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Finding the perfect exit strategy

Article Date:  Dec 14 2006


Understand what you are selling

According to the latest research, only half of entrepreneurs planning to sell their business know how much it is worth.

The value of your business will be determined by a number of factors: its size, future growth prospects, diversification, customer base, profitability and cash flow, as well as financial management.
While you do not want to undervalue your business you should not overvalue it either.

Selling shares or assets?

The first question to ask during initial negotiations is whether the business is to be sold through the sale of shares or as an asset. This decision will undoubtedly be driven by tax considerations.

In a share purchase the purchaser buys the target company along with all its assets and liabilities. An asset purchase allows the purchaser to try and ‘cherry pick’ the particular assets he or she wants to acquire, without necessarily acquiring all of the liabilities (except for employees). There are also other key differences between the two types of transaction, including the form of documentation required for the transfer, tax and stamp duty implications, and in relation to the distribution of the purchase price.

In most cases sellers, primarily for tax purposes, prefer to sell shares and purchasers prefer to buy the assets. In practice most transfers of business are done by way of a share purchase, as otherwise the seller in effect pays capital gains tax (CGT) twice. The company pays corporation tax on the sale of the assets upon which the capital gain is made, and the seller pays tax when the cash is taken out of the company, either by way of dividend or by liquidation of the company.

Getting the fundamentals right

It is necessary to ensure that the business’ financial and legal information is up to date. Once you have found a suitable buyer, their solicitors and accountants will normally wish to carry out a financial review of the business known as a ‘due diligence’. This audit will involve their gathering of information about all aspects of the business so that the buyer can make an informed decision and modify the terms of sale if necessary. It is therefore important that you gather together the financial information required. This may include:
· a minimum of three years’ accounts and tax returns
· a full list of debtors and creditors, with balances and payment schedules
· company secretarial and other statutory documents
· all relevant legal and HR documents, e.g. copy leases and employment contracts
· ensuring that details, budgets and business plans are ready to be inspected by potential buyers.

Heads of terms

This precedes the main contract and highlight the principal issues of the agreement and the intentions of both parties. The heads of terms may contain:
· what the purchaser is buying
· the value of the business
· how the purchaser intends to pay
· any other terms and conditions of the sale.

It is essential that professional advisers such as solicitors, accountants and specialist tax advisers are appointed early in the sales process and before the heads of terms are agreed. In a court of law this document may be considered to be legally binding. In our experience as tax advisors, many clients come to us already having signed this document, simply because they didn’t appreciate the future tax implications of the sale. While it isn’t impossible to re-negotiate terms, you – the vendor – are in a far weaker position with the purchaser.

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