Getting ready
As our corporate finance friends will tell you, you can’t just wake up one morning and decide to sell your business. Well, you can, but you probably won’t get the best price for it.
Preparing a business for sale takes time – a minimum of 12 months usually – to ensure the business is trading profitably, strong management are in place, and prospective buyers can see and believe in the future growth potential.
Alongside this, owners need to be confident that there are no hidden risks in the business which could erode value on a sale, and also that the corporate structure is appropriate so that, at the right time, the business can be sold in whole or part without undue complexity. Tax is a key aspect of both these considerations.
Tax risks – destroying value
Most business sales are structured as the sale of a company or group of companies, for good reason. It minimises operational disruption to the business (there is usually no need to novate contracts or transfer employees, for instance) and often gives the vendors the best personal tax treatment.
However, buying a company means buying the company’s tax history and also inheriting any past errors or failures by the company to make correct tax filings and payments. For this reason, potential buyers will often undertake detailed tax due diligence and in addition will require the vendors to sign up to comprehensive tax warranties and indemnities. These indemnities typically run for (at least) 7 years, so that if any tax exposures come to light post-sale, the buyer will be able to claim a refund from the vendor.
Unfortunately, it is not uncommon for tax due diligence to uncover so many (or such material) issues, that the sale process has to be terminated, or at least a substantial amount is held back from the sale proceeds to cover risks which have been identified and which need to be resolved post-sale.
Vendor due diligence and healthchecks
To minimise the risk of hidden tax issues coming to light only during a due diligence exercise (or worse, post-sale), many business owners commission a vendor tax due diligence (VDD) exercise, prior to putting the business up for sale. An external advisor will undertake a thorough, independent review of the company’s tax position, and will make recommendations on any historical issues which need to be resolved or any weaknesses in the company’s procedures. The benefits of doing this in advance of a sale include:
- The VDD can be undertaken to a more managed timetable when not in the middle of a sale process;
- Issues identified in the VDD can often be resolved prior to a sale process commencing, such that they either no longer need to be disclosed to buyers or (more likely) they will be disclosed but will not become a contentious issue as the vendor will be able to show that the point has been resolved and is no longer a risk;
- On an eventual sale, buyers’ tax due diligence is likely to be considerably less time-consuming and stressful for the vendor and their team, because the bulk of the work will already have been done at the VDD stage.
Sometimes, a company will decide that its tax affairs are mostly straightforward and low-risk, but that the nature of its business is such that there is one tax area which is more risky and which should be focussed on. In such cases, a “healthcheck” review of that specific area may be appropriate. For instance, a company with significant imports and exports may benefit from a VAT and customs duties healthcheck. Or a company which engages a large part of its workforce as independent contractors may need an Employment Taxes healthcheck.
Corporate structure
It is also worth considering the corporate structure and whether this is appropriate, especially if not all of the business will be sold in one go to a single buyer, or if the owner would want to retain any of the group’s assets (eg property) post-sale. Corporate structures often grow over time in a haphazard way as a response to specific short-term requirements, and it is often found that some pre-sale restructuring is needed.
For instance, it may be necessary to demerge or otherwise extract assets or businesses which the owner wants to keep or which buyers will not want.
There are often more options available for such restructuring when it is considered well in advance of a proposed sale. Both timing and tax considerations can drastically reduce what is achievable, when a sale process is already underway.
The owner’s personal objectives will also play a part in determining an optimal sale structure. Some owners will want to receive their sale proceeds for personal use whereas others will want to reinvest their proceeds in their next business. This decision has a significant effect on determining the best sale structure while minimising the tax to be paid on the sale.
Conclusions?
It’s worth thinking about tax considerations as early as possible, when you start to contemplate selling part or all of your business. Done properly, some advance work and planning can make the eventual sale process smoother and less stressful (and can actually save in fees overall), as well as ensuring you receive your sale proceeds in the best way and ensuring that the likelihood of tax exposures eroding your proceeds is minimised.
