Reaching Retirement? How to close your business cost-efficiently 

After watching your business fully flourish and bear the fruits of your investment, you may be contemplating how to cost-effectively shut shop after reaching the milestone of retirement. If your business is solvent and reaping profits, it’s vital to plan your exit route strategically to ensure that you select the most appropriate closure procedure and adhere to strict guidelines by seeking assistance from a licensed insolvency practitioner.

Upon approaching retirement, you may be overwhelmed with exit planning, from structuring pension payments, devising a plan of action for the legacy of your business and thinking deeper into your prospects following retirement. To facilitate your retirement master plan, you will need to unlock funds to help fulfil your goals, which calls for the effective extraction of profits through a Members’ Voluntary Liquidation.

What is a Members’ Voluntary Liquidation?

A Members’ Voluntary Liquidation is an exit tool for profitable businesses approaching the end of their lifetime due to the likes of owner retirement. If your business is solvent, a Members’ Voluntary Liquidation is typically the most cost-efficient procedure, providing that the business has around £25,000 in retained profits. If your company has significantly less in funds, dissolving the business may be a more cost-efficient route. For the business to be classed as solvent, it should be able to settle liabilities within 12 months.

A licensed insolvency practitioner will be required to navigate the process due to the complexities surrounding the distribution of funds. It’s vital to select a reputable insolvency practitioner experienced in the field as they will bear the responsibility of managing your funds throughout the liquidation.

The process will require disbursements which are smaller costs for legal notices, including the Gazette notice which displays your intention to close the business, opening up the door to any objections and sharing your intention to seize trading. You will also be required to pay a bond to protect you whilst your funds are in the hands of the insolvency practitioner.

How will my funds be treated from a tax perspective?

When distributing funds during a Members’ Voluntary Liquidation, this will be treated as capital, rather than income and will, therefore, be subject to Capital Gains Tax, rather than income tax as with dividends. This is what makes a Members’ Voluntary Liquidation appealing for those with significant profits to extract. In addition to this, you could benefit from Entrepreneurs’ Tax Relief, further reducing your tax bill. If you qualify for the tax scheme, you could benefit from paying a flat rate of 10 per cent in capital gains tax, up to a lifetime limit of £1 million. The limit originally stood at £10 million; however, this was reduced following the Budget Statement in April 2020 applying to disposals made on or after 11 March 2020.

This exit tool offers a cost-effective route to close your business, giving you the best chance at maximising profits, paving the way to retirement.

My business is insolvent – what’s the best route for me?

If your business is insolvent and therefore unable to meet its liabilities, you could consider a Creditors’ Voluntary Liquidation which is a formal insolvency procedure for businesses in the deep end. If your business has reached a sour end due to the accumulation of debt, this may be your best option which consists of winding up the company.

If you are struggling to identify whether your business is insolvent, a combination of the balance sheet and cash flow test can help illustrate the financial health of your business. In simple terms, if expenditure is more than income, combined with poor cash flow, the business may be in a troubling position and therefore insolvent, unable to repay debts. If your business is beyond rescue and you wish to pull the plug before stacking up any more debts, a licensed insolvency practitioner can initiate a Creditors’ Voluntary Liquidation, ensuring that the end goal is fair to both parties.

Take specialist advice before making any of the above life-changing decisions which could shape your future working life and consequentially, your commitments during retirement.

Retiring may not necessarily mark the end of your life in the business world; you can still dip your hands in by acting as a mentor figure or taking a shadow role in another business. If you decide to straddle in and out of retirement, you could consider sharing your industry experience as a veteran in the field or invest in businesses which may generate interest. Retirement doesn’t have to mean putting an end to your interest in the business world as you can watch your investments grow, mature and savour the wealth of time now available to you by making life an adventure and fulfilling the tasks you always put off.

Keith Tully is a partner at Real Business Rescue, business recovery and restructuring expert for businesses in financial distress and specialises in Members’ Voluntary Liquidations and Creditors’ Voluntary Liquidations to facilitate a cost-efficient exit.