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Partner Piece – INCE Gordon Dadds

February 25, 2019

Share sales and assets sales the pros and cons

How the sale of a business is structured will depend on the circumstances and aims of the buyer and the seller. As a general proposition an individual seller will normally wish to sell the company carrying on a business although a buyer may wish to buy the business and assets.

 

Share sale

The tax advantages of a share sale to the seller are substantial.

First, there is only one tier of taxation. The proceeds of sale are received directly by the individual; in an asset sale the company may be taxable on the sale of the business and the shareholder taxed again when the proceeds of sale are taken out of the company.

Second, the proceeds of a share sale are subject to capital gains tax (unless exceptionally the proceeds of sale are taxable as income under anti-avoidance provisions such as the employment related securities regime). As a result the maximum rate of capital gains tax payable by the seller will be 20% although it may be 10% if

(a) the seller qualifies for entrepreneurs’’ relief (which is available to directors or employees owning more than 5% of a qualifying trading  company)

(b) EMI entrepreneurs’ relief which is available to employees acquiring their shares on the exercise of EMI options no matter how small the shareholding and

(c) investors relief which is available to shareholders other than employees who have held their shares for at least 3 years. In short the 10% rate of capital gains tax may be available to a wide range of shareholders.

This should be compared with the taxation of a sale of the company’s business and assets. The company will incur a liability to corporation tax on the asset sale at a rate of 19% of the profits however there will be a further tax charge on the distribution of those profits to the shareholders. Further the individuals will be liable to taxation at potentially 38.1%. A shareholder could take the proceeds of an asset sale out of a company by putting the company into liquidation in which case they may be taxable as capital at 20% or even 10% if entrepreneurs relief were available. However, the capital treatment of a distribution in a winding up is subject to anti-avoidance rules one of which may tax a distribution as income if the shareholder carries on a similar business to that carried on by the company in liquidation within in 2 year period.

So pausing here a seller may be able to mitigate the amount of tax payable on an asset sale however it will normally be more and potentially considerably more than the tax which would have been paid on a share sale. So why would anyone arrange for a sale of the company’s business rather than its shares?

 

Asset sale

There are a number of reasons for an asset sale. From a buyer’s point of view there is little reason to recommend a share purchase. The only tax relief that may be available for the cost of acquisition of the shares is an increase in the base cost of those shares. However, the gain on the sale of the shares may fall outside the scope of taxation if substantial shareholding exemption is available to the buyer in which case there is no tax benefit from incurring expenditure on the purchase of the shares. Even if the buyer were to pay capital gains tax on a subsequent sale of the shares the current value of that future tax relief (taking into account the timing and probability of that future sale) is likely to be low.

A buyer may, however, be entitled to tax relief for expenditure incurred on a number of business assets including plant and machinery and intangible assets (other than goodwill) the buyer may be able to roll gains arising on the disposal of assets by it into business assets it acquires.

In addition, there are no stamp taxes paid on the acquisition of assets other than land (although as businesses do not normally own their own premises stamp duty land tax is not normally an issue) whereas stamp duty is payable at 0.5% of the consideration given for shares in a UK company.

 

Historic liabilities

Another feature of an asset sale is that the buyer does not generally take over the historic tax liabilities of the business being acquired.

(Assuming the business acquisition is a transfer of a going concern for Vat purposes the buyer will not pay Vat on the acquisition but may inherit the sellers position under the capital goods scheme however the capital goods scheme provisions apply to a limited range of assets and are not normally a problem in practice). The buyer in acquiring the target company will take over all the target company’s liabilities including tax. A buyer will require a full range of warranties and indemnities on a share purchase and this may increase the duration and costs of the transaction.

This of itself may not be sufficient to result in the transaction being structured as an asset rather than a share sale. In my experience given the tax benefits to the seller of a share sale the seller may go to the expense of a complex pre-sale reorganisation to seek to achieve the share sale of a company owning the business whilst retaining a company with the historic business liabilities.

Perhaps the most likely reason that a seller would accept an asset sale is one of practical necessity. If the seller wished to retain part of the business an asset sale may be the only practical method of achieving this. However, even here there is room for some tax planning.

A seller could arrange for the company to transfer the part of the business to be sold to a subsidiary. If the subsidiary carries on the part of the business as a separate trade. As such the company may be able to sell the subsidiary and avoid any tax on sale of the subsidiary and de-grouping charge if it qualifies for substantial shareholding exemption.

Whilst a buyer will normally prefer an asset sale the financial attraction of a share sale for the seller is very strong and it will normally be sensible to seek to restructure the target company or its business before the sale to enable a corporate sale in a way which is acceptable to the buyer.

This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.

 

Author: Huw Witty, Partner and Head of Tax

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    Hugh Morris, Former Client

    We are delighted with the services that Bluebox was able to offer. They showed an intimate knowledge of a deal cycle, managed a tight auction process and were highly communicative from the start. I would happily recommend Paul and his team to business owners contemplating a sale of their business in the next 24 months. Experience is key and this has paid off for us.

    Laurence Seward, Former Client

    Aligning ourselves early with Bluebox, and entrusting the team to guide us through their process proved to be a highly rewarding investment from all viewpoints. Bluebox’s support significantly enhanced both the value of our business and its ‘saleability’. I would highly recommend Bluebox to business owners contemplating an exit in the next two years. The earlier the engagement the better so far as I am concerned.

    Mike Minett, Former Client

    We began working with Bluebox in early 2015 through their Blue Diamond Programme, as we were contemplating an exit. We found that the process focussed our minds on the key areas of growth in the business, and prepared us well for the inevitable rigours of due diligence. During the sale process itself, the advice offered by the Bluebox team was invaluable. We found them to be helpful, straightforward and honest.

    David Stokes, Former Client

    When selecting our adviser, it was extremely important that they had access to international buyers and were experienced in cross-border M&A. The team at Bluebox proved to be invaluable by identifying a strategic acquirer from America who was not known to us and by negotiating an excellent deal for all parties. I was also impressed with the process management from Bluebox, which ensured that the deal was closed in a timely fashion.

    Jeff Weinstein, Former Client

    When I first engaged with Bluebox, I was hesitant as to the benefits of using an advisor to firstly, find a buyer for my business and secondly, to get a deal over the line. However, now that the deal has completed with KPM, I can honestly say that the finer negotiation points handled by Bluebox and their overall management of this process has been nothing short of first class. I would be delighted to recommend Bluebox’s services to any entrepreneur contemplating the sale of their business.

    Bill Ballard, Former Client

    Bluebox worked closely with us over the following six months and helped us to implement some key initiatives which made InferMed a more attractive acquisition target. Once we decided to sell the business, the Bluebox team were very diligent in ensuring that no stone was left unturned. They negotiated expertly on our behalf to ensure we got the best deal possible.

    Alan Montgomery, Former Client

    The pre-sale planning programme that we signed up for with Bluebox made us develop our strategies and focus on the bigger picture. It proved to be a very rewarding investment from all viewpoints and significantly enhanced both the value of our business and its ‘saleability’. I would highly recommend Bluebox to business owners contemplating an exit in the next two years.

    Nigel Parsons, Former Client

    I have experienced first hand the value that can be created through highly structured pre-sale planning. It amazes me that it is not something that everyone does. It is so disappointing to see around 90% of transactions collapse before they complete and pre-sale planning will not only enhance your price, but also significantly enhance your chance of a closed deal.

    James Caan, Investor

    We worked incredibly closely with our advisers who provided expert knowledge of the sale process with which we were not familiar. We were truly delighted with the results.

    Marten Nielson, Former Client

    We appointed advisers to manage the sales process after we had received a number of unsolicited approaches for the business. I was incredibly impressed by the immense value that could be created by expertly negotiating with a group of already interested parties.

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    I was delighted with the service that the team offered and their real attention to detail. The deal was not without its complexities and it was reassuring to have such experienced advisers assisting me throughout the negotiations.

    Peter Bennett, Former Client

    Truly delighted with the way my sale process was managed. The fact that the team I worked with achieved such a great multiple is testament to their experience and their ability to create some true competitive tension.

    James Averdieck, Gü, Former Client

    The team at Bluebox provided invaluable support in negotiating this complex transaction. Their access to international purchasers, and exceptional knowledge of cross border M&A ensured that the deal was concluded efficiently, achieving a highly successful outcome for us all.

    Jon Parslow, Former Client

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    Simon English, Former Client

    Bluebox provided invaluable advice in managing the negotiations with incoming investors. Their skills in handling these discussions were evident from the outset and the vital interface that they provided between the incumbent team and the incoming investors was truly beneficial.

    Henry Braham, Former Client

    Bluebox have a professional, dynamic and experienced team that is greatly assisting me with my focus on my exit within the next 24 months. Their structured approach is very refreshing and their ‘Blue Diamond’ programme is adding immense value.

    Matt Evans, Former Client

    The team at Bluebox provided me with a seamless service from the start of the engagement until our deal was completed. Attention to detail was commendable and their understanding of corporate M&A very impressive. I could not recommend them highly enough.

    Victor Lewis, Former client

    Having tried to sell my business previously – and failed – I was only too aware of the importance of pre-sale planning. This is a talented team offering a service that most people find out about, but too late.

    Simon Hulme, Former Client

    Bluebox are a quality outfit. Their access to International acquirers and relationships with the highest quality domestic investors was impressive. My shareholders and I received excellent service from start to finish and it was refreshing to be dealing with a senior team throughout the sale exercise.

    Michael Clapper, Former Client

    I cannot recommend the team at Bluebox highly enough. Their expert guidance throughout the entire sale exercise resulted in my shareholders securing an excellent deal with which the entire team was delighted.

    Mark Rodol, Former Client

    I’m really pleased with the service Bluebox provided. The team demonstrated excellent knowledge of the process to follow and led negotiations for the hospital in a way that allowed us to ensure we received appropriate value whilst focusing on reputational risk. Communication and service were of a very high standard.

    Steven Davies, Former Client

    With Bluebox’s expert advice we were able to find the right buyer that will benefit our business strategically. We’re delighted with the outcome and look forward to starting our new chapter

    Clive Hillier, Former Client

    The advice offered by the Bluebox team throughout the process was invaluable to the shareholders. We strongly believe that participating in Bluebox’s pre-sale planning programme was a significant driver behind the success of the deal. Their project management and negotiation skills throughout the sale process itself resulted in an exceptional deal being delivered to all parties involved.

    Harpal Singh, Former Client

    I chose Bluebox because they were the only CFA we considered who were a real ‘solution sales’ organisation rather than a team of accountants and/or ex-bankers! Selling a business is a solution sell and therefore a sell-side CFA requires this skill at its core.

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