By Marie Martel, Associate Director, Tax, Grant Thornton in Belfast
With the dawn of a new decade, you may be considering if there will be a significant change in the ownership of your business within the next few years.
Quite what form this will take you don’t yet know – it could be an all-out sale, a partial sale to a private equity investor, a management buy-out, or some other form of transaction.
Naturally, you will want to maximise the value of your business at the time of the future transaction. Whilst tax won’t be (and shouldn’t be) the number one priority when building value for a future sale, it is a material aspect of all transactions.
Early engagement with transaction tax specialists can help protect value from being eroded and resolve any potential deal-breakers up front.
There will be many commercial points at the top of your agenda to make your business as attractive as possible to a prospective purchaser or investor. These should include embedding a strong and incentivised management team, ironing out any operational inefficiencies, streamlining and focusing the business in the ‘right’ direction, and ensuring the business intellectual property is adequately protected, to name a handful.
In addition to ‘commercial readiness’, it is also important to give some thought to ‘tax readiness’ for the following reasons.
Firstly, in most cases, shareholders will pay tax on the money they receive from the sale. Due to the way UK tax law works, it is often only possible to make certain changes to improve your ultimate tax position well in advance (say two to three years) of a transaction happening.
Secondly, any tax issues within the company can cause increased legal conditions on the sellers (at the lower end of the scale), price reductions or a withholding of some consideration (at the higher end of the scale). In worst-case scenarios, unresolved tax issues can result in sales failing.
So, what three key questions should you consider well in advance of any transaction?
What will be sold? If you are not selling your entire company, then it can be more efficient from both a tax perspective and commercially, to restructure now, rather than wait until shortly before a transaction and do things in a rush.
Who will benefit from the sale proceeds? When a company is sold, whoever owns the shares at that time will benefit from the sale proceeds in accordance with their rights as a shareholder. If you would like the proceeds allocated in a different way (eg to benefit certain employees, family members or family trust) it may be more tax efficient to reallocate shares well in advance of a transaction for a number of reasons, such as obtaining reliefs such as Entrepreneurs’ Relief, and reducing any high income tax charges for employees.
Does your company have any ‘red flag’ tax issues? Tax issues within the company far too often cause an unhelpful distraction whilst a company is being sold, with buyers being nervous about acquiring a business with significant tax liabilities.
The impact of such tax issues can be unwanted delays or late changes to the price or structure, which can frustrate all parties involved. Common areas which cause unexpected and material tax issues include employee held shares, share schemes, consultants/contractors and international tax compliance matters.
Irrespective of when you may be considering a sale of your business, it is never too early to start a conversation with an experienced transaction tax specialist to help you maximise tax reliefs and to focus efforts on reducing/eliminating tax risks.
This can have a material impact on your proceeds from a future sale, and in some cases can influence whether the transaction happens at all.
For further information or advice, Marie Martel can be contacted at marie.martel@ie.gt.com
Grant Thornton (NI) LLP specialises in audit, tax and advisory services.