The October 2024 Labour budget has introduced sweeping changes to the UK’s tax and economic policy, creating both challenges and opportunities for entrepreneurs looking to sell their businesses. From higher capital gains tax (CGT) rates to revised thresholds for reliefs and increased regulatory scrutiny, these changes have a direct impact on how businesses are valued.
For business owners planning an exit, it’s critical to understand how these policy shifts affect your valuation and what you can do to protect and maximise the value of your business. This blog explores the key policy changes and provides actionable strategies to help you adapt.
Key Policy Changes from Labour’s 2024 Budget
1. Increased Capital Gains Tax Rates: The most significant change is the rise in CGT rates, particularly for higher earners. Entrepreneurs selling their businesses now face a larger tax bill on their sale proceeds, reducing the net gain from the transaction.
2. Reduced Business Asset Disposal Relief (BADR): Formerly known as Entrepreneurs’ Relief, BADR has been further restricted, with the lifetime allowance reduced and eligibility criteria tightened. This means fewer business owners can benefit from the reduced 10% CGT rate.
3. Stricter Compliance and Regulatory Oversight: Additional resources have been allocated to HMRC to increase audits and enforcement. Business sales are likely to face more scrutiny, particularly regarding valuations, tax structuring, and due diligence.
4. Changes to Dividend Taxation: Dividend tax rates have increased, further impacting business owners who plan to distribute sale proceeds as dividends to shareholders.
5. Focus on Environmental, Social, and Governance (ESG): New incentives and penalties tied to ESG compliance have been introduced, influencing how buyers assess the long-term value and risk profile of businesses.
How These Changes Impact Business Valuations
1. Higher Transaction Costs: With increased CGT and reduced tax reliefs, the cost of selling a business has risen. Buyers may account for this by negotiating lower purchase prices to offset the seller’s higher tax liability.
2. Reduced Net Proceeds for Sellers: The combination of higher taxes and reduced reliefs means business owners keep less of their sale proceeds. This could make some owners reluctant to sell, potentially reducing buyer competition in the market.
3. Enhanced Focus on Compliance: Buyers are now more cautious about potential liabilities, given HMRC’s stricter oversight. Any discrepancies in your financials or compliance history could negatively impact your valuation or delay the deal.
4. Greater Emphasis on ESG Factors: Businesses that demonstrate strong ESG practices are likely to command higher valuations, as buyers factor in future regulatory compliance and reputational risks. Conversely, businesses lacking in ESG initiatives may see reduced buyer interest or lower offers.
5. Shift Toward Deferred Deal Structures: The increased cost of borrowing and tighter financial conditions may prompt buyers to favour deferred payments or earn-out structures over lump-sum offers. While this doesn’t directly impact the valuation, it affects how and when sellers receive their proceeds.
Strategies to Protect and Maximise Your Valuation
To navigate these challenges and preserve your business’s value, consider the following strategies:
1. Optimise Tax Efficiency
Work with a tax advisor to explore strategies that reduce your tax liability, such as:
– Structuring the sale to qualify for remaining BADR benefits.
– Exploring Employee Ownership Trusts (EOTs), which can offer CGT-free exits if certain conditions are met.
– Spreading proceeds through deferred payments to avoid triggering higher tax brackets.
2. Strengthen ESG Credentials
Demonstrate your commitment to environmental, social, and governance practices. Buyers increasingly value businesses that align with these principles, as it reduces future compliance risks and enhances brand reputation.
3. Conduct a Pre-Sale Audit
Address potential red flags before entering the market by:
– Reviewing your financial statements for accuracy and transparency.
– Ensuring compliance with tax and regulatory requirements.
– Mitigating risks such as overdependence on key customers or suppliers.
4. Showcase Stability and Growth Potential
Buyers are more risk-averse in the current climate. Highlight the following to boost confidence:
– Recurring revenue streams or long-term contracts.
– Proven resilience in navigating economic challenges.
– Clear growth opportunities, such as expansion into new markets or product lines.
5. Engage Professional Advisors Early
Selling a business in the post-budget landscape requires expert guidance. Work with advisors to:
– Navigate tax complexities.
– Position your business as an attractive investment.
– Negotiate terms that align with your financial goals.
Looking Ahead
While Labour’s October 2024 budget has created new hurdles for business sales, it has also highlighted the importance of strategic planning and adaptability. Business owners who proactively address these changes can still achieve successful, value-maximising exits.
The key takeaway is this: don’t wait for the perfect conditions. By preparing early, engaging the right advisors, and adapting to the new policy landscape, you can protect your business’s value and secure a rewarding outcome.
Now more than ever, selling a business requires a proactive approach. If you’re considering an exit, start planning today to navigate the challenges of the new tax regime and capitalise on the opportunities that remain.
Get in touch with the Chalkhill Blue team today on 01793239542 or email us at [email protected]
