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Sale of Business Assets or Sale of Shares?




Background

We are often asked by company owners looking to sell their business whether they should sell their business assets or the shares in the company. The answer varies, so here are some of the factors that need to be considered.

Why a share purchase?

This is a really easy answer as you sell everything and therefore it is a much cleaner sale and you retain nothing, as a rule.  Usually you can get Entrepreneur’s Relief on the Capital Gains Tax due above the basic allowance. Therefore you only pay 10% tax on the proceeds, if you meet all the criteria.

You need to ensure first that all of the shareholders are happy to sell (or perhaps are compelled to do so by a shareholders’ agreement) and that the Buyer is happy to take the responsibility of inheriting all of the Company’ history.

One of the key advantages, for the Buyer, is that there is no TUPE (Transfer of Undertaking (Protection of Employment) Regulations) involved, as the employees remain employed by the same employer, unless they are later required to transfer to the Buyer’s own separate company and adopt different contractual rights, which is when it gets tricky.

If you have cash in the Company, you can either add it to the sale price (taking advantage of Entrepreneurs’ Relief) or you can dividend it out or even pay it into your pension fund before the sale.

If you have key favourite assets you can retain them, such as your mobile phone and number, your car, your laptop or even your favourite chair or that picture of your grandfather. 

Why not a share purchase?

The Buyer may not want all of the baggage and history which goes with the shares in the Company, as he would be “inheriting” everything, including historic CCJs, and contracts with suppliers, disputes with the landlord etc.  

Therefore, when selling shares, the due diligence process can be tiresome, with a heightened need for the Buyer to be very particular about the degree of care to be taken to check everything and for the Seller to disclose everything.  This risk is also usually reflected in more detailed warranties needed from the Seller.

The Seller may not wish to sell everything and may prefer to retain things like debts owed to the Company, certain assets, cash at the bank etc. However, these items can be “carved out” of the deal or taken in a tax-effective manner.

There was a time when most buyers’ advisers would advise against buying shares but this has changed. 

Why an asset sale?

An asset sale is very simple. No baggage, just the business as a going concern, usually client base, employees, assets but excluding money at bank and the past trading history.  Therefore due diligence is a more simple process.

You can retain an offset of losses to set off against your tax position.

Why not an asset sale?

TUPE will apply and all employees will be covered by it on the basis that their employment will transfer from one economic entity to another.  This definition of a transfer can include the transfer of one major piece of equipment, a major contract or even a building, if those employees’ employment is directly linked to the transfer of that asset.

You should bear in mind that ALL employees transfer, unless you take great care to provide a settlement agreement which should be agreed and settled in advance and refer to both the seller and the buyer.  Also claims from old employees and even personal injury claims will transfer.

You can get warranties and indemnities to cover most of this kind of thing but disclosure is essential.

If you have a lump sum of cash within the Company which does not transfer, the only way to get it out of the company is usually by dividends but you could simply close the company down and distribute assets, under Entrepreneurs’ relief.  Often it is better to sell shares and get Entrepreneurs’ Relief of the lump sum.

If you have unclaimed losses in the Company, the Buyer cannot use them when you just sell assets, and any advantage will be lost if the selling company ceases trading.

Summary

It is a good idea to take good advice well before you actually start to sell the Company, so that you can take good tax advice from your accountant at an early stage and marry that up with legal advice.

This advice will help you decide what you are selling and to get your ducks in a row to prepare for the sale.

It may be that the regular bookkeeper you use is not the right person for this one-off kind of advice.  It depends if it is covered by their normal area of expertise.

Preparation of the company for sale is hugely helpful, dealing with employee,  landlord and customer issues to resolve any potential claims and squaring up things like old stock and any other minor issues, to make sure that there are as few problems as possible to disclose.

Proving management accounts which are up to date and customer accounts which are paid up to a reasonable credit period shows good management.  Even providing a good set of company books, clean and tidy offices, and vehicles which are smart and clean will help a good sale.


Article Date: 13/12/2019

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