Recent analysis has shown that over a fifth of SME directors are now over the state pension age of 65, with 12% being aged over 70. What implications does this have for UK plc and for the individuals involved? Christian Annesley reports.
The research is in: 21% of small business directors are over retirement age, and more than half of those are over 70 to boot.
What does it mean for those leaders who are putting off retirement in favour of ploughing on – and for the economy, too?
Accounting firm Moore Stephens, which pulled out the numbers and delivered the findings, said that one issue it does raise for small business owners is to try to plan for any retirement well in advance since the process can often take longer than expected.
Many reckon that preparing a business for sale and seeing that sale through can take three years or more. So it follows that any advance planning for retirement can allow business owners to leave the company when they are ready without putting strain on its ongoing growth, and especially where restructuring is required.
Tax and planning
Similarly, tax arrangements also need to be considered. For example, directors will need to look not only at the tax reliefs available, such as Entrepreneurs’ Relief (ER) but also consider that these reliefs may impact other incomes and investments. Setting up a trust may be beneficial in some cases, such as reducing inheritance tax bills for relatives, but it still needs to be planned well in advance.
Mark Lamb, head of owner managed businesses at Moore Stephens, argues that business owners are often great at making their businesses a success, but don’t always make a success of planning for retirement.
“Not putting an exit plan in place long before retirement can lead to a business owner having to work much longer than they had hoped – even past the age of 70,” said Lamb. “Poor planning can mean a sharp loss in profitability as a business moves from one generation of owners to the next.
“By thinking ahead, SME directors can get themselves into a place where they are prepared for their departure from their businesses and comfortable that they are leaving it in safe hands.”
A wider view
Others, however, argue that the growth of the over-65 leaders should be viewed in a wider context and is a cause for optimism rather than being necessarily negative.
Clinton Lee is an M&A adviser and argues that, since retirement age is an artificial construct, over 65s in leadership roles shouldn’t be viewed as creating a potential problem.
“Owners like Bernie Ecclestone and Rupert Murdoch don't continue to run their businesses because they need the money, or because they don't have a succession plan. They do it because they enjoy it. The narratives you often see in the media about ‘baby boomers’ and commercial opportunities related to this demographic are, in my opinion, driven by vested interests of business brokers and M&A advisers like me.”
Lee says the variable that really counts in relation to a business and its departing leader is not so much age, but how long-established the business is.
“When an older business owner asks me to assist with a sale, my first instincts are to verify that they have indeed reached the point where they are genuinely willing to write themselves out of the script and won't think twice. It's a lot more difficult to say goodbye to a business when you've been running it for 40 years compared with, say, 18 months. Some of your best friends work in the business and the business is such a big part of your life that there's little separation between business and personal life. “
But these businesses don't take longer to sell, Lee insists.
“In fact, better-established businesses attract more buyer interest as these businesses have proven themselves through credit crunches and dot-com busts and more.”
When it comes to valuation, the biggest implications are where the deal relies on the continued involvement of the departing owner.
But while there are many influences on the price a business can fetch, the owner's age isn't one of them, says Lee. “Staged exits – or exits with at least two separate equity events at different points in time – aren't a problem either, especially when the business has a full management team in place and is not reliant on the owner.”
When it comes to tax, Lee says that exiting owners are often tempted to wing it – but that’s a risk.
“The larger the value of the business, the more sense it makes to have a tax adviser on the team – they could suggest alternate ways of structuring a deal to ensure the vendor maximises total returns. Sometimes that can involve providing the buyer with tax advice.”
Lee says that as well as inheritance tax, capital gains tax and ER, all of which are complicated enough, there’s also the potential for some to sell the assets of the business rather than the shares. It’s possible in certain circumstances to construct the asset sale to spread the tax burden and take advantage of multiple years of CGT allowances.
“It might even suit a buyer to acquire assets rather than shares as there's subjectivity involved in how the total price is spread across various assets – the assets that depreciate – and the assets that don't. It may take the seller’s tax adviser to spell out to the buyer how best to benefit from the acquisition – and why.”
Are you over 65 and leading a business, or have advised people in this position? What do you make of this trend? Is it good for the economy, or storing up generational issues for UK plc?