Selling a business? Legal tips on maximising your profits

The impact of Coronavirus on businesses has led to increased activity from owners of SMEs looking to sell. It has become increasingly important since the pandemic to make your business more attractive by structuring the sale to offer buyers more flexible terms.

The same general principles apply to most SME businesses, including shops, restaurants, internet businesses, E-commerce, service industries, pubs, hotels or B&Bs.

Heads of Terms are important

Be clear what it is you are selling and consult your professional advisors in advance. It is of course important to get your accounts and financials in order and include detailed forecasts where possible.  Preparing heads of terms is also important offering flexibility which will be more attractive to buyers.  Deals struck up can later fall apart if key issues have not been addressed at the outset. A good set of HoTs will help smooth the sale path.

What exactly are you selling?

Most businesses are run through a limited company.  Consider if you selling the shares or just certain assets.  There are pros and cons with each.

By selling the shares, the buyer will pick up the liabilities of the company.  Therefore they will ask for extensive warranties and indemnities.  Transferring assets may be simpler but one added complication can be obtaining landlord’s consent to transferring a lease.  Assets may be preferable if the business is not eligible for Covid 19 Government assistance.

Either way, the type of sale is usually determined by tax considerations.  One issue is to avoid the tax ‘double whammy’ for individual shareholders-corporation tax on the chargeable gain on the sale of the business, on top of income tax on the distribution of the net proceeds as dividends.

The usual way round this is to claim  Business Asset Disposal Relief (formerly Entrepreneurs’ Relief).  If the company is a trading company the seller can benefit from a capital gains tax (CGT) rate of 10% on qualifying assets owned for at least 2 years. This is very attractive for sellers and individual shareholders selling shares in a private trading company.

Take tax advice before you even market the business for sale, so that you don’t end up paying more tax than you need to.

Structure the sale price: Capital vs Income

Structuring the deal is important.  The impact of Covid-19 on trading is such that you need to consider offering more flexible deals to buyers.  Consider whether to sacrifice receiving a capital sum now for a potentially larger  sum later.  A Seller’s willingness to continue in a consultancy or employment role after sale may assist in maximising the price.  Consider also taking non cash consideration, usually in the form of shares in the purchasing company.

Although to many, ‘cash is king’, you may be able to achieve a greater sum overall if you  consider deferred payment of the consideration over a period of time.  An ‘earn out’ arrangement giving the seller future compensation out of profits is another method  which is often attractive to buyers.

Alternatively, consider a joint venture agreement with the buyer whereby the risks of future trading can be shared.

Which assets are you selling?

Only include those assets which are necessary for the smooth running of the business as part of the sale.  For example, you could exclude a freehold or long leasehold property, the full value of which may not be reflected in the price for the business which may be based on a multiple of profits.  A seller might also exclude any intellectual property rights and licence their use to a purchaser thereby maximising the return on such rights.

Consider re-structuring the business in advance of a sale so as to separate two distinct businesses.

Is VAT on the sale avoidable?

If the sale of the business is treated as the Transfer of a Going Concern (TOGC), it will be outside the scope of VAT. While you do not pay VAT on the sale, you are not prevented from deducting input taxes on related expenses as a general business overhead.

TOGC applies where a business is transferred either in whole or in part as a going concern, and the assets are to be used by the buyer in continuing the same type of business.

However, your buyer needs to be registered for VAT at completion of the sale, or must be liable to be registered, if the turnover exceeds the existing registration limit immediately before the transfer. There must be no significant break in the normal trading pattern before or immediately after the transfer.

Employees’ rights and reducing the workforce

The rights of employees are protected under the Transfer of Undertakings (Protection of Employment) Regulations 2014 (TUPE), in the case of a ‘relevant transfer’.  A relevant transfer includes the transfer of a business.

The rights of those employed immediately before the transfer will automatically be transferred to the buyer, preserving continuity of employment.  Any action you as the seller may have taken towards your employee before the sale is now deemed to have been taken by the buyer.  So any claim an employee could have brought against you eg race discrimination or harassment, may be brought against the buyer instead.

There are exceptions to these conditions.  In cases where there is an ‘economic, technical or intending change to the workforce’ (ETO) before or after the relevant transfer, the employee will not be deemed to have been unfairly dismissed.

The reason for the ETO must also involve changes to the workforce i.e. the number of employees involved.  Genuine redundancy would be a valid economic reason.  A technical reason might be a lack of appropriate skills, while an organisational one would perhaps be the need for a reduced combined workforce.

But even if there is an ETO reason entailing changes in the workforce, an unfair dismissal claim might still arise if the employer does not act reasonably in dealing with the procedural aspects of the dismissal, such as failing to give employees the opportunity to apply for suitable alternative employment.  Simply, reducing the workforce to achieve a sale, say  at the buyer’s request, or to obtain a better price, would not usually be considered an ETO reason and the employee would have a valid claim against the buyer for unfair dismissal.

Restrictions on the seller

Your buyer will be concerned to protect the goodwill and name of the business against the risk of you setting up in competition or soliciting customers.  No restrictive covenant is implied, so be prepared to offer an express clause in the sale contract.  Restrictive covenants will be enforced, but only to the extent that they are not an unreasonable restriction to trade.

The reasonableness of a restriction will be tested against the geographical area to which it applies.  This is based on the geographical distribution of the business’s customers at the time of purchase, not what it is expected to be in the future.  The period the restriction is to apply and the nature of the restricted activities are also taken into account when considering whether a restriction is reasonable or not.

Our team of expert commercial solicitors will be pleased to advise. Please contact Alan Zeffertt if you would like assistance:

E: alan.zeffertt@anthonygold.co.uk

T: 020 7940 3950