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Owner-managed businesses: Is the rise in exits here to stay?

An increase in owner-managed business exits has prompted discussion over whether this trend, which affects the global markets as well as the UK, is here to stay or whether it will be a short-lived movement.

Irwin Mitchell’s Corporate team has noticed an increasing amount of activity in owner-managed business disposals over the last quarter. This could be to do with the recent uncertainty across the globe, prompted by Brexit and political instability in the US, persuading people to sell sooner rather than later and risk a global economic downturn.

The potential tax changes relating to entrepreneurs down the line might also be a big cause of this recent trend. Entrepreneurs’ Relief applies to those who are selling all or part of their business, who pay less Capital Gains Tax (CGT) at the reduced rate of 10% on all qualifying assets.

Entrepreneurs’ Relief applies to a wide range of circumstances. For instance, you can claim Entrepreneurs’ Relief if you are selling all or part of your company as a sole trader or business partner or if you are selling shares in a company as a stakeholder totalling 5% or more in the company, provided certain pre-conditions are met.

Entrepreneurs’ Relief is a hugely attractive tax break for business owners and can save them considerable sums in CGT. However, were this to change then for owners planning on selling their business in the coming year or two, an early disposal may be the safest option for business as Corporate Partner Bryan Bletso explains. “There are concerns that if there was to be a change in the current political landscape, Entrepreneurs’ Relief could be one of the first tax reliefs to be withdrawn, have its qualifying criteria changed or its rates altered, which is focusing the minds of business owners who are considering their exit strategy.”

Another possible cause of this trend is related to the UK’s business relations with other countries, both in Europe and further afield. “There’s been an increase in interest from foreign buyers looking at making strategic acquisitions in the UK to take advantage of the weak pound, against both the US dollar, Euro and other currencies,” Bryan continued. “Our London Corporate team is seeing a big increase in work which involves an overseas acquirer – over half of our deals. US acquirers are particularly active”

This relatively short-term trend may also be linked to the longer-term trend of older business owners retiring. The ‘Baby Boomer’ generation, applying to those born between 1946-1964, is slowly changing the landscape of business as this age group begins to consider retirement. Business exit strategies and succession planning by this generation, who would prefer the safety of retiring earlier rather than risking changes to Entrepreneurs’ Relief in the future, in conjunction with the global economy facing uncertainty, may be the root of the increase in exits.

Another explanation is offered by Regional Corporate Partner John Riddick, who is hesitant to offer Brexit as a reason to sell or otherwise.

“There is often a natural exit point for business owners. These can be family issues such as succession leading to the beginning of a sale process; if the agendas of the shareholders are no longer aligned, then it is vital that either the business is sold or those shareholders exit,” John explained.

“Quite often the only way to get liquidity for large minority shares is to sell the whole business. The other obvious sale triggers are retirement, planned exits and de-risking investment where the business is by far the largest asset in a family’s portfolio and they need capital for their own individual needs outside the business.

“What is clear is that a combination of business and personal advice is required in the OMB sector, and Irwin Mitchell have the capacity within its Private Wealth team to assist in conjunction with the Corporate teams.”

Whether one or all of these factors are the cause of this recent trend, Irwin Mitchell can advise on exit strategies for business owners, Entrepreneurs’ Relief tax and corporate M&A matters with its Private Wealth and Business Legal Service capabilities.

Published: 21 September 2017

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September 2017

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Bryan Bletso