Time to Harvest: How to Extract Maximum Value from Your Business Success

Building a successful business takes years of hard work. You’ve invested your time, energy and money into making it work, and hopefully that hard work is now paying off.

But once your business starts generating healthy profits, there’s another question to consider

How do you actually get the value you’ve created out of the business?

This is where profit extraction comes in.

Whether you’re taking money out regularly, building towards an eventual sale, or simply making sure you’re not leaving more tax on the table than necessary, having a plan can make a significant difference.

By working with our clients to look at the bigger picture, we help them to understand their options and identify a tax-efficient approach to extracting profits that works alongside their wider personal and business plans.

It’s not just about taking money out

For many business owners, the instinct is to leave profits sitting in the company. There can be good reasons for doing this, particularly if you’re planning to reinvest in the business, build up a cash reserve or fund future growth.

But there can also come a point where you need to think about unlocking some of the value you’ve created.

The right approach will depend on your circumstances, including your company structure, personal income, future plans and the amount of profit available.

This is where talking to an accountant, like Forth Accountancy can help. At Forth Accountancy, we look at your individual circumstances and future plans to help determine whether retaining profits, taking dividends, salary or another approach may be appropriate, and consider the tax implications of each.

That’s why profit extraction shouldn’t be an afterthought. It should form part of your wider financial and business planning.

Salary and director remuneration

One option is to take money from your company through salary or other forms of director remuneration.

Salary can provide a regular personal income and may be particularly useful for covering your day-to-day financial needs. It can also have implications for National Insurance, income tax and the company’s corporation tax position.

The important thing is to look at remuneration as part of the bigger picture rather than deciding how much to pay yourself in isolation.

We help our clients consider how their remuneration fits with their overall tax position, both personally and within the business, and work with them to identify an approach that is appropriate for their circumstances.

Your personal tax position and the company's position are connected, so what works well in one year may not be the most efficient approach in another.

Dividends

For owner-directors of limited companies, dividends are another common way of extracting profits.

Unlike salary, dividends are paid from available post-tax profits and are subject to dividend tax rules rather than employment income tax.

That doesn’t automatically make dividends the better option.

The most tax-efficient balance between salary, dividends and leaving money within the company depends on your individual circumstances. Changes to your income, other sources of earnings and tax rates can all affect the outcome.

This is why we work with our clients to look at the different options available and the tax implications before they make decisions about extracting profits, helping them identify a tax-efficient route that works for them.

It’s also important to remember that dividends aren’t simply money you can take whenever you like. The company needs sufficient distributable profits, and the correct procedures need to be followed.

What about the money left in the business?

Sometimes the best decision is not to extract the profit at all, at least not yet.

Retaining profits can give your business a valuable financial cushion. It could help you invest in new equipment, recruit, expand, manage quieter periods or take advantage of opportunities as they arise. The key is knowing why you’re retaining the money and having a plan for it.

If your company has accumulated significant cash reserves over several years, it may be worth reviewing whether those funds are still serving a useful purpose within the business.

We can help clients review their financial position and consider whether retaining profits supports their plans, or whether there may be a more appropriate way to use or extract some of that value.

Think beyond this year's tax bill

Tax efficiency matters, but it shouldn't be the only consideration.

A decision that saves tax today might not be the best decision for you personally or for the future of your business.

For example, if you’re considering selling your company in the next few years, the way you extract profits and structure your finances could form part of your wider exit planning.

That’s why it’s worth thinking about profit extraction before you need to sell or take a significant amount of money out. Good accountants, like ourselves, work with our clients to look at the longer-term picture, helping ensure decisions made today take future plans into account.

Planning for an eventual exit

If selling your business is part of your long-term plan, you shouldn’t wait until you’re ready to put it on the market before thinking about what happens to the value you’ve built. Exit planning can involve much more than finding a buyer and can take 1-2 years to happen.

You may need to consider:

• How much your business is worth

• What you want to receive from the sale

• How much cash you want to extract before an exit

• The tax implications of different options

• Whether the business is ready to operate without you

• How you want to structure the sale

• What you want your personal finances to look like afterwards

By helping our clients early on with business sales and understanding the financial and tax considerations involved and planning ahead for the transaction gives everyone more opportunity to consider how the business is structured, how profits are extracted and what the eventual sale could mean for you personally.

The earlier you start thinking about these questions, the more options you’re likely to have.

And what if you're looking to acquire a business?

Planning isn’t only relevant when you’re selling for some business owners, growth may mean acquiring another business. An acquisition can create significant opportunities, but it also requires careful consideration of the numbers and the tax implications.

Before committing to an acquisition, it’s important to understand the financial position of the business you’re buying, how the transaction could be structured and what it could mean for your existing business.

At Forth Accountancy, we support clients with business acquisitions, helping them work through the financial and tax considerations so they understand what they are taking on and can make informed decisions.

Whether you’re looking to sell or acquire, involving your accountant early in the process means the financial and tax implications can be considered from the outset.

There isn't a one-size-fits-all answer

This is one area where a generic online tax calculator or rule of thumb can only take you so far. Two business owners with similar levels of profit could have completely different circumstances and, therefore, completely different approaches to extracting that profit.

The right strategy needs to consider you, your business and what you’re trying to achieve.

It might involve a combination of salary, dividends, pension contributions, retaining profits or planning for an eventual sale. And the most appropriate approach can change as your circumstances change.

That’s why we don’t simply look at the tax position in isolation. We work with our clients to understand where they are now, where they want to be and how their financial decisions can support those goals.

Don't make profit extraction decisions alone

Growing a profitable business is an achievement but deciding what to do with those profits isn’t always straightforward.

Before you take money out of the business, it’s worth talking to your accountant. There are different options available, and the most appropriate approach will depend on your circumstances, your business and your plans for the future.

An accountant can help you understand the tax implications of different options, whether that’s salary, dividends, pension contributions, retaining profits within the business or planning ahead for an eventual sale.

The important thing is to understand your options before you make a decision. What looks like the obvious choice may not always be the most tax-efficient or appropriate one for you.

At Forth Accountancy, we can help you understand those options, work through the tax implications and identify a tax-efficient route for extracting profits. And when the bigger picture involves selling a business or acquiring another one, we can support you through those financial and tax considerations too.

A conversation with us before making those decisions can help you make informed choices and get the most value from the success you’ve worked so hard to build.