Exploring options for selling your business can be a daunting task. Understanding your motivations for sale (e.g. retirement, derisking or seeking additional funding for growth) will be a great start to determining how to approach the project. Establishing this key factor will often drive which process or method of exit is the right choice for you.
In this article, we discuss the different types of exits that we regularly see in the M&A community and VAT considerations.
This is the most traditional method of sale. It is where the business is marketed to and ultimately sold to a trade purchaser. This may be a competitor, an expanding company or an overseas operation looking for a UK enterprise.
This is perhaps considered the cleanest transaction and often allows owners to realise their value at completion and walk away from the business in its entirety. This process will allow the market to determine the price and potential buyers who see strategic benefits often make great bidders and can pay well.
It is often a very flexible way of exiting a business as all commercial terms including funding options can be bespoke and negotiated.
There is however no guarantee that the business will make it to sale and/or the process may take an extended period. Depending on how the sale progresses it may also become market knowledge that the business is for sale, which can lead to some uncertainty.
A sale to a private equity group is a sale to a private investment fund who acquire the shares in the company. Typically, private equity groups will buy mature proven businesses with demonstrable growth strategies.
Selling to private equity is often an exit strategy for an owner that wants to realise the value in a business but remain actively involved. It is often a great option for businesses in rapid growth markets as private equity purchasers will, in effect, be buying a business in order to sell it again in a few years at an increased value or by way of listing.
Private equity can bring bags of experience to the table and often have proven track records for growing businesses. However, private equity funds can be notoriously tough and often require long tie in requirements for selling shareholder and the management team. Indeed, they often insist on including their own management within the company going forward.
A management buyout (MBO) is an acquisition of a company by its existing management team often supported either by private equity finance or by traditional institutional debt finance.
An MBO can have many benefits for both you as seller and the management team purchasing.
MBO’s are often seen as an excellent option to preserve the legacy of the business and incentivise an active management team. The management team will have an in-depth knowledge of the business and established relationships with the businesses stakeholders making the sale transition much easier. It can also mean that the transaction may, on occasion, be undertaken in a shorter process than a regular arm’s length sale and the market does not become actively aware of the sale as it is handled internally.
However, an MBO can be costly. The management team will need to fund the purchase. Whilst available options include securing private equity backing or traditional institutional bank lending these may be time consuming and ultimately difficult to achieve.
Employee Ownership Trusts
In order to introduce more diversity into the UK Economy, in 2012 the then government commissioned a review of employee ownership of companies. The review suggested that sale of companies to its employees should be encouraged by generous capital gains reliefs for owners of businesses who sell their shares to their employees.
Differing from a management buyout, the shares in the company would be transferred to a trust established for the benefit of the entire employee base of the company, an Employee Ownership Trust (EOT). Not only does the sale benefit from the capital gains tax relief for the exiting shareholder but many view the sale to an EOT as beneficial for employee engagement (adopting a “John Lewis” culture). It also provides income tax reliefs for annual bonus payments to employees. It is also possible to structure a sale to an EOT as a partial exit, thus leaving the owner an ability to retain up to 49% of the company.
However, once again funding the purchase needs to be considered. Funding for EOT purchases however tend to come from the future income generated by the company, this will mean that the owner will be paid out over several years rather than an immediate realisation of value and exit.
How to approach the market
If you are considering a sale to either your management team or your employees, engaging experienced advisors early in the process is always desirable. Sales to employees often afford tax benefits for all involved so a thorough assessment of the best methods should be undertaken. From this point it is often time for a frank round table discussion with the parties involved. Management teams may have considered the move before being approached but they will of course need time and opportunity to analyse the transaction and deal with their own challenges including funding for the purchase and ongoing ownership structures. Similarly, EOT purchasers will need to assess the prospects of the transaction so early engagement with these parties is often key.
If the general market is the correct place for you to market and ultimately dispose of your business, there are several methods to obtain a purchaser. You may feel comfortable to approach potential interested parties yourself or you may wish to consider additional advisors to broker the deal. Business sale brokers will assist with marketing the business, much like a property estate agent. Details of the business will be put to market, and they will assist in passing information and scheduling meetings with prospective buyers. Corporate Finance lead advisors (usually trained accountants) however provide a very different, bespoke service. They will undertake initial financial due diligence providing the financial basis of the valuation of your business. They then research and identify potential bidders and confidentially approach targeted parties to consider your sale. They will then broker the negotiation of the terms of the sale and provide financial and commercial support throughout the project. They will also act as the drivers in the transaction project managing the lawyers and other transaction teams.
When it comes to private equity it is likely that corporate finance lead advisors would be engaged. Corporate finance partners often have proven track record in private equity sales and have ongoing close relationships with acquiring funds. Much like a sale to the trade market, the corporate finance advisors will assess the business, undertake the initial financial due diligence and valuation of the company and provide their own views of the transaction.
VAT should be considered when selling a business. An error in VAT can lead to losing 20% of the sale price, or the entire deal can be jeopardised if the buyer finds VAT risks within the business. Over the years, we have assisted clients in preparing for sale, in addressing specific concerns and in negotiations.
Some examples will illustrate the risks:
- Buyers do not like businesses where VAT has not been properly considered. We undertake VAT due diligence “health checks” for sellers, preferably well in advance. Any issues which are found can then be resolved before making a strong tender to the market. Examples of VAT issues identified include VAT not being charged correctly e.g. in respect of the supply of rented property, digital supplies, transport, locum doctors, agency, and so on. The buyer either walks away or negotiates down the price and presses the seller to make (and pay) hasty concessions to HMRC. A seller intending to sell their business should undertake a ‘VAT health check’ at an early stage in their exit strategy.
- For sales of assets (rather than shares, e.g. in order to obtain a business with a ‘clean’ history), a buyer prefers a VAT-free purchase. This is achieved by implementing a Transfer of a Going Concern (TOGC). The TOGC rules are awkward and we have provided advice in numerous scenarios, such as where the seller’s structure is unclear and the buyer was unable to replicate this for TOGC purposes; or where the wording proposed by the buyer would have collapsed the TOGC; or where deposits were paid in advance of required statements being made, which would have resulted in additional VAT and SDLT charges in respect of real estate assets.
- During negotiations, buyers will rely on perceived VAT risk to reduce the price of a business. It is important during negotiations that VAT issues are argued confidently by the seller to maintain a proposed selling price. We have supported sellers where the buyer doubted that VAT liabilities had been calculated correctly, such as in respect of residential lettings, partial exemptions, financial service exemptions, and so on.
- Sellers will also experience wider VAT implications. The sale of shares in a company is exempt, usually resulting in irrecoverable VAT in respect of professional fees. It does not have to be this way. Careful planning and carefully documenting intentions can result in the VAT on professional fees being recoverable, as was illustrated in the recent case of Hotel La Tour Ltd  UKUT 178.
Wright Hassall’s experienced Corporate and VAT teams can assist when selling a business. Please contact Freya Summers to discuss your exit options and Kevin Hall regarding VAT considerations and support.
This article was written by Freya Summers, Partner in our Corporate team and Kevin Hall, Partner in our VAT team.
The information provided in this article is provided for general information purposes only, and does not provide definitive advice. It does not amount to legal or other professional advice and so you should not rely on any information contained here as if it were such advice.
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