What would Dr Mo Lar do? Part 8
Over the course of this 11-part series, Managing Director of the 4dentists group Richard Lishman will explore ways to tackle a number of personal and professional challenges by providing advice and guidance to fictional character Dr Mo Lar. In the eighth article, he explains what Lar has to consider when selling his business.
Having spent years building a dental empire, Lar has reached a point in his professional career where he is both financially and personally ready to sell his business. To initiate his intended exit strategy successfully and set himself up for retirement a few years down the line, he will need to consider his options carefully and at length. That way, he will be able to enjoy a few stress-free years before he hangs up his dental tools for the last time.
To obtain the most from his sale, Lar will need to consider the business structure of his practice. If he were to sell an unincorporated practice as a sole trader or business partner, for instance, Lar would be able to use Entrepreneurs’ Relief (ER) to pay less capital gains tax (a tax on the profit of an asset). Having owned the business for longer than a year, which is the prerequisite for ER qualification, Lar would only need to pay 10 per cent on all gains made from the sale of his business.
An incorporated practice, however, is not eligible for this generous relief if it is the limited company that is selling the practice (or practices). Instead, a 19 per cent corporation tax must be paid on all profits, as well as an additional income/capital gains tax charge on the sale proceeds. Saying that, the extraction of funds from the business can be reduced with careful financial planning. The use of the substantial shareholding exemption is one possible way to cut costs, as the business would only incur tax when funds are extracted from the company rather than paying tax on the entire sale of the practice.
Then again, if Lar chose to dispose of his shares in the limited company as a way of selling an incorporated practice (or practices), ER would still be available to him, as long as he owns/controls more than 5 per cent of the business and is an official employee of the company. It is important to note, however, that where a company holds significant cash balances or investment assets, it would be classed as “non-trading”, meaning ER would no longer be applicable. As such, Lar would need to ensure that his company qualifies as a trading business if this is the exit strategy he wanted to take. However Lar chooses to execute his exit strategy, timing and advanced planning are key—especially if he plans to restructure his business.
The same goes for due diligence. When Lar eventually sells, a buyer and his or her legal team will need to carry out a comprehensive appraisal to evaluate the business’s commercial potential. For Lar, that means answering a number of enquiries and providing the relevant documentation to confirm that the various statements about the practice are correct. To do this efficiently, and in a timely manner once the process begins, Lar must ensure that all the agreements are in place and valid; registrations, permits and certificates are up to date; and all equipment is in good working order. Naturally, collating everything takes time—especially if a document has been misplaced or is invalid—so Lar would need to start early if he wants to minimise the risk of delay. At this stage, an associate agreement would need to be negotiated as well to govern the post-completion working relationship between Lar and the new principal. He does, after all, plan to stay on for the next several years until he reaches retirement age, so it is critical that agreeable terms are reached.
Once the sale has been successfully completed, Lar will need to consider what to do with the residual balance. Paying off personal loans, asset finance, residential and commercial mortgages, and practice finance would be the main priority, followed by investments, if there is any money left over. He will also need to take into account the tax implications of investing for the future.
Altogether, there is a great deal involved in selling a business, but with the expert help of the 4dentists group, Lar can rest assured that the process will go smoothly.