Most small to medium sized businesses are sold through the sale of shares or assets.
The major question to be addressed will be whether a sale of shares in the company or a sale of the trade out of the company is the preferred route? Tax will be a major consideration in the choice between the two.
The first significant question will be, are there major assets on the balance sheet that are not wanted by the purchaser, pointing to a trade sale rather than a share sale?
Secondly, assuming that you want to qualify for Entrepreneur’s Relief (ER) are there any plans to defer any part of the consideration such as loan notes or earn out clauses? If ER is sort, qualification of shareholders and time periods must be reviewed before sale plans are finalised.
If a trade sale is planned , this will leave the original company cash rich. The shareholders may then choose to liquidate the original company triggering their ER or keep the company as an investment vehicle, selling this within 3 years to qualify for ER or retaining it as a quasi pension fund.
Deferred consideration is often used to bridge the gap between purchaser and vendor expectations. Purchasers may not have the agreed consideration available on day one, so an agreement is reached to pay over a period of time or a proportion of the payment is conditional upon results achieved. In either case, part of the payment is deferred. Commonly, the purchasing company will issue loan notes which are redeemed at an agreed rate over a period of time.
The tax rules relating to capital gains were changed in 2010. The system now in place means that that you must qualify for ER at the date any loan note is redeemed. Your choice is to pay the entire amount of capital gains tax at 10% up front, or if you no longer qualify for ER (no longer an officer or employee of the company) at the time the loan note is redeemed, you face a 28% capital gains tax bill. There is an alternative, you can make an election to HMRC regarding the way in which you would like to treat your ER/Capital Gains tax and you have 2 years in which to make your decision.
The earlier you take professional tax planning advice relating to a possible sale, the better. When negotiating with a vendor both the type of sale preferred, the timing of the consideration payments and the capital gains treatment have very significant implications for your tax bill.
If you are considering purchasing a company, similar considerations arise. In general terms, purchasing the trade from a company will allow corporation tax reliefs for amortised goodwill, simpler due diligence and legal requirements and allow you to purchase only those assets you are most interested in. Again, early tax advice in any transaction is essential.
If you would like to discuss your plans please call Graham Buckell on 01332 365855 or email grahamb@batesweston.co.uk or contact your usual Bates Weston partner.
This advice is general in nature and you should take no action without consulting your professional advisors.
