10 June 2024

The current economic landscape presents a challenging atmosphere for small businesses. From government expenditure to day-to-day business planning, budgets are tight and expectations are moderate. With growth outlooks still uncertain, many business owners are being forced to reevaluate their plans, either focusing on efficiency to weather the storm or eyeing exit plans.

Here, Haines Watts Swindon owner Martin Gurney examines the strategies available for owner-managers in the year ahead to balance risk and opportunity from tax to investment.


Growth Planning in a Risk-Averse Environment

In the aftermath of a tough few years, entrepreneurs who have been through it all have come out with a new perspective. Culturally, we're witnessing a shift towards risk aversion among UK businesses, particularly those that have weathered recessions and the recent lockdown.

With borrowing and capital still scarce in light of ongoing high interest rates, the idea of investing to grow can seem risky. When talking to customers, we find that many businesses are choosing to prioritise financial security over expansion. This can mean:

  • Managing capital withdrawals strategically to maintain flexibility for operations
  • Postponing or simplifying future investment
  • Reducing hiring or focusing on retraining existing staff
  • Managing fixed costs to improve capital buffers


Acquisitions as Exit Planning

Given the diversity in the UK economic landscape, it’s inevitable that these factors will impact different businesses in a range of ways. For example,  the private equity market is growing, with restructuring and acquisition activities on the rise.

This is a common phenomenon during economic downturns where smaller businesses in distress can present an attractive acquisition opportunity for larger enterprises with more access to credit and dreams of restructuring and combining smaller organisations for efficiency and future resale.

For owners, this can either be a threat or an opportunity. Those who are tired of swimming against the economic tide may find the idea of a third-party buyout attractive, while others may prefer to maintain their independence. Indeed, while external acquisitions and mergers into larger groups can provide efficiencies of scale, they also risk changing the relationships that are the core asset of many small businesses.

Competitors who move into new ownership structures may have capital on their side, but this also provides the chance for smaller businesses to reiterate their core values and service levels to clients who value that approach.


Tax Planning Amidst Uncertainty

With economic uncertainty still a major concern, tax efficiency and retaining cash is essential for managing outflows. With the number of credit schemes and deductions having tightened in the last few years, owners are left looking at good old-fashioned tax planning.

  • Capital allowances, for instance, offer opportunities to invest in qualifying assets and reduce tax liabilities.
  • Pension contributions can provide tax relief for excess capital in the business and long-term financial security for owners
  • The difference between tax on salary and tax on dividends has narrowed over the last few years. For business owners, dividends might offer only a marginal tax advantage over salary at the lower end of earnings.

For drawing money out of the business, the lack of easy options available means that timing becomes the key advantage. For example, if you’re looking at a significant future expense, the time to plan for needing, say, £100,000 is at least two years in advance. This allows for more flexibility in timing bonuses and salaries to align with tax bands and reduce exposure.


Succession Planning For The Long Term

Given the challenges facing owners, it’s understandable that some may be considering how to dispose of their business. But for businesses considering an exit, the rules on passing on your company are still tightening. For example, the current 10% tax rate on business disposals, already reduced in allowance from £10 million to £1 million, might not be permanent.

As one of the main benefits for owners moving on, this can make the difference between walking away with the majority of your business value or losing thousands to tax. The earlier you start to think about exit planning, the more likely your chances of leaving on terms that suit your needs.

While the tax allowances remain, it is key to remember that crystallising this benefit requires a sale, which can be challenging in a market with expensive credit and limited buyers. If you start thinking about looking for acquisitions at the last minute, you may find a longer wait ahead of you than you anticipated.

This is one of the reasons that Employee Ownership Trusts (EOTs) have increased in popularity as a viable alternative to third-party acquisitions, but these bring their own complications.


Staying on Track in 2024

While headwinds remain, it’s important to remember that conditions are almost certain to improve with time. The difference between businesses that struggle and those that thrive is the ability to make the most of the opportunities available – your customers, your team and your unique position in the market.

This starts with the ability to understand your financials, mitigate potential risks and maintain enough capital flexibility to move when green shoots present themselves. Haines Watts advisors work with thousands of businesses, from one-man bands to international leaders in their fields, to help them get more out of their numbers. We can share best practices, advise on processes and ensure you have the data you need to stay in control.

To get more clarity on what the year ahead might hold for you, why not get in touch with one of our team?