners should seek to build a company that is saleable at any time. This can be achieved by improving value, efficiency, and resilience and will ultimately ensure you have the flexibility to time the sale optimally based on market conditions and tax rates.

Once the business is ready for sale, monitor tax policies and market trends and aim to sell when both are favorable. Having a sale-ready business gives you control and flexibility to choose the best moment and will deliver a sale price that offsets any less favourable tax rates that may be incurred.

Prioritise a well-prepared business over timing the tax rate and ensure you take advantage of expert guidance where possible. An exit strategist can help you in undertaking the process of adding value and preparing for sale, while planning with a knowledgeable tax advisor can address the timing nuances and present ways to structure the sale for maximum tax efficiency.

Proper exit preparation
So, what constitutes a proper exit plan? It will be a process undertaken over a minimum of three years or – ideally – up to five years. This may sound like a lot of time – and it is – but, after all, this is likely to be the biggest (or one of the biggest) transaction of your life as a business owner and this sort of timescale means you are giving it the requisite time necessary to unlock the highest valuation.

A crucial early step will be to consult with an exit strategist, which will help lay the groundwork to make your business exit ready. Exit strategists often utilise a “business attractiveness index” which will highlight areas of the business that require attention in order to prepare it for sale and ensure it is as attractive as possible to potential buyers.

An exit adviser will help you to establish the current valuation of your business and then your desired valuation. While expectation management may also be required if your desired valuation is not realistic, a plan will then be formulated to close that gap as far as possible and help your business achieve as high a valuation as possible prior to your exit.

Arguably the most challenging stage in exit preparation will be scaling up your business. A scaled-up business is more attractive to potential buyers (and hence more valuable) for a couple of key reasons.

Fundamentally, of course, a scaled-up business will be generating higher turnover and profits – meaning that buyers will be willing to pay a higher price. Scaled up businesses attract far higher sale multiples than smaller companies when brought to market, giving you a significantly greater pay day.

Furthermore, a larger business is often simpler, quicker and more cost-effective to transfer to a new owner. While it may naturally seem that it would be more laborious to transfer control of a larger operation, the opposite has repeatedly been shown to be true. Bigger businesses are more likely to have proven, established processes in place – meaning that it is far simpler for a new owner to take control in comparison to a smaller, less-developed company.

For a more in-depth guide to scaling up, read our piece on scaling up your six-figure business prior to a sale.

As well as scaling up, growing your business’ market share is another key preparatory step prior to a sale. A business with strong market share and diverse revenue sources is likely to be more profitable, as well as more resilient in the face of economic shocks and more agile when it comes to capitalising on new avenues for growth.

Funnily enough, considering you are in the process of getting your business ready for sale, conducting M&A deals of your own can be the ideal approach to achieving this goal. Organically adding new revenue sources, diversifying and growing market share can be a long-winded process and may prove highly distracting at a time when you are engaged in pre-sale preparations.

M&A, on the other hand, is a fast, efficient means of adding new capabilities, products and sources of revenue to your business – particularly in an environment like the current one, in which organic growth can be more challenging to achieve.

Ownership transitions can, on occasion, cause uncertainty for a company’s clients and staff and another area of focus should be on solidifying client relationships and providing certainty to staff (tangentially, this is another reason why bolstering your business through M&A can be valuable – adding new clients and staff may prove wise in case of any lost business or resignations).

With both clients and staff, openness and transparency are crucial. While it may not be advisable to immediately keep them informed after every new development in the sale process, keeping them in the loop and ensuring you don’t spring any nasty surprises on them will mean that neither clients nor staff feel blindsided during the sale and feel forced to reconsider their relationship with the company.

A satisfied, diversified client base, as well as a strong, loyal workforce will both be major assets when it comes time to bring the business to market – so there is a significant financial upside to ensuring that you keep them both happy when preparing your business for sale.

Staying with the personnel side of things, an exit process spanning 2 – 5 years also ensures you have sufficient time to take care of three key steps: opening up succession pathways within the business, building a strong leadership team and, perhaps most importantly, decentralising yourself from the business.

As outlined in our insight on the importance of decentralising a business owner, a business without a strong leadership team and which is heavily dependent on one or two senior figures is, for all intents and purposes, almost unsellable.

It may have a strong client base, years of profitability and a compelling product or service offering, but if key knowledge and responsibilities are concentrated with figures who will leave post-sale then successfully transferring the business to entirely new ownership becomes an almost impossibly laborious process and one that the vast majority of buyers will simply refuse to consider.

Conversely, if your business has a strong leadership team in which responsibilities are spread around, codified systems and processes that ensure key knowledge is clearly laid out and teachable and a pathway for future leaders to move up towards senior roles, it immediately becomes a far more attractive proposition for a potential buyer and, hence, a more valuable one.

In terms of a business’ financials, a full preparation is key for two crucial reasons: ensuring a minimum of three years of solid financial performance and giving you time to get your financials in order to help facilitate a smoother due diligence process for potential buyers.

A core focus throughout a sale process should be improving turnover and profitability. It goes without saying that these are both highly important to potential buyers and giving yourself enough time to improve these figures means that a minimum three year process is critical.

Three years of strong growth will show buyers that a business is on an upward trajectory and that the strategy driving the business forward is solid. Of course, business ownership is an uncertain game and 3 – 5 years of immaculate growth may not be possible even for the best of companies.

For that reason, being able to demonstrate signs of growth (contract wins, favourable new terms with existing clients, strong pipelines of future work) will be valuable, potentially even if a business is loss-making. Even more crucial in this scenario will be having a solid business plan in place, complete with detailed, granular financial forecasting showing how the business will grow over the coming years.

These are just some of the critical steps that you should take while preparing for a sale, but by no means is this an exhaustive list. For a deep dive on pre-sale preparations, check out our guide on making your business a more attractive acquisition target.

Conclusion
There’s no doubt that increases to capital gains tax are bad news for business owners considering selling their company and may even cause some to reconsider or pause their exit strategies in the hopes that rates will fall again in future. However, if a company is not sale ready then concerns over rising tax rates are secondary – if not essentially immaterial.

Recent surveys have suggested that many UK owners are simply unprepared for an exit process and such a lack of preparation is something that will prove far more detrimental to the value of a business sale than any increase in tax rates.

While business owners across the UK will undoubtedly be frustrated at the changes, unless they feel that their business is ready to be sold and would attract a strong valuation, they should resist the urge (or any advice) telling them to hurriedly put their business up for sale.

Favourable tax rates are a welcome bonus, but ultimately they are no match whatsoever for the kind of windfall owners can earn by adding value, de-risking and optimising the operations of their business in a well-planned, properly executed pre-sale preparation process.


BSR Members can keep reading to view details of a proven, month-by-month exit planning and implementation process that has guided thousands of business owners in the UK and US to de-risk and accelerate the value of their enterprise.

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