sales of assets or shares

Selling Shares or Assets ? … it matters

I’m currently helping someone sell their business to a huuuuge perfect-fit buyer who popped up out of the blue with a great life-changing offer…

BUT

… and there has to be one…

… the buyer doesn’t want the company… they just want to buy selected assets…

OOOPS

Below I go into the pros & cons of selling the shares in your company or selling the company’s assets… but just now I want to focus on one thing…

The real Bottom Line…

… I’m talking net proceeds received by the seller on the sale of their single biggest financial asset…

Sell the shares in the company and the seller will be taxed at the Entrepreneurs Relief rate of 10%

Sell the assets of the company and the seller will be double taxed… because… 1st the company will pay corporation tax on the gain on selling the assets… & 2nd the owner will be taxed when they try to extract the cash from the company…

In this case an offer of £4m results in roughly net cash proceeds of

£3.6m if the company’s shares are sold

£2.1m if the company’s assets are sold

They’ll get 70% more cash in their hand if they sell shares and not assets

What to do ?… hold out for a share sale ? … or use the huge difference in net proceeds to shave the selling price and encourage the sale of shares…

In this case the seller can drop the price to £2.4m if the buyer will take shares… and still come out ahead of an asset sale…

That leaves a fair bit of scope for the imagination… and deal-making?

Some slightly dull detail… from the sell side

In a share sale the buyer acquires the shares of the company that owns the trade and assets of the business

In an asset sale the buyer acquires the assets which make up the business (e.g. property, machinery, intellectual property and goodwill)

Typically a share sale is more attractive from a tax perspective to a seller than to a buyer… an asset sale will often be more tax efficient for a buyer than a seller (but recent tax changes have narrowed the gap)

All you need to know about Entrepreneurs Relief 

The seller’s pros and cons

Share Sale

Pros
* A share sale is simpler for the seller as the company is sold as a ‘going concern’

* It is a more discreet sale… the business will carry on as usual

* The buyer of shares takes on all the company’s problems & liabilities

* It is usually significantly more tax efficient for the seller than an asset sale

Cons
* A share sale is a greater risk for the buyer than an asset sale because of the liabilities the buyer may be exposed to… so…

* A buyer may apply a discount to reflect the increased risk

* The buyer may expect the seller to give extensive warranties and indemnities as protection against unknown liabilities

Asset Sale

Pros

* The seller is your company and so any warranties or guarantees you give are given by your company, not you personally… (but you may be bounced into giving them anyway!)

* You can hold onto  parts of the business (and even sell to a different purchaser at a later date)

* An asset sale  involves the buyer in fewer risks and so the transaction may be more straightforward.

Cons
* Not as tax efficient for the seller as a share sale, as there are two layers of tax.

* The buyer will probably ‘cherry pick’ the assets they want to buy.

* The sale will be logistically more complex than a share sale (legally transferring all assets and contracts etc can be messy)

* You’ll still own the company and may have to sort out winding it up before taking out the cash proceeds

 

Hierarchy of Buyers

Hierarchy of Buyers… who you sell to matters?

When you come to sell your company… who you sell to can have a massive impact on the price you get… so let’s take a quick look at the Hierarchy of Buyers… worst first.

Management Buy Outs (MBOs) … usually these guys don’t have the money to buy you out… so they borrow… and anyone who borrows money has the price they can offer capped by the bankers they borrow from

And it gets worse… bankers love doing MBOs but they hate the sight of you disappearing into the sunset to live happily ever after… so the earn-out part of the deal can be big… and loooooong…

There may be cuddly reasons you’d like to do this (legacy stuff/guff) but I’m talking getting best price here… so MBO is a no…

Venture Capitalists (VCs or PE)… these are pro’s who work ‘for sale sites’, accountants, lawyers et al to find opportunities… if they’re buying your company outright they’ll look to buy it low… goose it… flip it quick…

… and buy low is a no…

Competitors… they get what you do, should understand your value (may not be a good thing?!) and there’ll be synergies when you combine… & that’ll boost the value… (2+2 = 5)…

… if they’re buying ‘opportunistically’ then the price may not be great… (everyone loves a bargain, right?)… but if it’s strategic the price may be worth it…

Complementary… these are companies not quite in your space but it makes sense for them to move into it through acquisition… they’re likely to be strategic buyers… which means they should give any Competitor a run for their money when it comes to the price they’ll pay…

…. so much for the basics… you can see that to get a better price you want strategic buyers (not opportunists) with cash (no banks involved)

… but there are a couple of other buyer-characteristics that can boost the price you’ll get…… 

Overseas buyers… will definitely be making a strategic acquisition… and so pay premium prices

PLCs... there are a few reasons why stock market companies might pay the premium price you want  (e.g. their management might be using acquisition to hit City growth targets… & they’re not using their own money!) … but I’ll just quickly explain the PE game & how it can help you get the price up…

PE game… The value of a stock market listed company can be expressed in terms of a Price Earnings multiple…  where the value of the company is measured as a multiple of its profits…

… so a Plc with £1m profit and a stock market valuation of £20m would have a PE of 20…

You’ll have heard talk about profit multiples when it comes to valuing a private business… typically non-stock market companies may sell in the 2 to 8 x profits range… (I’ll discuss this in detail elsewhere)

Now, there are a variety of reasons why private companies have lower PE multiples than Plcs (e.g. governance issues )… but the main thing is that there IS a big difference… and you can exploit that to seriously raise the price you’d get…

Say your private company makes £1m profit… and a complementary private company has offered to buy you for £8m… that’s a generous top end multiple of 8 x profits

To a Plc with a PE of 20… £1m profit could boost their stock exchange value by £20m… so your £1m profit is worth more than £8m to them… and there’s no reason why they wouldn’t share a bit of that ‘extra value’ with you !

That’s the PE game… profits are worth more to a Plc than to a private company… & they’ll pay more for them…

Here’s another definition of the PE game

So… our ideal buyer is ... a cash rich, overseas, stock market listed company, operating in a complementary sector looking to strategically move into your space here in the UK

Better still… find a few of ’em… because…

Making a Market Matters… the more people after your company the better the price you’ll get… sometimes it’s easy to forget that basic principle when talking profits & multiples & earn-outs !!!