YOU want to sell your business but how do you want to sell it? I
If the business operates through a limited company, 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’s a share purchase?The buyer acquires the entire corporate entity - assets and liabilities - and assumes responsibility for the company with a clean break for the seller. Provided 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’s an asset purchase? With an asset purchase the issue of exactly which assets, rights and liabilities 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 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, 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.
* 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, make sure you understand the basis of the offer, how and when it will be paid and how much you’ll end up with after tax and expenses.
* 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’s 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 an ‘I owe you’ from buyer to seller. 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 carry interest or be interest free. Tax treatment of loan notes can be complex but can be beneficial to a seller so it’s advisable to take tax advice.
* What’s an earn-out? This means 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. Do this early and prior to agreeing details which may be legally binding. Make sure your accounting records are up to date and if the purchase price you’ve agreed is to be adjusted against completion balance sheet targets; make sure you’re agreeing realistic targets. Your accountant should advise on the preparation of completion accounts or recommend an accountant who can, and help with tax planning. If you’re planning on retiring post-sale, they may 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, but the sooner you start getting ‘sale ready’ the better the chance of achieving the price you’re looking for and the process being smooth and less stressful. Collate relevant business and customer contracts, employment contracts, leases, bank documents, accounts and management information and ask appropriate questions of relevant people, including 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 clients and customers are engaged and on up-to-date terms and conditions.
* Instruct a lawyer with relevant experience in mergers and acquisitions. There are plenty of advisors who may ‘dabble’ outside their specialism but when you’re selling what may be your life’s work it’s not worth the risk.
* For more information email corporate solicitor Brad Stewart at LCF Law at bstewart@lcf.co.uk or call (01274) 848 800.
LCF Law has offices in Bradford, Ilkley, Leeds and Harrogate. Visit lcf.co.uk
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