Business owners have many important decisions to make as they approach retirement, including plans for succession and deciding if, and how, the business will feature in the owner’s financial affairs in retirement. In this article, our team at Vesta Wealth offers some retirement options for business owners. We hope this content helps you and invite you to contact us if you would like to discuss your options with us about your own business.
Sell the business
This can be the most intuitive option for an owner. The process of selling a business, however, is not always straightforward and requires careful planning. Firstly, there may not be a ready buyer at the time you look to sell. Market conditions may also affect the price buyers are willing to pay. You will also need to carefully consider any shareholders’ agreement which dictates how your shares can be sold, ceding control to a third party.
It is worth noting that you do not have to sell your business in its entirety. Another option may be to sell your majority stake, allowing you to ease into retirement, stepping back from day-to-day operations. This can also give more transition time to hand the reins to successors effectively.
Phase away control
If yours is a family business, owners who are parents often like to pass the business to the children. This hand-over process usually takes time and can run over many years. This helps to ensure the business will continue to run properly when you retire. Here, share transfers can be less of an issue since control, and the business’s funds, are kept inside the family. The main change is that younger generations start taking over the daily running of the business. Things often work differently, however, in a non-family-owned business. Here, control may be gradually ceded to another director (joint owner), typically also gradually selling off your shares to him/her.
Choose to liquidate
Sometimes it is not possible to sell a business and there is nobody available to keep running it e.g. family members or other directors. For owners in this situation looking to retire soon, MVL (Members’ Voluntary Liquidation) is an option to consider. This can be expensive because a liquidator will need to be appointed. However, liquidation is usually more tax-efficient than taking money out of the business via dividends. A series of steps need to be taken to complete the liquidation process including getting a majority of directors to sign a Declaration of Solvency.
Of course, liquidation is not the only option. You could apply for your business to be struck off the register of companies. To do this you need to prove that there has been no trading for 3 months. Should the business be insolvent then it can be an option to start Creditors’ Voluntary Liquidation (CVL), which would lead to it being struck off. Unless personally guaranteed, any liabilities will be written off (except where directors are found guilty of causing the CVL through fraudulent trading or misfeasance).
Entering dormancy
Ceasing trading does not necessarily mean striking your company off the register. A small business considered dormant will be required to jump through far fewer administrative hoops. Here, the government needs to deem that your business has had no ‘significant accounting transactions’ across an accounting period. Here, things are much cheaper than MVL and lets you reopen again quickly if you need to come out of retirement.
Using pensions
Business owners are likely to have built up one or more pension pots across their careers. Prior to winding down a business, therefore, it will be crucial to examine these with a financial planner to see how they fit into your retirement strategy. A state pension can be accessed from age 66 in 2021, whilst private and workplace (defined contribution) pensions can be withdrawn once you reach 55 (set to rise to 57 from 2028).
Ongoing ownership
It is possible to enter retirement and continue owning the business. For you, it may be that you wish to semi-retire and keep on working with your business in some form e.g. as a consultant. However, bear in mind that additional hires of managers may need to be made to keep up the previous work of the owner. This results in an additional overhead which eats into business profits, potentially lowering your dividend. It is also worth bearing in mind that, should you enter retirement with less than 50% of company shares, then under the articles of association you could be forced to retire by the other owners. This may happen if, for instance, you lose mental capacity due to ill health in older age, and the directors decide that you need to step back.
Invitation
If you would like to discuss your financial plan and investment strategy, then we would love to hear from you. Get in touch with your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.
Reach us via:
t: 01228 210 137
This content is for information purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.