The first thing you must do when preparing to exit a particular operation is to make yourself aware of the potential for price "chipping". This means you must get your company in apple-pie order because, if you do not, you are exposing yourself to the possibility of a buyer being able to pick holes in what you are selling and attempting to chip away at the asking price.
There are a number of points for both individual and corporate sellers to consider.
- Make sure that you have filed your statutory accounts, corporation tax, PAYE and VAT returns on time.
- Make sure that all your company's records are up to date - you will have to disclose all key matters to the buyer. So, for example, check that you have employment contracts with your employees.
- Ensure that your accountants file the company's most recent year-end accounts promptly, so that your last corporation tax return can be submitted to HM Revenue and Customs (HMRC) early. This will mean that, if any questions are raised, you can either agree them before the buyer undertakes his due diligence or, at the very least, have a realistic idea of any additional liability that may arise, rather than being saddled with the buyer's estimate.
- If there are any outstanding issues with, say, disgruntled former employees, HMRC or any outstanding planning permissions, either agree them or obtain a realistic assessment of how much the potential liability is. As part of the disclosure exercise, you must inform the buyer of the problem, so be prepared.
- Look carefully at the status of your staff. A high proportion of staff are genuinely self-employed within the catering and hotel industry; however, self-employed status is often challenged by HMRC (which is looking for extra PAYE and national insurance contributions). Be aware that your buyer's accountants may raise this issue.
- Beware of potential problem issues. Is there a pensions "black hole" for the staff? Is there a legal requirement to consult with your staff in advance of any proposed transaction? If so, make sure this process is commenced well in advance of your proposed exit date.
There are further points that only corporate sellers need concern themselves with.
- Check your corporate history: have any of the assets been transferred from another group company to the target company in the past six years? If so, when the target company leaves the group, there may be a "degrouping" tax charge. You can elect for that tax to be paid by the corporate seller (or a member of the seller's tax group). If such companies have tax losses, it will be cheaper for them to pay the degrouping charge than to agree to the buyer's price reduction
- If any land (or building) has been transferred to the target company in the past three years, there may also be a stamp duty land tax (SDLT) degrouping charge.
- Is the target company a member of a VAT group? If so, you will need to deregister it from that group.
- A target company can, in certain circumstances, be liable for the unpaid corporation tax liabilities of companies in the same group. Therefore, it is important to ensure that the rest of the group's tax affairs are up to date.
- If a target company either claims losses from or surrenders losses to other group companies, make sure that these claims are made before the sale takes place and cannot be amended without your consent.
The second main concern for a seller is to maximise the price. Make sure that you are only selling the assets that the buyer really wants. If the buyer wants your hotel only, then avoid inadvertently selling him other assets as well.
It is important to review what your company owns. If it owns other assets, you might consider removing them from the company before the buyer places a bid. If your company is a member of a group (for tax purposes), you should be able to extract those assets from your company without giving rise to an immediate tax charge. However, if you are an individual seller, the extraction might well give rise to a tax charge.
You should also look at the tax position to see if there are any "hidden" assets you should be paid for. For example, Stamp Duty Land Tax is charged at 4% on the sale price (and also on the VAT charged on the sale proceeds), where the sale price for the land and/or buildings is £500,000 or more. By contrast, stamp duty on the purchase of shares is only 0.5%. Make sure you share in that 3.5% saving.
Similarly, if your company has trading losses, you can put some value on these and ask for deferred (future) consideration as and when those losses are used. Also, if you are in, say, a dispute with HMRC over your company's claim for capital allowances (which, if won, will reduce its future tax liabilities), ask for some additional consideration to be paid if your company wins its argument with HMRC.
Review your tax position before you sign up to the heads of terms for the sale. Individual sellers will want to benefit from business asset taper relief (BATR) on the sale of shares in your company - as a higher rate tax payer, you want an effective tax rate of just 10%.
But taper relief can be tainted. For example, your company may have such large cash reserves that it is not deemed, for BATR purposes, to be a trading company. Or you may not have held the shares in your company for a minimum of two years.
Similarly, if you are a group of companies selling a hotel or restaurant, you want to benefit from the substantial shareholding exemption (SSE) and pay no tax on the sale of the target company. Again, large cash reserves could be an issue.
When it comes to the sale process itself, remember to consult professional advisers. They should be involved in reviewing any heads of term that you are asked to sign. This is because the balance of power switches once heads are signed. Until then, you (the seller) are in control and can typically win a negotiation. After heads are signed, often the balance of power switches to the buyer.
However, do your research on the buyer. For example, if it is announcing an expansion round, you will be in a better negotiating position.
If you have a foreign buyer, remember that the sale process is likely to take longer and be more cumbersome to negotiate, owing to cultural and legal differences. Do not fall into the trap, for example, of agreeing that the stamp duty charge should be split between the buyer and the seller - this might be standard in California, but it's not in the UK.
Consider whether you should employ extra personnel to support you in the running of your business while you deal with the sale process. You certainly do not want to let your business results suffer because you are overstretched, especially if you are receiving consideration which will be calculated by reference to profits in the current year and/or in future years, as is often the case.
To conclude, preparation is key in any exit strategy - not only in terms of what you want to sell and for how much, but also in terms of being aware of any "gaps" that could give rise to a price reduction and having "plugged" them in advance or quantified the exposure.
One of the best and most cost-effective ways of approaching an exit scenario is to perform an internal due diligence exercise with your own advisers beforehand. This enables you to ensure that you can reply convincingly to any queries raised by an interested third party and to "plug" any of the gaps mentioned above. This will increase your chances of completing the process successfully and maximising the sale price you receive.
Michael Miller and Elizabeth Small are partners in the Corporate Department of law firm Halliwells.
Tel: 0870 365 8267