Selling the company you built up is a life-changing event and you must get the right advice at the right time from trusted advisers to achieve your goals.
It is best to start planning early to optimise the value you achieve and, from a tax perspective, to ensure you are in the best tax position.
Get the basics right
For you as a shareholder, accessing the 10% capital gains tax rate on the first £1million of lifetime gains qualifying for Business Asset Disposal Relief (“BADR”), worth up to £100,000 should be high on your agenda.
Various conditions need to be met for the 10% BADR rate to be available when shares in a trading company are sold. However, it’s surprising how often simple things aren’t done which could have improved the position.
For example, to claim the 10% BADR rate, it is necessary to be either a director, company secretary or employee for at least two years prior to a sale and for your shareholding to amount to at least 5% of the ordinary share capital, votes and value of the company.
Where you and your spouse are involved in the company, it’s therefore important to ensure that you each meet these basic conditions so that you can access BADR.
Similarly, the shareholdings of other family members who work in the company should be checked.
What about the team?
Key to driving up the company’s value to your target sale price is keeping your staff focussed on achieving that growth. Motivating your staff and keeping hold of key people is therefore vitally important but also a major challenge.
The starting point when thinking about staff incentives is to identify the commercial objectives you want to achieve and the key performance metrics that will allow you to reach those goals.
Starting to plan early allows you to identify key staff and also identify and fill gaps in your current team.
The reward package you offer staff will consist of various elements. Cash is a major part of this, as is pension provision and other benefits. The company culture and working environment also play an important part.
Share incentives
Share incentives for staff are a useful tool in the overall reward package you offer to employees. However, a share-based incentive has to be relevant to the employee and have meaningful targets to be effective. The potential value of what is on offer must therefore be communicated and understood by the employee. If the employee doesn’t appreciate the value of the incentive, the incentive is unlikely to achieve its commercial objective.
There are several ways in which an equity-based incentive can be structured, and the most effective method will depend on your circumstances. As a starting point, however, share options provided within a government-approved Enterprise Management Incentives wrapper, known as EMI options, are generally the first share incentive structure considered by owner-managed companies.
EMI options are a well-trodden path and are tax-efficient and very flexible, so they should be appropriate in most cases. Where they aren’t available other incentive structures such as another government-approved share option structure known as a Company Share Option Plans (“CSOP”), growth shares or part-paid share arrangements may be appropriate.
In summary, to be effective the staff incentive should be tailored to your, the company and the employee’s specific needs and circumstances. The more it is aligned to these, the more likely it is to be successful for you, the company and the employee.
Corporate Finance
Read more about Corporate FinanceRead moreTo be effective the staff incentive should be tailored to your, the company and the employee’s specific needs and circumstances.
