There are several books sitting on my bookshelf that I have never felt overly compelled to read. One is a biography for Warren Buffett and another is Richard Branson's 'Screw it, let's do it – Lessons in Life and Business'. I am sure those books are interesting to read, and they probably paint a much more exciting picture of cutting a business deal than the reality.
The purpose of this Tax Digest is to consider:
- the process and planning that may be required to prepare a business undertaken by a company for sale;
- the tax implications that may arise when preparing a company for sale; and
- the tax implications of selling a business.
Whilst the tax focus relates to the preparation of a company for sale and the tax implications of that process for a company, this Digest includes points that may be useful for unincorporated businesses and limited liability partnerships also.
This Digest also touches on some of the personal considerations of a vendor selling their company, the changes to entrepreneurs' relief/business asset disposal relief and the need to consider the vendor's wider needs, for example retirement planning and estate planning.
Preparing for sale
Some clients will build a business with the intention of selling it, or in some cases floating it. Having such intention at the outset of the business journey encourages defining the business plan, strategy and marketing at the outset. The business will be developed with a clear strategy, normally for between three and five years. There will be clear values and a mission statement that is reflected in internal and external communications. There will be key performance indicators to measure that strategy and a personal development plan to tie the employee's objectives into those of the company. The business will religiously maintain its corporate governance, and professional advisers will be brought in as appropriate to ensure risks are minimised and value is secure.
These clients are rare. The more common client wishing to sell their business, may have built the value by accident, be looking to retire or is looking to the family's younger generation to take it over. Each sale will be different and to maximise value will need consideration significantly ahead of a sale. Ideally, the preparation for sale should start at least three years before the intended sale. The period may be shorter where the purchaser knows the business and risks involved, ie the business is sold to the management team.
Assuming a client has indicated they would be interested in selling their business in a few years' time, an opportunity arises to consider what that disposal would look like.
Knowing the client's exit strategy will help determine the advice to be given.
An unconnected purchaser will want the business to increase in value in their hands. If the vendor intends to sell to an unconnected person, such as a venture capital trust, and they are integral to the performance of the business, they may have to be prepared to remain working in the business (normally through an earn-out arrangement).
If it is known that the vendor wishes to cleanly exit the business at the point of sale, it is likely they will need to put in place a management team. If that team can work without significant guidance from the vendor, the vendor would have achieved the ability to exit at the point of sale. However, to entice the right management team may also involve incentivisation, such as an enterprise management incentive share scheme. Also, an entrepreneurial management team may become part of the exit strategy.
If the intention is to sell to the management team, the requirement to remain in the business after the point of sale may be less. The management team may have their own ideas on how they can grow the business, although with change comes potential risks. Whilst the vendor may agree the sale with the management team, they will also wish to retain some control over the business.
Contents of this Tax Digest
- Selling your trading company
- Preparing for sale
- Reorganisation ahead of sale
- Sales process
- Sales of shares or business
- Business asset disposal relief
- Earn-out arrangements and deferred consideration
- Company purchase of own shares
- Vendor-initiated management buy-out
- Enterprise management incentive schemes
- Business premise ownership
- Retirement planning
- IHT planning