Payback Time

Business owners might often cast their minds back to when it all began, and the concerns and challenges that confront many starting out in business. How do we secure our first contract? How do we recruit staff? How do we fund the business?

Fast forward five or ten years and the business in which they have invested so heavily – in terms of time, effort and money – may be profitable, running very well, and a significant employer.

At that stage, business owners might understandably want to realise some value from their business through the sale of some of their shares whilst, at the same time, remaining involved in the future growth of the business.

The key point is that it’s quite likely that the value of shares held in the business is worth considerably more than all the other assets owned by the individual, including their house.

Geoffrey Sparks of Charles Russell Speechlys concurs: “Increasingly we have noticed a trend towards shareholders selling part, but not all, of the equity in their businesses to realise some of the accumulated capital gain. A partial sale of shares to a third party, normally to a venture capital or private equity firm, is attractive because the individual, and their fellow shareholders, can maximise the tax reliefs available on a sale of shares.”

Rewarding effort

Whilst still running the business that they have created, this equity release could help directors repay their mortgage, privately educate their children or grandchildren, assist with house deposits or buying properties for children, or simply to release the cash to enjoy themselves.

But Sparks is keen to add a note of caution. “Not all businesses will be suitable for a partial sale and, of course, each and every business and situation is different.”

However, there are some key drivers that would need to be met for a partial sale to be attractive to a prospective buyer. “The business should have historic EBIT profits (earnings before interest and tax) of not less than £750,000, and should still be growing, both in terms of turnover and EBIT,” advises Sparks. “Ideally the business should also have additional managers in senior roles alongside the owner/director.”

It is important to note that this is not a retirement plan or, indeed, an opportunity to work significantly less hours. If that is the principle aim then owners should consider a sale of the business as a whole. Partial sales work where the owner/director still has the drive and appetite to continue the business, but wants to release some equity for themselves and their family to enjoy.