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Selling Your Limited Company For Shares Has Downsides As Well As Tax Benefits

Not So Fast!

Not So Fast!

Sellers of UK private limited companies are often told by their accountants that “It has to be a share sale”. The tax breaks on a share sale are compelling but there are downsides to a share sale as well.

Sellers are highly motivated by the available tax breaks to sell the shares of their limited company as opposed to selling the trading assets of the business. Unfortunately selling shares conflicts with one of the private business sellers other most cherished objectives – being free and clear with the money with no prospect of future claims by the buyer. There really is no such thing as a free lunch when it comes to selling a company, and a sale of shares will leave the seller with long term obligations to the buyer.
 
What Are The Tax Breaks When Selling A Private UK Company?
 
Capital Gains Tax on the sale of shares in a private UK limited company is effectively only 10%. To qualify for “Entrepreneur’s Relief” you must have owned at least 5% of the company for a full year before the sale, and be a director or employee of the company. An individual can offset a maximum of £10 million in sales proceeds against capital gains in their lifetime.

The combination of corporate and personal taxes on an asset sale can be as high as 40% on the goodwill portion of the sale. Other than getting the right selling price there usually is no more important issue in any UK private limited company sale than securing an offer for shares.

Partnerships or sole traders qualify for Entrepreneur’s Relief on a sale of assets – because there are no shares to sell.
 
So What Are The Downsides Of Selling Shares In A Private Limited Company?
 
A recent experience with one of our clients is typical. By far the best offer we received for his office supplies company was from a large corporate. Unfortunately the buyer did not want to inherit the past actions of a smaller private limited company and made an offer for assets. Through several rounds of painful negotiation we moved the buyer towards an offer for shares, although at a slightly lower price to compensate for higher costs. Our client was ecstatic, until he received the buyer’s draft contract and their 60 page due diligence questionnaire.

It does take a lot more work to complete a share sale and the sale contract lands the seller with obligations that can last for several years. Buyers know that they are on the hook for any actions of the previous owners and will seek a contract that makes the seller responsible for any costs that arise from past bad acts. A share sale contract will typically run to at least 80 pages of assurances by the sellers about the company and obligations to pay if undisclosed problems come to light. Taxation, employment matters and regulatory compliance in particular can leave the seller exposed to future claims for many years.

Then comes the sting in the tail. Buyers know that whatever the contract says it is difficult to get money back from a private seller after the sale. To protect themselves they typically insist that up to 20% of the selling price is held back for up to two years. A further 10% is often retained for up to 3 months to protect the seller from last minute changes in working capital.
 
Is It Still Best To Sell Shares Rather Than Assets?
 
In most cases the benefits of the tax break far outweigh the extra work, but the retentions and long term obligations can take some of the shine off the transaction. Getting only 70% of the consideration at closing, and being saddled with long term obligations to the seller, is not at the forefront of our clients’ minds when their tax advisor tells them, “It just has to be a share sale”.

 

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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