Do you want to be judged as a life style business?

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Published: 3 Dec 2014

It’s a common dilemma that you’ve probably thought about but decided to deal with at a later date. Trouble is that event at a later date can come around far more quickly than you expect.

The event I’m referring to is the time when you want to sell your company. And the dilemma that many business owners go through is that, on the advice of their accountant, most of their income from the company is in the form of dividends, which is great for today but has an impact tomorrow on the value of your company in the eyes of the purchaser. What should you do? Or perhaps the question is what should you have done?

In the meantime you ask your accountant to inform you of the profit after tax for the last three years, so that you can assess the company’s value and inform the purchaser.

The salary and dividends that you’ve received each year from your company, including your wife’s salary, gives you a reasonable living. So you anticipate that a purchaser would be prepared to pay the asking price or a figure near to it.

If the purchaser intends to run the business, he may be prepared to accept this position. However, the purchaser may take the view that a large part of the dividend income should be treated as remuneration of a working director and therefore deducted from annual profits before tax. Inevitably this reduces the company valuation which is based on trading profits.

Many purchasers of small companies look at the profit before directors’ remuneration as a “lifestyle business” and do not take account of management remuneration. This gives an over-valuation of the company which may be accepted in certain industries for small entities.

So what can you do today that will help you tomorrow realise a fair sale price for the business you’ve worked so hard to build?

If you wish to understand these implications in greater detail, before agreeing to a value and committing to a sale, you are invited to have a free consultation with David Cane of Sundial Tax & Finance Ltd (Contact Details: (T) 0845 177 0036; (M) 07749 080 806; (E) [email protected]