HOW to…sell your business.

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This is a follow up to my post “The bigger picture – selling your business”. In that post I gave you tips on how to polish your business into an attractive product to be purchased by a rich buyer. In this post I’m going to briefly explain HOW you can sell your business. There are two main ways. Either an asset sale or a share sale. There are pros and cons to each but ultimately your lawyer should be able to advise you on the best method, having considered the nature of your business.

In a share sale, the buyer will purchase everything to do with a company including all assets and liabilities, known and unknown. In an asset sale, the buyer will purchase the assets which make up the business of a company. In the former, pretty much everything stays the same save that the company has a new owner, in the latter, the company will still exist but it will usually be an empty shell harbouring only those assets and liabilities that the buyer did not want to buy.

Below, are some key considerations that will be influential in determining HOW you should sell your business.

  1. Liability

In a share sale, due to the fact that the buyer purchases the shareholding in the target company, it inherits all of the assets and liabilities in the target company. This means that the seller gets to walk away from any problems with the company and the buyer as the new owner, takes them on. If a buyer wants to purchase the shares in a company but it is riddled with liabilities such as ongoing litigation, tax investigations etc, it will negotiate a discount in the price of the shares that it is purchasing to reflect the risk of these liabilities or it will negotiate indemnities from the seller. A seller indemnity is basically a promise from the seller to the buyer that if things go wrong with said liability, the seller will pay to the buyer a sum of money as compensation.

In an asset sale, the buyer can effectively cherry pick which assets it will purchase and which liabilities it will assume. For example, the buyer can refuse to assume tax liabilities but it may take on certain ongoing disputes which are inherent in taking on, for example, service contracts.

  1. Employees

Usually, in an asset sale, employees do not need to be taken on by the buyer, though commonly the seller will require the buyer to offer new contracts to all or most employees on terms that are substantially similar or identical to their existing contracts (including a recognition of prior service) so that the seller avoids wrongful dismissal claims from the employees.

In a share sale, the target company’s employees remain employed by the company because nothing really changes. It’s just a sale and purchase of shares!

  1. Reduced Complexity

As you’ve probably cottoned on, share sales are much simpler than asset sales. The only documentation you need is in respect of the shares that are being purchasing. In an asset sale, each asset will effectively require its own contract. For example, there will be separate transfer documentation for equipment, vehicles, intellectual property, licenses, permits and real property.

An asset sale may also trigger the need to obtain third party consents to the transfer of the assets due to change of control provisions in contracts. For example a permit contract may say that the seller “must obtain written consent before it can transfer/assign the right to the permit”. In selling the permit as part of the assets, the seller must ask permission before it can go ahead. For obvious reasons, third party consents can be a pain to obtain; it just takes one unreasonable so and so to hold things up! It is always best to, if you can, give third parties a heads up and assure them of any changes in advance. This will make negotiation a lot easier.

So, the important thing to understand about a share sale vs an asset sale is that one method involves taking EVERYTHING whilst the other allows you to CHERRY PICK what you want. The form of sale that is best for your company really depends on the nature of your business and what it is that you want to sell. There is a heading that I have not covered but which is the most important consideration of all and that is TAX. TAX can determine how much you receive on a sale of your business and it differs in a share sale or an asset sale. This is where experts must be enlisted. I once worked on a deal where, three days before completion the whole structure changed because of TAX. I couldn’t believe it…so many sleepless nights!

As with all my posts, I cannot emphasise enough how important it is to get your lawyers involved but even more so when you are selling your business – after all you want to get the best price right?

Hope you found this helpful! Please like and please share!

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HOW TO… pay yourself!

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When you are the owner of your own business, it is all about ensuring that you are paying yourself in the most tax efficient way. There are a few options and you should go through them with your ACCOUNTANT (yes you should have one of these). It will also depend on your legal set up (sole traders and partnerships, read no further but limited companies this is for you). Set out below is a basic guide of how you can pay yourself effectively in your limited company in the UK.

A The Elements

  1. Employee

As a director of a limited liability company, you are an employee for tax purposes. You will be paid a SALARY. This means that, as with all employees, you need to register with HMRC to use PAYE to pay your salary – full details can be found on the HMRC website HERE.

Your company (remember that it is a separate legal identity even if it is literally YOU) will need to deduct income tax and National Insurance Contributions (“NICs”), from your salary and pay these deductions to HMRC, on a monthly (or possibly quarterly if the amounts are low enough) basis.  The aim is to keep these outgoings as low as possible in order to fall within a low tax bracket, effectively reducing the amount of income tax and NICs that you pay.

  1. Dividend

A dividend is a distribution of a portion of a company’s earnings, decided by the board of directors, to a class of its shareholders. Dividends can be issued as cash payments, as shares of stock or other property.

A company’s net profits can be allocated to shareholders via a dividend, or kept within the company as retained earnings. Dividends attract corporation tax payable by the company and may also raise a personal tax liability in the way of income tax. The corporation tax liability is calculated and paid to HMRC at the end of the company’s financial year and takes into account the overall profit of the company and any dividends that have been made over the period. In this respect it is difficult to estimate the amount of corporation tax payable when the dividend is issued so BEWARE that you must ensure that the company has the available profit to make the net dividend payment AND the additional tax liability. If a company pays a dividend that cannot be supported by its profits then it is technically insolvent (AAAAARGH!).

The good news is that currently only higher or additional rate taxpayers pay tax on dividends (with a 10% reduction which represents a 10% tax credit).

  1. Corporation Tax

Corporation Tax is a corporate tax levied in the United Kingdom on the profits made by companies and on the profits of any foreign company with a UK branch or office.

Taxable profits for Corporation Tax include the money your company or association makes from:

  • doing business (‘trading profits’)
  • investments
  • selling assets for more than they cost (‘chargeable gains’)

If your company is based in the UK, it pays Corporation Tax on all its profits from the UK and abroad.

If your company isn’t based in the UK but has an office or branch here, it only pays Corporation Tax on profits from its UK activities.

B The Solution

The popular solution is to pay yourself using a mixture of salary and dividends. Dividends are National Insurance exempt so you do NOT pay NICs on them. They thus represent an attractive method for taking funds out of a business.

Sounds pretty simple HOWEVER the ever changing beast that is tax is never simple. The level of salary you draw is dictated by other factors too, such as pension requirements, if you draw too low a salary you may not be able to make the level of pension contributions you would like even if your overall pay is pretty high. Also, you can only take dividends out of your post-Corporation Tax profits, i.e. from the money that you have actually earned, whereas a salary can be paid out of future earnings (e.g. by borrowing money from your bank) – if you pay yourself too small a salary, relying on a monthly dividend to cover your living expenses, then a lean month could leave you short of cash. Therefore as previously mentioned, you need an ACCOUNTANT.

C How do I issue a Dividend?
Here are the basic procedures for issuing a dividend.

  • Ensure that there are sufficient profits in the company to allow for the dividend. Print a balance sheet and profit and loss account for the period to remove any doubt.
  • Call a meeting of the directors to minute the decision and details of the dividend.
  • Generate a tax voucher for each shareholder. A tax voucher is a simple statement showing the company and shareholder details along with the individual’s shareholding net dividend amount and tax credit.
  • Issue the dividend payments along with the tax vouchers and file the board minutes and accounts at the registered office.

You can guess what I’m going to say though, you should (if you really want to be good) at the VERY LEAST, do this with a lawyer for the FIRST time. Then once you’ve got the hang of it, you’re good to go!

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