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Ask the expert
Aileen Gates is a partner and Head of Tax at Campbell Dallas.
Email Aileen with your financial queries.
ARE YOU EXIT READY??
For entrepreneurs, selling a business successfully
can be a significant life event. In addition to the
sense of achievement this brings, realising value
built up over years of hard work can provide
them with the means to pursue other
cherished business and personal
goals. However, in our experience,
that value can be eroded materially
if exit readiness is not considered
carefully at an early stage, being at
least a full year before any potential
sale.
Holding structure and availability of reliefs
As far as possible, the business and the way it is
owned should be structured to be tax efficient
for the entrepreneur when the ultimate
sale takes place. In that regard, we
encounter holding structures which
would result in multiple layers of tax
when returning sales proceeds to
the ultimate owners. With early
action, it can be possible to
restructure and simplify the
position to avoid unnecessary
tax charges.
Whilst this article focuses on
tax considerations, early planning
is essential more generally to
identify and carry out any actions
needed to ensure that the business
is an attractive commercial proposition. As regards
tax, the business’s own position can affect the
price that a purchaser is willing to pay for it; whilst
the holding structure and availability of tax reliefs
can affect the amount of tax suffered by the sellers
on that price.
Tax reliefs have been introduced to incentivise
the establishment and growth of new businesses.
However, they are subject to detailed conditions
and their availability should not be assumed
without checking the position. For instance, many
business owners will be aware of Entrepreneurs’
Relief which, when available and claimed, provides
for a lower 10% rate of capital gains tax, subject to a
lifetime limit of £10m of qualifying gains. We have
seen a number of cases where the expected relief
would not in fact have been available because of
a failure to satisfy the conditions relating to the
owner, the shareholding and/or the company’s tax
status. Since, typically, these conditions require to
be met throughout the year before the sale takes
place, it can be too late to rectify the position if this
is identified during the sales process. However, if
the sales process is deferred or aborted, value can
be lost if economic conditions change before the
business is sold at a later stage.
Tax position of the business
Often, an exit is achieved by selling the company
carrying on the business. In that case, the
purchaser will wish to understand and investigate
the company’s affairs. It will typically engage
professional advisers to carry out due diligence
on key areas, including tax. Where issues are
identified, the price may be reduced or deferred
in part until the matter is resolved with the tax
authorities. Normally, the sellers will also have
to give warranties and indemnities to protect the
purchaser if further liabilities are discovered after
the sale has completed.
Given the above, we strongly recommend that
exit readiness is considered at least a year, but
preferably longer, before any potential sale and
monitored thereafter. Whilst not all business
owners will be working towards a clearly defined
exit timetable, this should still be considered
given the potential for an exit to be triggered by
a change in plans or circumstances, such as an
unsolicited approach.
We recommend that an early review is carried out
to identify and resolve any such matters before
the sales process begins. That assists in preserving
value, simplifying the sale and presenting the
business as well managed and controlled. The
review should also consider the availability of any
tax assets (e.g. tax losses, R&D tax relief or capital
allowances) which may increase the value of the
company.
If you would like to explore this issue further or have
general tax questions, contact Aileen Gates at aileen.
[email protected] or call 0141 886 6644.
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