The following articles are by Chris Lane, partner, Kingston Smith LLP and first appeared in Caterer & Hotelkeeper magazine.  They have been reprinted with kind permission from the magazine.

The Problem

Melissa has spent over thirty years building up her successful Italian restaurant in the Midlands.  She is now approaching retirement and is worried that she won’t be able to fund her retirement from the sale of the business.  Melissa, like many restaurant owners, works long hours and has little time for business planning.

The Law

The last thing that small business owners tend to think about is how they are going to leave their business. They are usually too involved on a day to day basis to spend any time thinking about the future. But it is important to give it some thought as early as possible so that you can work towards a thought out plan. There are extremely favourable tax breaks for owners who wish to sell their business or pass the business on to the family, but the best position always needs planning and forethought which cannot be left to the last minute.

Expert Advice

Melissa needs to review with her advisors what her financial objectives are for her retirement and how these objectives could be met. This will obviously depend on her planned lifestyle and may even involve a move of house. When Melissa retires there will be more time for her to spend her money, although like most people she will need less money to live on than she does at present. This is because major expenses like mortgages and family come to an end approaching retirement.  Her major asset is of course the current business and her two main options are to sell it or pass it on to her successors. Obviously the major difference is that one is a gift and will not raise any capital for her retirement and will be a restrictive factor if she needs the value to fund her retirement.

Clearly Melissa’s actions will be different if she needs to sell the business as she will be looking to maximise the potential value of the business by making it as attractive as possible to purchaser. One of the main attractions is of course a sound financial track record for the business. Buyers that are confident in the ability of the business to generate profits going forward are more likely to pay the asking price.

If the projected market value of the business is still not sufficient to fund Melissa’s retirement she may have to consider delaying the date at which she retires. This will give her more time to try and increase the value of the business by either making the existing business more profitable or by increasing the size of the business by expansion.  Any delay in her retirement date will in theory reduce the funds needed to fund her retirement.

To Do Checklist

• Consider what your financial needs are going to be in retirement.
• Discuss with your advisors how this can be funded
• Obtain a valuation of the business.
• Set a realistic retirement date.
• Put yourself in the shoes of a buyer and think of ways to make the business more valuable.

Beware!

Do not sit on your hands. The problem will not go away and the sooner you consider your options with your advisors the sooner you can start working on a plan to achieve your objectives.

Contacts

Chris Lane is a partner at Kingston Smith, one of the UK’s top 20 accountancy firms, and can be contacted for further advice on: 020 7566 4000 or clane@kingstonsmith.co.uk.  Chris and his team specialise in providing business and financial advice to the hospitality sector.