Corporate solicitor, Brad Stewart, from LCF Law provides advice to shareholders, directors, management teams, private equity, funders and investors. He has acted for businesses in a wide range of industries and has particular experience of dealing with the sale and purchase of dental practices, nurseries and Independent Financial Advisors, as well as advising on pension scheme lending and securitisation. Brad explains the best approach to take when selling a business:
Decide what you’re selling – you want to sell your business but how do you want to sell it? If the business operates through a limited company, then you’ll have the option of a share or asset sale. If you’re a sole trader or partnership, you’ll be limited to an asset sale. The buyer will have their own preference and the eventual structure will be influenced as much by bargaining position as tax planning, risk management and administrative ease. Both structures achieve the objective of the buyer gaining control of the business however, there are fundamental differences between the two and it’s always sensible to take tax advice before settling on one.
What is a share purchase?
The buyer acquires the entire corporate entity – both the assets and the liabilities – and assumes responsibility for the company ‘warts and all’ meaning a clean break for the seller. Provided that any property is held in the company’s name there should be no need to transfer the premises. Employee contracts should be unaffected. You may pay capital gains tax on the sale, but this could be reduced through entrepreneur’s relief.
What is an asset purchase?
With an asset purchase the issue of exactly which assets, rights and liabilities will transfer to the buyer will be a matter for the parties to negotiate. A buyer with a strong negotiating position will want to cherry-pick the assets they wish to take on and leave behind those that they don’t want. As the buyer tends to leave the seller with any undesirable assets or liabilities, together with any unidentified liabilities, the level of due diligence required tends to be lower. If you have employees, then the TUPE regulations will apply, and you’ll need to take employment advice. You’ll likely also need to deal with transferring the business premises to the buyer. In addition, if you’re selling the assets of a limited company, you’ll need to work out how to extract the cash and wind up the company, you’ll pay corporation tax on any profits made from the asset sale, and tax on sale proceeds withdrawn as a dividend.
Agree a price – Valuers and agents have various methodologies for valuing your business dependant on factors such as business sector and the economic climate but ultimately, it’s worth what someone is willing to pay.
When you accept an offer, you need to make sure that you understand the basis of the offer, how it will be paid, when it will be paid and how much you’ll end up with after tax and expenses. The offer might be for a set amount but is that headline figure contingent on what the company’s balance sheet looks like at completion and will the figure be adjusted if the balance sheet isn’t as expected?
How are you going to be paid? The simplest mechanism would be cash on completion but that puts all of the risk on the buyer and therefore they may look at other options.
What is deferred cash?
The cash could be spread over several years, but you as the seller will still need to pay the tax up-front. There’s also the risk that you don’t get paid which can be mitigated against by taking security or quasi security such as guarantees.
What are loan notes?
Another form of deferred consideration, in essence it’s an ‘I owe you’ from the buyer to the seller. They will usually be repayable in instalments in accordance with an agreed payment schedule or payment may be triggered by performance criteria. They can be secured or unsecured and can carry interest or be interest free. Tax treatment of loan notes can be complex but can be beneficial to a seller so it would be advisable to take tax advice.
What is an earn-out?
This would mean that you don’t get the full amount straight away and the amount that you eventually receive will be dependent on the performance of the business after completion – which adds to your risk that you don’t get paid what you’re expecting. It’s often the case that you’ll need to continue to work in the business after completion to help achieve an earn out target.
Talk to your accountant – It’s important that you do this early and prior to agreeing any specific details which may be legally binding or at least carry some moral force. Make sure your accounting records are up to date and if the purchase price that you’ve agreed with your buyer is to be adjusted against completion balance sheet targets; make sure that you’re agreeing realistic targets so that you get paid what you expect. Your accountant should advise you on the preparation of completion accounts or recommend an accountant who can. Your accountant may also be able to help you with tax planning which may inform the sale structure that you settle upon. If you’re planning on retiring post-sale, then they may be able to help in putting in place inheritance tax planning to deal with the sale proceeds.
Prepare for due diligence – A sale takes time, generally we’re talking weeks and months rather than days, but the sooner you start getting ‘sale ready’ the better the chance of achieving the sale price you’re looking for and the process being smooth, efficient, and decidedly less stressful. Collate relevant business and customer contracts, employment contracts, leases, bank documents, accounts and management information and ask appropriate questions of the relevant people including any professional advisors, insurers, co-sellers and directors, landlords and lenders for example, but you don’t have to tell staff straight away! Get your statutory filings and company books in order, make sure any clients and customers are engaged and on up-to-date terms and conditions.
Instruct a lawyer – Instruct someone with the relevant background and experience in mergers and acquisitions (M&A). There are plenty of advisors out there who may “dabble” outside of their specialism but when you’re selling what may be your life’s work it may not be worth the risk. You’ll likely need a team of advisors meaning at least an M&A lawyer, a property specialist, and an employment specialist and if the advice is going to be joined up it makes sense for all advisors to be under one roof. Given that post transaction you’ll likely be sitting on a substantial sum of cash, it’s also worthwhile talking to a private client lawyer to discuss options available to protect your wealth including inheritance tax planning.