Preparing a Business For Sale

Preparing a business for sale for a business owner involves planning in advance to achieve the best price.

They will look to maximise earnings, which might include:

• Increasing margins where appropriate
• Cancel any expenditure which is for long term benefits

The lead time will depend on a number of factors:

• Current economic climate – pandemics are generally not ideal
• Market trends
• Is there a lot, or a little, of general merger and acquisition activity in the sector
• Prospects for the sector

What the owner manager will need to demonstrate to a potential buyer?

• Strong fundamentals of the business
• Strong and committed management team
• Good financial controls
• A strong brand
• An ability to find its ideal customers
• Reputation – tax and non-tax?
• Tidying up the balance sheet – surplus cash / investments, loan accounts, assets used personally

Sale to a third party

So, here, we are contemplating the sale to a third party – often referred to as a trade buyer.

A trade buyer might be a competitor or someone trying to get into a new market. This appears to be the case with Kranky’s

The purchaser might be prepared to pay a premium to get into the vendor’s market.

However, the potential purchaser will want to ensure that the current management team remains sweet. As such, they might consider awarding shares to the key members of staff or paying bonuses as a sweetener.

There are broadly two main sales routes in these circumstances:

• A sale of the business and assets by, in this case, Wonka Chocolate Limited; or
• A sale of the shares by Sir Willy Wonka

Generally, the latter is preferred by the Vendor, and the former is preferred by the Purchaser.

What happens, in the end, will depend on who has the stronger bargaining position.

Asset sale - Preparing a Business For Sale

General

In this scenario, it will first be necessary to identify (precisely) the assets and liabilities of the business.

This route should involve fewer warranties than under a share sale as the purchaser under this route will not be acquiring the company history (unlike if they purchased the company shares).

General tax consequences

Here, the Company will sell the trade along with the assets. This will lead to a cessation of the trade for tax purposes.

This will result in the end of the accounting period.

Unrelieved trading losses will generally be lost

In addition, on the sale of property, there might be a capital gain subject to corporation tax. The same applies for any pre-2002 goodwill.

The sale of post 2002 goodwill and any other intangible fixed assets will generally give rise to a trading receipt.

One big potential issue the vendor might have with this route is the likelihood that it results in a double tax charge. Specifically:

• Firstly, within the company on the disposal to the Purchaser; and
• Secondly, when the goodies are paid to the shareholder – for example on a capital distribution in pursuance of a winding up.

Share sale

The alternative route is a share sale by Sir Willy to Kranky’s.

The main advantages could be summarised as follows:

• Avoids the double tax charge issue expressed above;
• Can potentially secure BADR on the disposal – effective rate of 10% (albeit the lifetime limit of £1m is now a shadow if its former self)
• Possible to defer the capital gain on disposal by receiving consideration in shares or loan notes
• Sir Willy could also arrange his affairs such that he was non-resident in the year he sold the shares (and remained outside of the UK for the full 5 years).

Structuring the share sale

The vendor might sell their shares for:

• Cash consideration:
  • Initial – taxable upfront
  • Deferred:
    • Ascertainable – taxable upfront even where contingency
    • Unascertainable – the right to receive future consideration is a separate asset (chose in action) under Marren v Ingles. Called an earnout. See next slide
• Consideration satisfied in shares:
  • Any CGT liability can usually be deferred under the share for share provisions – no disposal rule
  • Clearance
  • Base cost of new shares is equal to that of the original shares
  • Can disapply the rule if wish to crystallise a gain to, say, use BADR
• Consideration satisfied in loan notes
  • To the extent that the consideration is paid in loan notes – then the gain is deferred
  • Mechanism is different for Non-Qualifying Corporate Bonds and QCBS
• Mixture

Earn-outs

Coming back to earnouts.

These are a good tool where there is a price gap between the vendor and the purchaser.

An earnout deal typically involves the vendor receiving a fixed sum on completion – further sums being paid later depending on a formula based on the business’ results.

The seminal case is Marren v Ingles. The right to the future sum is an asset in itself. This right is valued and the value is added to the proceeds received by the vendor.

As such, where we have an earnout, we bring into account:

• Any cash paid upfront or is ascertainable
• The value of any earnout right

If you would like to talk to ETC Tax about preparing a business for sale, then please get in contact. We are here and ready to advise you.