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Selling a Private Company: Practicalities of a Share Sale

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When selling a private UK company owners are steered by advisors towards a share sale in order to take full advantage of Entrepreneurs Relief on their capital gain. While the tax advantages are undeniable sellers need to be aware that a share sale has certain disadvantages as well.

“My accountant says it has to be a share sale”. I hear these words from almost all our clients, and for good reason, the effective rate of Capital Gains Tax on the sale of shares in a private UK business is only 10%. So long as the selling price is acceptable the benefits of the 10% tax rate overwhelm all other considerations in the transaction. It just has to be a share sale.

There Are Downsides To A Share Sale

Unfortunately, as with most good things in life, the tax benefits of a share sale come at a certain cost. Completing a share sale is more challenging than a sale of assets, and will saddle the seller with long term obligations to the buyer. We explore the differences between a share sale and an asset sale in this post: Selling a Company: Asset sale or share sale?.

What are the additional challenges and obligations thrown up by a sale of shares?

Legal Issues

A company limited by shares has a legal personality of its own. The consequences of actions taken through the company, good or bad, remain with the company even if ownership changes through a sale of shares. Any sensible buyer will attempt to limit the risks of illegal or deceitful behaviour under previous ownership by negotiating a contract that requires the sellers to make good any losses arising from events under their ownership. A large proportion of a share sale contract that will typically run to at least 80 pages is made up of assurances by the sellers about the company, and promises to pay if problems are found after the sale. Promises have to be made about taxation, employment matters, regulatory compliance, customer relationships and many other areas.

Buyers recognise that it can be difficult to extract money from sellers after the sale and typically insist that a proportion of the selling price is held back to settle any claims. Between 10% and 20% of the selling price may be held in escrow for up to two years.

Due Diligence

Because the buyer’s exposure to past acts by the company is so much greater in a share sale due diligence will be far more intrusive. In particular tax records, corporate documents, board minutes and regulatory compliance will be subject to detailed scrutiny.

Working Capital

The buyer’s valuation of the business will be based on a certain level of working capital (inventory, debtors, creditors) in the business. The expected level of working capital is usually stated in the offer letter with reference to a balance sheet at a certain date. To protect the buyer against a run down of working capital prior to the sale part of the selling price will be held back until audited balance sheets at the closing date are prepared. Typically around 10% of the selling price is held back for up to three months.

 

If you are interested in finding out more about these and other issues relating to the sale of a private company one of our business sale experts would be delighted to talk to you in complete confidentiality. Click CONTACT ME to book an initial phone conversation or call us on 01604 432964.

 
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