Selling some of the shares in your successful small business can make sense, even when it’s profitable and growing. Also, if you are considering selling any of your shares it may make sense to do so sooner rather than later. That’s because it’s anticipated that in the Autumn budget the new chancellor will raise the capital gains tax they would have to pay after selling a business or part of it.

An increase in capital gains tax rates from their current level of 20% could make a big difference to the sums founders would expect to receive from selling their shares. There is also a possibility the Government will reduce business asset disposal relief, which allows people who own more than 5% of a company to sell their stake and pay a lower tax rate on their profits. Entrepreneurs lost significant amounts when the tax on the sale of businesses increased dramatically in 2020 via a reduction of the tax relief.

Of course, most founders running profitable businesses won’t be influenced to sell just by a change in tax rates. However, an increasing number of founders are seeking partial sales of shares, often called secondaries. This allows them to take some money off the table and still play a key role in running the business, leaving them in a position to continue growing their remaining share.

Now I’m not an accountant but given the potential risk of tax rises in the Autumn budget, I believe that for some founders it may make sense to take a partial exit now.

Cashing in on financial security

After a founder has fought hard to establish a profitable business, they may find that they’re worth a lot of money on paper, but they don’t have access to much cash outside of the business. Given how much time and effort they’ve invested in building the business from scratch, it’s reasonable for them to want some financial security and a partial sale of shares can generate significant sums whilst leaving them in charge.

I speak from experience. I co-founded HomeServe, the international property repairs group, from a bootstrapped startup. The company took time to find its feet, but I was able to take money off the table on several occasions. This gave me the financial security I needed without having to relinquish all of my shareholding in the business as it continued to grow. Once it established a recurring revenue model, the business went from strength to strength, and we never looked back. Eventually, my business partner took over the running of the company and I kept my position in the business until HomeServe (by then a FTSE 100 company) was sold to private equity company Brookfield in 2023 for around £4 billion. The decision to make a partial exit but retain a significant stake in the business proved to be the right one. 

Cashing out before the tax rises

Unfortunately, most Venture Capital and Private Equity funds won’t deal with secondaries. They worry founders will lose their motivation if they get the opportunity to take money off the table, stifling the growth of the business. Also, many funds can only make investments that qualify under the Enterprise Investment Scheme and secondary transactions don’t qualify for the tax relief it offers.

Too often founders are led to believe that their only option is a total exit, a route many are reluctant to take. It can be better for them, their employees, their investors and the wider economy if they stay. That’s why they should be encouraged to derisk while continuing to grow their businesses. Stable and financially secure founders and business owners will be highly motivated to finish what they’ve started. Hopefully, we’ll see more profitable businesses expand and succeed as a result.

But with the prospect of higher tax rates around the corner, it might be the right time for founders to consider taking some cash off the table sooner rather than later.