4 April 2024
The process of building your life after exiting your business is not unlike the journey you embarked on when founding and growing your company, but it serves up new challenges and is often underestimated by business owners. Here we outline three things that owners should consider after a business exit.
Having exited their business, many entrepreneurs use their wealth to start or invest in another company. Others may take on consulting or advisory roles or invest the proceeds from the sale in a portfolio. Plenty of owners look to establish a foundation or charitable trust, while some are happy to walk off into the sunset. Whatever the path, we recommend undertaking a comprehensive financial review so that you can meet your annual living costs and backfill any potential holes through strategic investment management.
Afterall, wealth can help make a step-change in your
lifestyle, but it also needs to be carefully managed so that it continues to
work for you and your family in the future. And so, we’ve put together a list
of three key things that owners should consider after a business exit:
1. Reframing your wealth strategy
When there are proceeds from an exit or a sale, many wealth managers apply a single investment strategy, exposing it all to the same level of risk. However, we believe in a different approach called multi-purpose investing, whereby we allocate a business owner’s accumulated wealth into three segments: essential, desirable, and aspirational. Each segment has a distinct purpose, so each is underpinned by a different investment strategy.
- Essential: the purpose is to meet the essential income needs of the client over the next five to 10 years, the underlying strategy is designed to provide the necessary level of liquidity. Up to 20% is invested in high-grade bonds and bond funds to meet annual drawdown needs as agreed in advance.
- Desirable: the purpose is to achieve moderate growth of the wealth within the segment, often to fund lifestyle choices, we construct a diversified portfolio designed to deliver returns with high probability. Around 60% is invested in a core portfolio of liquid global equities, property, bonds, and funds.
- Aspirational: the purpose is to generate surplus capital to secure a family legacy or philanthropic giving – we would invest in less-liquid assets and special situations over the long term. Around 20% is invested in concentrated, less liquid opportunities, such as private equity.
2. Moving abroad
We can look at the tax implications if you decide to move overseas. This is especially important for owners who retain shares in the company after exiting because they may be liable for additional tax. Owners often decide to become non-resident as they approach an exit so they can take advantage of more favourable tax regimes overseas. The extent of someone’s charge to Irish tax depends on their tax residence, ordinary tax residence and domicile status. If an owner is tax resident, ordinarily tax resident or domiciled in Ireland, a liability to Irish tax arises on their worldwide income and gains.
It is important to understand the rules because establishing
non-residence and non-ordinary residence in Ireland takes time and is often
impractical for families. To become non-resident, you need to be present in
Ireland for fewer than 183 days in the tax year or 280 days in aggregate in the
current tax year and the preceding year (this test only applies where an
individual has spent more than 30 days in Ireland each year).
3. Sharing the wealth
We also speak to clients who want to give some of their wealth to family members during their lifetime. The concept of family charters or family constitutions are becoming more popular because they help tap into the family culture and define their values and aspirations. Setting out broad principles over everyone’s expectations relating to education, investment decisions, personal expenditure and philanthropy can help with the transition. It can also open lines of communication and resolve conflicts.
Current legislation in Ireland allows parents to give each of
their children a tax-free sum of up to €335,000 in the form of a gift or
inheritance. This threshold is cumulative so every gift or inheritance received
since 1991 would count towards it. If the cap is breached, any more gifts or
inheritances will be subject to capital acquisitions tax (CAT) at 33%. However,
small gifts of up to €3,000 can be given annual without attracting any CAT.
These smaller amounts don’t count towards the threshold but could be extremely
useful if the recipient needs to pay for childcare, education or even a deposit
on a house.
Giving money to charity used to be managed through a disposition in someone’s will, but lifetime giving is increasingly common as many owners seek to deploy capital to causes they are passionate about. Involving the next generation in the decision-making process is also something we’re seeing more of. When there are reserves of cash or assets that aren’t earmarked for the family, families could consider setting up a charitable foundation. It is worth exploring whether such a structure is the right vehicle for you and your family as an initial first step. As an alternative, if the owner donates cash or assets directly to charity, CGT, CAT and stamp duty will not normally be applied.
The next phase of life
It is not uncommon for many successful business owners to have done no professional or personal preparation for what comes next. Indeed, we often meet owners who say that finding post-exit fulfilment is an even bigger challenge than making the business successful in the first place.
Making the transition into retirement or into the next phase
of life is crucial for your happiness, so it’s worth drawing up a plan. You may
not stick to it but it’s always better to have something in place. That way,
you can focus on the next phase of life – and how the proceeds from an exit can
support your ambitions.
This can help owners focus on the next phase, which should also involve mapping out how the proceeds from an exit can support your ambitions.
How we can help
At Goodbody, we understand that exiting the business is one of the most important personal and professional decisions that any entrepreneur can make. That’s why we believe in the importance of planning – and so, last year, the team at Goodbody and AIB Capital Markets put together a report on business exit planning and succession in Ireland. We wanted to arm business owners with practical information to be aware of and to action where appropriate.
So, whether your exit is on the horizon or a little further into the future - we're here to help. Our Succession Advisory Team, made up of M&A and tax specialists and wealth planners, offers business owners a coordinated one-stop advisory service across all aspects of a potential business exit, including both personal and corporate financial readiness for business owners. Download our report ‘What’s your plan?’ here.
