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The Selling Process Series - To Sell or Not to Sell

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  • Choice or necessity?
  • Do you own the company or are you a majority shareholder or do you need to consult and bring on board other shareholders?
  • What is the objective –
    • to generate income – are there assets that could be sold and leased back? i.e. property;
    • to raise capital for investment or expansion – a sale of some of the shares will have an impact upon your profits but will raise long term finance by way of new investors;
    • to realise your investment growth in the business – a full sale; or
    • the business is in difficulty - a forced sale?

One of the first issues to be addressed when considering selling a company is whether the objectives of the parties will be best achieved by a share sale or the sale of the company's business and assets.

From a tax perspective both a seller and a buyer should aim to:

  • Maximise the net consideration for the seller at a minimum tax cost (immediate or future) to the buyer.
  • Minimise the tax cost of the subsequent sale of any unwanted assets of the target business.
  • Minimise the buyer's net financing costs.
  • Minimise the ongoing (annual) tax costs of the acquired and existing business, by the efficient use of reliefs.

However, the differing tax objectives of the parties cannot always be fully accommodated within the same structure.

As a broad generalisation, the tax advantages of a share purchase to the seller are likely to be greater than the tax advantages of a share purchase to a buyer. Conversely, an asset purchase will often be more tax efficient for the buyer than the seller.

For the seller an asset sale would result in a double charge to taxation, for example tax paid by the company on the proceeds received from the sale of the assets plus tax paid by the seller on the dividend distributed out of the remainder of the proceeds of the sale to the seller. 

Are there any potential material contingent liabilities?

Such as major litigation that may deter a buyer from buying the shares of the company and make an asset purchase where the buyer can pick the best elements of the business more attractive.  

In practice, any differences between the buyer and seller on fundamental points of the deal structure are likely to emerge at an early stage.

Where the buyer, for whatever reason, does not want to buy shares in a company and the seller is unwilling to entertain a different structure, negotiations are likely to fail well short even of any meaningful attempt to agree heads of terms.

If the company is in bad health or the majority shareholder/owner is and needs to sell then a forced sale may be the only option. The business may need capital injection, a new management team with fresh ideas and policies or a takeover/merger to give economies of scale none of which the current owner(s) can provide. A sale in these circumstances would be on buyer favourable terms – a buyer expects to pay a discounted price to solve a seller’s problems.

A final matter that has to be considered is whether the company should be closed down – can more value be realised by selling off the assets and liquidating the company? 

This option is more suitable where a business is on the decline but it has valuable assets, this could be land that could be redeveloped.  Even where a business may be insolvent expert advice should be sought as there may still be a saleable business that can be carved out.

In conclusion, the structure and price paid will depend largely upon a thorough and detailed anaylsis of the business and the viable options available to the seller and the negotiating skills of the seller and his corporate professional advisory team.

At FDR Law our Corporate Team will work closely with you and your team of professional advisors to guide you through the process providing expert advice and assistance.

If you would like to find out more, please contact Head of Corporate, Margaret Evans at Margaret.evans@fdrlaw.co.uk or another member of our commercial team on 01925 230000, visit www.fdrlaw.co.uk

** This article does not present a complete or comprehensive statement of the law, nor does it constitute legal advice. It is intended only to highlight issues that may be of interest. Specialist legal advice should always be sought in any particular case.**