Selling a business can result in significant wealth – learn what to plan for before and after a deal is completed.
When business owners, entrepreneurs or company executives exit a business – be that through an IPO, a management buyout, or a sale to private equity or a trade buyer – it usually results in a major liquidity event. Indeed, it’s a time when many individuals come into a significant amount of wealth for the very first time.
Before they reach that point, however, there are basic but quite existential questions that need to be asked – even before thinking about selling a business. “How much do you intend to sell for? Would you accept a non-compete? Do you want to stay in the business or leave completely? Do you have a succession plan in place? And who are you selling to?” asks Duncan Chandler, head of Financial Services, M&A, BDO UK. “An exit can be very protracted, and, ideally, you should be looking at a minimum two-to-three-year timeframe, as that gives you the most amount of comfort and a nice ‘glide path.’”
As business exits can be complex, it’s not surprising that many going through the business exit planning process focus solely on the business rather than on what to do with the money once the deal has been completed. But putting aside personal wealth planning matters can prove costly.
“It’s vital to have conversations about wealth planning as soon as you can, to both financially and emotionally prepare for how your life will change when you exit a business and come into considerable wealth,” explains Adam Turner, associate director of Wealth Planning at RBC Wealth Management in the British Isles. “For instance, you may shift from living off a substantial income with limited capital to having no income and relying on the capital realised from the business.”
When a client is ready to discuss their situation, it’s best to start by trying to understand their plans for what comes after the exit. For example, do they intend to retire, to travel? Or do they hope to launch another business? From there, it’s possible to build a wealth “road map,” working out the income level they need and structuring wealth appropriately.
“At the very least, we’d expect people to be having these conversations 12 months ahead of an exit,” says Daniel Cordery, director of Relationship Management at RBC Wealth Management in the British Isles.
An individual’s long-term wealth plans when a business exit is realised can typically be broken down into three areas of focus:
Such planning, however, can create worries. A recent RBC Wealth Management survey of 600 high-net-worth individuals in the UK revealed that their three main concerns were inheritance tax (IHT), gifting without giving away more than they can afford and knowing how much is enough to maintain a lifestyle in retirement.
When it comes to a business exit, here are some ways to allay those concerns:
To pass on any of your wealth to the next generation in a tax-efficient way, you may want to consider:
Depending on the nature of the exit, an individual’s shareholdings may be subject to certain limitations. For instance, they may be subject to a lock-in period, which means they may not be able to access some of the value until well after the exit.
Similarly, for IPOs, custody and transaction fees impact the value realised on disposal of shares. Building an effective disposal strategy can prove valuable.
Just as with share lock-in periods, if an individual has deferred compensation, they may not actually realise some of the liquidity until years later – and it may not be the amount they originally expected. Cashflow modelling ahead of the exit can help an individual plan for various scenarios.
Once the decision has been made to sell a business and, potentially, an initial offer is on the table, it’s essential to try to cement the value of the business. “Continuity is key,” explains Chandler. “If this isn’t being sold to another business with a strong management team in place already, is there a strong succession plan in place? Are all key contracts nailed down? And are existing systems, products and processes all tried and tested? Can this business pass forensic due diligence?”
The value of the business has a direct impact on what an individual will realise on exit, so shoring this up is essential. One way is to ensure that protection policies for all key people are in place. Losing such individuals to either illness or premature death prior to a sale or an IPO can dramatically impact the business value. The presence of the policy gives buyers confidence, as it’s an extra layer of protection for their investment. With restrictions to Business Relief applying from April 2026, relevant stakeholders will also need to be aware of the liquidity required for potential IHT liabilities on an owner’s death.
“When clients come and see us after a sale, they’re either very excited about the future or they’re terrified because they’ve just received an amount of money much bigger than they’ve ever had before,” says Cordery. “If we’ve had those early conversations with people, this is the point at which they can take a step back. This may involve putting a large part of the money on deposit into bonds for six months so they have time to breathe.”
For people receiving significant wealth for the first time, this can be a particularly fraught occasion. Results from the RBC survey show that 89 percent of those new to wealth would benefit from further guidance on the responsibility of having wealth, compared with 63 percent of those with established wealth.
Taking financial planning advice before, during, and after a major liquidity event, such as selling a business, can help pave the way to a secure financial future.
“In a way, when someone comes into a large cash holding, it really is a case of going back to basics from a wealth-planning perspective,” explains Turner. “It’s here that we look again at that goal-based conversation – what do you want to achieve and how can we help you achieve that? And there are certain things we would typically look at.” These include:
The value of a single stock holding can be extremely volatile. If an individual is subject to a lock-in period or intends to retain stock, hedging and investment strategies can limit the impact of price fluctuations.
A diversified portfolio is a commonly recommended investment approach, and this can be executed both before an exit and on an ongoing basis.
It’s essential to maximise the growth of investments and minimise exposure to income, dividend and capital gains tax (CGT) drag by structuring the net proceeds efficiently.
The UK has a high tax burden on investment income and gains, especially for large portfolios held outside of tax wrappers, such as individual savings accounts (ISAs) and self-invested personal pensions (SIPPs). There are a number of structures that can reduce the tax drag for larger portfolios – for example, international bonds, family investment companies and private funds.
It’s also possible to defer CGT due on a business sale through the tactical use of tax-efficient investments. By investing the gain into an Enterprise Investment Scheme (EIS), for instance, the gain is deferred until the EIS investments are exited (but can be deferred again if reinvested into another qualifying EIS investment).
Other benefits of EIS include a 30 percent reduction in an income tax bill, an IHT exemption after two years and CGT-free gains, provided conditions are met. It’s important to note, however, that these are high-risk, illiquid investments, so should typically form only a small portion of a wider portfolio.
Coming into considerable wealth may ultimately lead to a significant exposure to IHT. A whole-of-life insurance policy can be taken out to provide a lump sum to cover any IHT liability based on the expected assets at the time of death, which will often largely be comprised of illiquid assets, such as property, that will take time to sell.
Term assurance policies can complement this to provide an “umbrella” of protection. Unlike whole-of-life policies, these expire after a set period but can “buy time” to implement wider planning such as gifting or restructuring to reduce the estate. It’s essential the policies are set up in an appropriate trust, so that the proceeds stay outside of the estate for IHT purposes.
Because there are so many potential moving parts from a business- and personal-wealth perspective, the value of ongoing reviews throughout the entire exit process (and beyond) can’t be overstated.
“It’s very rare that a business exit goes 100 percent to plan, not least in the final figure that is realised,” notes Cordery. “So having the ability to be flexible as things change can really help deliver the best possible outcome.”
Ongoing financial planning for business owners helps ensure their goals remain relevant and the right balance is struck across multiple objectives, including income requirements, estate planning, tax structuring, adapting to changing personal circumstances and evolving legislation.
This article was updated in Nov. 2024.
This publication has been issued by Royal Bank of Canada on behalf of certain RBC ® companies that form part of the international network of RBC Wealth Management. You should carefully read any risk warnings or regulatory disclosures in this publication or in any other literature accompanying this publication or transmitted to you by Royal Bank of Canada, its affiliates or subsidiaries.
The information contained in this report has been compiled by Royal Bank of Canada and/or its affiliates from sources believed to be reliable, but no representation or warranty, express or implied is made to its accuracy, completeness or correctness. All opinions and estimates contained in this report are judgments as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. This report is not an offer to sell or a solicitation of an offer to buy any securities. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Every province in Canada, state in the U.S. and most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as the process for doing so. As a result, any securities discussed in this report may not be eligible for sale in some jurisdictions. This report is not, and under no circumstances should be construed as, a solicitation to act as a securities broker or dealer in any jurisdiction by any person or company that is not legally permitted to carry on the business of a securities broker or dealer in that jurisdiction. Nothing in this report constitutes legal, accounting or tax advice or individually tailored investment advice.
This material is prepared for general circulation to clients, including clients who are affiliates of Royal Bank of Canada, and does not have regard to the particular circumstances or needs of any specific person who may read it. The investments or services contained in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about the suitability of such investments or services. To the full extent permitted by law neither Royal Bank of Canada nor any of its affiliates, nor any other person, accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or the information contained herein. No matter contained in this document may be reproduced or copied by any means without the prior consent of Royal Bank of Canada.
Clients of United Kingdom companies may be entitled to compensation from the UK Financial Services Compensation Scheme if any of these entities cannot meet its obligations. This depends on the type of business and the circumstances of the claim. Most types of investment business are covered for up to a total of £85,000. The Channel Island subsidiary is not covered by the UK Financial Services Compensation Scheme; the office of Royal Bank of Canada (Channel Islands) Limited is a participant in the Jersey Bank Depositors Compensation Scheme. The Scheme offers protection for ‘eligible deposits’ up to £50,000 per individual claimant, subject to certain limitations. The maximum total amount of compensation is capped at £100,000,000 in any 5 year period. Full details of the Scheme and banking groups covered are available on the Government of Jersey’s website www.gov.je/dcs or on request.
We want to talk about your financial future.