The Art of Buying & Selling a Business
Everyone starts a business with the intention of making a gain, this could be a gain in the form of profits or a gain achieved by selling your business. An astute entrepreneur always plans an exit strategy for his business, this makes investors confident about the business and assures that if required the business has an exit plan in place. To read more about exit strategies click here.
Selling a business can be a complicated process. The process can get confusing, from finding a buyer to valuing your business.
You could be looking to sell your business
- If you are planning to retire
- If it’s your exit strategy
- You are looking to make a gain
- Its time for a change
How does the sales process work?
Quick steps to sell your Business
- Value your Business
- Polish your Business Financials (Speak to a competitive Accountant in London or an effective Accounting firm)
- Make sure to set up an Exit Strategy in advance
- Find a broker who can help you find buyers and negotiate a deal
- Shortlist serious buyers
- Finalize contracts and the sales process
Where should I start?
When it comes to selling a business, the whole process may seem a little bit daunting. Here is a comprehensive guide that is prepared specifically for potential sellers. And it applies to companies as well as their shareholders.
A company or its business including assets can be sold, the way you sell it can vary. Some of the ways in which you can sell your business are:
Share sale: this is a situation where the company is either sold outright or in part. As such, the shareholders go-ahead to dispose of the shares to the new company owner, resulting in the shareholders experiencing a capital gain or loss depending on the transaction. To learn more details about capital gains tax click here.
Asset sale: in this situation, the company sells all the assets, trade or business. As a result, the company remains with the seller, however, due to the sale of the assets the company itself incurs a capital gain or loss after the transaction. The company is obligated to pay corporation tax that is imposed on the proceeds. The corporation tax charge is applicable unless the company can offset the corporation tax using capital losses for the prevailing year trading losses, the trading losses are carried forward only if they were created sometime after April 2017. Once the company has been taxed on the gains, the shareholders face the prospect that comes with double taxation on drawing out the company’s proceeds. This is where the winding up of the company takes place to extract all the remaining capital gains and profits.
Taxation can get complicated once a business is sold, our in-house personal tax accountants or business accountants should be able to provide smart and effective solutions to your accounting and tax problems.
Decisions on what to be sold
Before arriving at the final decision to sell the company or its assets there are a few questions to be answered.
- Is the company being sold still intact?
- Do the assets (land and buildings) involved in the transaction have redevelopment potential?
- Are the assets supposed to be disposed of to the highest bidder on a breakup basis?
- Are any additional assets being disposed of in tandem with the company?
- Will the additional assets become part of the whole transaction or will they be transacted separately? Is there any requirement for pre-sale reorganization?
- What will happen to the surplus cash balances?
- How will the intercompany director’s loan balances get cleared?
- Are there any tax consequences attached to writing off loans?
- Are the sellers willing to help the buyer settle down after the sale?
What is the nature of the business being carried on?
- Consider the type or scale of all activities being undertaken
- Do all these activities qualify for inheritance tax purposes or trade for capital gains?
- Is this just a property or some sort of investment business?
- Does the business have surplus cash on deposit?
- Put into consideration the effects arising from the surplus cash on the trading status (this is likely to affect CGT Entrepreneurs relief as well as IHT Business property relief).
About the existing business
Has the business experienced any capital or trade losses brought forward?
As a Business, you need to be aware of the following facts:
- That the share sale is likely to preserve the carried forward trading losses.
- Any company having capital losses will prefer selling its assets in order to mop up all capital losses.
Does the business/company have employees?
- The current employment contracts or agreements are protected under what is known as the Transfer Undertakings Protection of Employment Regulations (TUPE). But this protection applies where the business or company is sold (as a going concern). Speak to your accountant, they should be able to refer you to a good employment lawyer.
- TUPE doesn’t apply where share sales are involved provided that the employing company doesn’t change anything. This means the new business owner will not be able to change the existing contracts without consulting the employees of the company.
Valuation: Perform or obtain a valuation
- The first step when preparing a valuation is to come up with what is being sold and then draft up sales particulars.
- Some businesses can be sold along with their surplus assets such as land and property. Their capital value (for development purposes) may turn out to be somehow different compared to their carrying values in the accounts. Therefore, it is a good idea to consider their values, because they are actually different from the share price.
- Some businesses have special earnings that may affect their value. For instance, hotels are valued according to the number of letting rooms, professional practices are valued based on their multiple numbers of the fee earnings or restaurants are valued on the total number of covers they have.
- It is always difficult to value goodwill given that it could be intrinsic to the company, adhering to the surplus assets may turn out to be inseparable from its owner. It is always wise to consider the nature of goodwill as a way of finding out if it is valued appropriately. This is due to the fact that business valuation models like the capitalized maintainable earnings use a method that value businesses in their entirety, making it not necessary to establish the values of assets such as goodwill separately. Anyway, it all depends on the nature of the business.
Share sale/asset sale?
Share sale Seller’s planning points:
- Some shareholders have a tendency of favoring a share sale simply because it avoids double taxation. In addition, they stand a chance to qualify for CGT relief.
- Capital gains from the sale of shares can be deferred through proper planning but gains may also be mitigated if at all an individual decides to leave the United Kingdom and become a non-resident for tax reasons.
- The seller needs to take care of the terms laid down for a share sale especially where the considerations involve the inclusion of shares in the newly-acquired company. Also, the seller can take such measures when there’s an earn-out due to both employment-related securities and anti-avoidance provisions.
- In case the sales considerations are Deferred or subject to earn out, then the seller will try and secure loan notes to act as security (all these are subject to negotiation).
- The gain can also be deferred where notes are considered to be Qualifying Corporate Bonds or non-Qualifying Corporate Bonds unless an election is held to determine if Entrepreneurs’ Relief can be claimed on the basis of the disposal if necessary, conditions are met.
- If the company comes out as the seller and then the sale qualifies, it will be able to claim relief, especially for the disposal as directed by Substantial shareholding exemption (SSE).
Buyer’s planning points
- The buyer may only prefer a share sale on condition that it preserves the existing trade losses for the company.
- The trade may be incorporated into the existing company but it may become restrictive on the number of losses that are available to push forward.
- The share purchase becomes more complicated because the due diligence will have to be performed in order to cover for the company while considering its trade and business. As a result, the buyer might become responsible for the company’s tax history and liabilities. This means warranties, indemnities, and covenants will have to be negotiated, drafted and agreed upon to cover the company.
- Buyers will favor the purchase of assets as this way, they will be able to claim for capital allowances and acquire immediate tax relief post the sale, on write-downs of the stock and other assets.
- Since July 2015 buyers could no longer get tax relief for the amortizing capitalized goodwill. But there is the availability of a 6.5 per cent fixed rate on writing down allowances for the goodwill including other intangibles assets created or obtained by the company after 1 April 2019 (where they are obtained alongside the qualifying intellectual property assets).
- Due diligence is somehow straightforward when it comes to the asset sale because the buyer doesn’t need to take on the older business liabilities. But every asset will have to be placed under consideration separately.
Whatever process you follow to buy or sell a business, you need to think carefully about the tax and legal consequences. It is advisable to hire a tax accountant or a specialist business accountant who are fluent in the process of financial valuations. Our in-house accounting team are trained in the process of helping owners sell their businesses or buyers acquire businesses for their portfolios in a tax-efficient way. Speak to us to learn more.
Clear House Accountants are specialist Accountants in London. We have been working with buyers and sellers helping them perform valuations, due diligence and tax planning for buying and selling businesses across the United Kingdom.
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