Retirement Planning for Brokers

Business and Tax Considerations

Agenda

• Planning for Retirement – start early

• Succession/ exit mechanism

• Sale/Investment process

• Valuation & Due Diligence

• Sales structures

• Tax planning & reliefs

• Capital acquisitions tax

• Incorporating an existing sole trader business

Planning for Retirement – start early

• No matter what stage you are at early planning for succession/exit is the key

• Consider important issues for you first – e.g. family circumstances, cost of living plans, etc.

• Consider tax planning issues – proactive rather than reactive

• Consult with advisors

Planning for Retirement – Overview

ProcessStakeholders

to be considered

What is the strategy?

Specific Tax Matters to be considered

Planning for Retirement - Stakeholders

Stakeholders to be Considered

• Senior management and employees

• Family

• Clients

• Bankers

• Yourself!

Planning for Retirement - Taxation

What is the Strategy?

• Tax proactive rather reactive

• When looking at the profit or value, the key is to focus on profit/value after tax.

• Consider longer term objectives versus shorter term tax savings.

“The hardest thing in the world to understand is

the income tax”- Albert Einstein

Succession/ exit mechanisms

Exit strategies for a Brokerage include:

➢Transfer the business within the family

➢Trade sale/merger with a third party

➢Wind down and liquidation

In the case of Financial Brokers a sale of the client book (i.e. business on hand) is the most common exit

While wind down is always an option it is often not the best exit strategy

Succession exit - mechanisms

A “book of clients” can be acquired through merger/acquisition

Price paid will be determined by the ‘value’ of the current income from these clients as well as an assessment of the likelihood of future business

The associated benefit should be subdivided into:

➢Entitlement to a defined future income stream from client list (Financial Asset)

➢Likelihood of future income from these clients (Goodwill)

Sale/Investment Process

Appoint

financial

advisors

Preparing

the

company

Initial

valuation

Tax

Planning/

StructureDrivers for exit

Initial Evaluation and Preparation

Do we

proceed?Marketing and negotiation

Initiate

sales

process

I.M. /

Buyer

Research

Price / deal

Negotiations

Presentation

/ Due

Diligence

Potential

buyer

interaction

Finalise I.M.

/ Market

Assessment

Finalise deal

structure

C O M P L E T I O N

Buyer due diligence Vendor Team Legal

Employee issues and

service contracts

Detailed review of

IM

Financial structure and

working capital requirements

Commercial/operational

due diligence

Financial Projections

Confidentiality

Maximising value

Successful completion

Confidentiality and

Exclusivity

Heads of agreement

Sale and purchase

agreement

Legal due diligence

Financial and tax

due diligence

Tax structuringLegal, environmental, and

pensions due diligence

Valuations

Some of the most frequently used include:

Asset based valuation

Discounted future cashflows

Earnings basis

Earnings Basis

• Historical financial performance

• Projected financial performance

• Concept of maintainable earnings

• Investigate potential add backs to maintainable earnings

• Establish the multiple

Earning based valuation for Brokers

Establish what Recurring Commissions attach to the client list to be acquired/sold

Apply a Persistency Rate

Establish the Net Present Value of the future cash flow stream

Form a judgement in relation to likelihood of future additional business from client list

OR

Pure Multiple of Recurring fees

Usually an element linked to client retentions

Initial Evaluation & Preparation

Get Organised

• Books and records

• Completed audited financial statements and reliable management accounts

• Projected financials and related assumptions

Due Diligence Items

• Quality of Information

– IT / MI systems capability and capacity

–Effective and accuracy

• Tax

• Compliance / exposure

• Planning opportunities

Due Diligence Items

Quality of Earnings

▪ Revenue recognition

▪ Client profile, policies types and persistency rates

▪ Verification of EBITDA adjustments

▪ Operating risk analysis

▪ Maintainable earnings

Sale Structure

1. Owner A sells his shares in Company A to Owner B for cash

OWNER A OWNER B

OWNER A OWNER B

Shares in Shares in

CompanyA

CompanyB

Cash CompanyB

CompanyA

Shares in Shares in

CompanyA

CompanyB

Sale Structure

2. Owner A sells the business of Company A to Company B for cash

OWNER A OWNER B

Shares in Shares in

Tax Planning and Reliefs - Retirement Relief

Retirement Relief - A relief from CGT - Key Conditions

• Relief limited to lifetime proceeds –

➢€750k aged under aged 66 (€500k aged 66+)

➢To a child unlimited under aged 66; €3m aged 66+)

• Seller aged over 55

• Has owned business for at least 10 years

• Has owned shares in a family company for 10 years

• A working director for at least 10 years - full time working director for 5 of those years

• Over €750k Limit, relief does not apply - some scope for marginal relief if over €750k

• Watch for non chargeable business assets e.g. Investments

Tax Planning and Relief -Retirement Relief

Where Retirement Relief can be applied

• Sale of the goodwill to a third party

• Transfer of the business by way of gift or part gift

• Liquidation of a company, where cash has built up from trading or sale of undertaking – Watch timelines

• Claw back conditions where the retirement relief to a child is claimed

• Finance Act 2017 has imposed certain restrictions

Tax Planning and Relief - Entrepreneur relief

A reduced rate of CGT - 10% rate (Normal rate 33%)

Applies to:

• Unincorporated businesses: Owned for 3 out of the 5 years before sale

• Shares in companies: Owned for a continuous period of 3 out of the 5 years before sale

• Minimum 5% shareholding

• Minimum working requirements

• Excluded business – holding of investments/developing land

• Lifetime limit of €1m on gains

• Apply irrespective of size of proceeds

Tax Planning and Relief

Tax outcome varies depending on the structure

• Sale of the shares in the company for cash

• Sale by the company of the business

➢Company remains with the cash proceeds in the company

• Sale of business by a Sole Trader

Tax Consequences of Sale – Limited Company

Sale of Shares in company for cash

• Retirement relief – Full or partial relief from CGT

• CGT @ 10% Entrepreneur relief up to €1m of gain (with conditions)

• CGT @ 33% over €1m

Tax Consequences of Sale – Limited Company

Sale of Business of Company

Tax payable by the company on the sale of the business CGT @ 33%

Followed by liquidation of company with cash paid out:

• Retirement relief – Full or partial relief from CGT

• CGT @ 10% Entrepreneur relief up to €1m of gain

• CGT @ 33%

• Watch timelines for ceased to trade followed by liquidation

Tax Consequences of Sale – Limited Company

Sale of Shares versus Sale of Business

• Sales of shares generally more tax efficient

• Balancing buyer’s deduction position

• Higher legal costs involved in share sale

• A complex process involving extensive warranties and indemnities

Tax Consequences of Sale – Sole Trader

Sale of Business by a Sole Trader

Goodwill – liable to CGT with relief

➢Retirement Relief,

➢Entrepreneur Relief

Future Stream of Income – liable to Income Tax

➢Depends on income levels

➢Max rate of income tax 55%

Alternative Structure on Exit - Buy back of shares

Company buy-back of shares –

• Company has the funds to buy-out exiting shareholder

• Exit with family member taking over, or management buy-out

• Strict conditions to be met

Other Considerations -

• Top-up pensions for exiting shareholder

• Termination payment for exiting shareholder

Capital Acquisitions Tax

Business Property Relief – Transfer to next generation

• Value of the business for gift tax purposes is reduced by 90%

• Conditions re length of ownership; qualifying assets; business must transfer as a going concern

• Where Retirement Relief & Business Property Relief both apply, a transfer to next generation can be very tax effective

Incorporating an existing Sole Trader Business

• Tax reliefs which can be lost e.g. Retirement Relief if less than 10 years to potential exit from

Business

• Tax reliefs can be preserved by transferring entirely for shares – not possible if significant debt in business e.g. bank loans/overdraft

Contact

Suzanne O' NeillMidlands Partner

RSM Ireland

Birr Technology Centre, Birr, Co. Offaly

T: +353 (0) 57 912 5662 E: soneil@rsmireland.ie

Thank youfor your timeand attention