While you may have enjoyed owning and running your own business and being your own boss, when the time comes to retire, it is important to consider what is best for both you and your business going forward as you step down.
Justine Harris Hughes, a solicitor in our corporate and commercial team, outlines the key considerations for business leaders looking to retire and what options are available to them.
The structure of your business is a significant factor in determining the routes open to you at retirement – with limited companies having a much wider range of options than those available to a sole trader or general partnership. Here is a brief outline of the options available:
Sole traders and general partnerships
Businesses operating as sole traders or general partnership do not have any separate ‘legal personality’ – that is, there is no legal separation between the business and the individual sole traders or partners. Therefore, the business cannot own assets in its own right – the assets of the business are in fact owned by the individual/s.
If you wish to retire as a sole trader or from a general partnership, you may consider selling the business. The route to sell such businesses is through an ‘asset sale’, whereby the individual/s sell all the assets (tangible and intangible) and goodwill of the business as a going concern, for the buyer to continue to run the business after purchase.
If the business assets include leasehold premises, these will also be transferred to the buyer by way of an assignment, which in most cases will require the consent of the landlord.
Where such businesses have employees, the employees will have a right to continue their employment following the purchase, under the Transfer of Undertakings (Protection of Employment) Regulations 2006 – ‘TUPE regulations’. Their employment contracts will automatically transfer to the buyer on their existing terms (with the exception of old age, invalidity and survivors’ benefits under occupational pension schemes) and the buyer effectively ‘steps into the shoes’ of the seller/s.
What if selling is not an option?
It may be the case that selling to a third party is not an option – either because no suitable buyer has been identified, or the thought of someone else taking your business forward when you retire just does not appeal to you. In this case, you may decide the business has run its course, and it is time to close it altogether – particularly if there are no employees to consider.
If so, the assets can be sold separately (without an on-going business concern) to one or more different buyers and the business will cease trading.
It is important to note if the business is to cease trading, and there are employees, you will need to seek specialist advice to ensure any related employment issues are properly addressed.
Retiring from running a limited company
In contrast to sole traders and general partnerships, a limited company has a legal personality separate from that of its owners. It can therefore own its own assets and enter into its own contracts. In most businesses, the company will be ‘limited by shares’ meaning it is owned by one or more shareholder.
If you are planning to retire and you are the owner, or key shareholder of a limited company, the options for selling the business widen. While a sale can still be done as an ‘asset sale’ as noted above (with the company selling the assets and goodwill to a buyer, but the ownership of the shares in the company remaining the same), it can also be carried out by selling the shares in the company to the buyer.
In this case, all the assets continue to be owned by the limited company, but the limited company has a new owner, being the new owner of the shares.
Who can I sell my shares to when I plan to retire?
Prior to selling your shares in a limited company, you will need to ensure that there are no restrictions in place governing if, when and to whom your shares can be sold – for example, restrictions in the company’s articles of association, or a shareholders’ agreement with other shareholders (if any).
Provided there are no restrictions – or those in place can be removed – there are various parties who may want to purchase your company shares, including:
- Third parties, including new start-ups, competitors and existing companies that are new entrants to your market.
(It is likely that a third party will only want to acquire 100% of the shares in a company, therefore if you are not the only shareholder you will need to ensure that the other shareholders are also willing to sell simultaneously). - Members of staff, for example, a management buyout.
- Other shareholders, if you are not the sole shareholder of the company.
The latter two options may be particularly attractive options, for example in terms of business continuity, and to retain confidence in the business’s on-going success. It may be perhaps that selling to a competitor is just not palatable!
I would like to retire and sell my shares to the other shareholders, but funding may be an issue?
An alternative option in a company which has other shareholders, but where those shareholders are not in a position to purchase your shares, is to sell your shares back to the company itself – a ‘share buyback’.
In this case, if you wish to retire and sell your shares, provided the company has sufficient distributable profits to pay the sale/purchase price of your shares (or in other very limited circumstances, if distributable profits are not available) the company will buy your shares, and the shares will then be immediately cancelled. The ultimate result of this process is that the remaining shareholders then own the whole company – without having to purchase any shares themselves.
So, for example, if the share capital of your company is 100 shares, and there are three shareholder, where you own 80 shares, and two other shareholders own the remaining as 10 shares each, is outlines in the four steps below:
- You sell your 80 shares to the company for the sale/purchase price (and retire).
- The company then immediately cancels the shares.
- The share capital of the company is now only 20 shares.
- The two remaining shareholders still own 10 shares each – but this now represents 100% of the share capital of the company.
Plan early to ensure your retirement meets your vision for the future
As there are a number of options to consider with regards to retiring from running your own business, ideally, you should be thinking about these alternatives and plan your exit from the business well in advance.
You should also develop a strategy to help you transition into retirement. The first step is to consider when you want to retire, what sort of retirement income you will need and how can you achieve it.
This will help you determine whether you require anyone to take over the business, or whether you want to sell the business and how much it may be worth.
Justine Harris Hughes specialises in corporate matters including company and business sales and acquisitions. For further guidance and advice regarding your retirement from running your own business, please contact Justine on 0161 761 4611 or by email: justine.harrishughes@whnsolicitors.co.uk
