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

 

finance

Finance further up the food chain…

I like to think this blog is for scale-up owner managed businesses… so here’s a few aspects of finance further up the food chain that may be useful to know as your capital requirements change as you grow…

And since I like to give a few ‘insights & angles’ I’d rather not list all the types of finance available… just pull out a few interesting points…

Bullet Loans

Fancy a capital injection where you make no interest payments and no repayments of capital until the end of the loan… say 3 or 5 years later ?

That means you get to use all of the cash to grow your business… and pay absolutely nothing back for 3 to 5 years…

… and even then you can ‘roll it’ into a new loan…

They’re called Bullet Loans… and larger companies can get them from high street banks… so why not you?

I know a big name bank doing Bullet Loans for guys like you… if you’re looking to borrow £500k or more… and it’s one of those things where the more you’re trying to borrow the easier it can be to get

Private Equity

PE investment companies come in all shapes and sizes… with different specialisms and interests… and for me they differ from Venture Capitalists by liking less speculative opportunities…

PE outfits will gravitate towards companies & teams already well on their way who’d like to unload some (or all) of their shares to professional investors who’ll help drive continued growth…

Once you’ve got EBITDA (Operating Profit adjusted for Depreciation) around the £1m mark, picking up interest from PE outfits gets easier… and if you can show a route map to trebling EBITDA in the next 3 years it’ll definitely get them excited…

Venture Debt

I love finance… it’s an incredibly innovative space… full of developing financing options you may not know of… like Venture Debt

While PE houses gravitate to EBITDA producing investment opportunities… Venture Debt providers will be there for zero profit companies… early stage growth companies… and even start-ups…

I include it in this blogpost because you can’t get Venture Debt for just a few grand… it’s serious money for serious growth prospects…

The debt terms can be very flexible… ranging from traditional repayment models to interest only with balloon payments… but it comes with some rights to convert debt into equity so the lenders can become shareholders in the company under certain conditions…

The lender gets traditional security levels (charges over company assets etc) but the extra risk of lending to riskier companies is compensated for by equity warrants (chance to own shares in a growing company)

Personal Guarantees

As you take in more capital the Personal Guarantees you might be asked to make can get a bit big on you…

… you may not mind PGing a £20k overdraft facility… but PGing a £600k loan might make you & those back at home wince…

You can now insure against a PG being called in… and as the PGs get bigger this option may well suit

But if insurance doesn’t appeal… and if the PGs are called in… there are specialist Lawyers who negotiate with the banks for you and drive the amount you have to pay up waaaaay down… often with a no gain/no pain fee structure…

Loans against your shareholding

Rare as rocking-horse poop… but as your company grows and attracts outside investment you may find yourself locked in…

… you can’t sell your shares… can’t earn money outside the business… and your wages etc may be capped…

And to add to the frustration… your shareholding in your company may be your biggest financial asset… but you can’t use it !

Or can you?… there are people out there who’ll let you raise money using your shares as security.

Interesting times for Finance

Even if none of the above works for you…  the point is… different sizes of companies, at different points in their growth cycles have lots of different options…

… and the financial innovation at the moment can seem absolutely dizzying with oodles of new offerings…

… so…

… at the risk of invoking the ‘Chamberlain Curse’… why not make the most of living in interesting times… ?

 

 

audit

Audit… hear, hear

I never liked auditing… but I like audits

Way I see it there are only two reasons not to have an one… cost & hassle… but here’s a few thoughts on why having an audit can be a good thing

Credit Ratings…

… the agencies love audits… it means a pro has checked your systems to make sure the numbers produced are solid & that they class you as a Going Concern (likely to continue in business for the next year)… and that gets you a better credit rating…

Funders…

… bankers, shareholders et al get comfort from an audit… wouldn’t you, if you were them?

Buyers…

… you’d be happier buying a company whose numbers have been audited, right?

Hassle is good…

… the systems checks auditors do can help improve business processes, introduce best practice, and prevent fraud & cock-ups

 

The Government keeps lifting the limits and reducing the number of companies who MUST have an audit… but for companies looking to really scale-up that may not be doing them any favours…

I’m with the Norwegians… this ‘let’s exempt smaller companies’ has gone too far… they’re looking to introduce a Nordic audit for smaller businesses… but I won’t be holding my breath here in the UK…

Yet I’m not the only one to say hear hear to an Audit

Just over a quarter of respondents to an ICAEW survey of small businesses carried out in 2014 felt it would be better for the economy if businesses like theirs were required to have an audit. Nearly half of businesses with between 10 and 50 employees said they would have an audit even if this were not compulsory.

For financial years beginning 1st January 2016, a company is exempt from needing an audit if they meet 2 of the following :

Turnover over £10.2m

Total assets greater than £5.1m

More than 50 employees

That’ll stop another 10,000 companies needing an audit 🙁

survival rates

Survival… a fitness test

Here’s a table I knocked together from ONS data showing the survival rates of companies founded from 2007 onwards

If you’ve survived 5 years, take a bow… one of only 4 in 10 who made it…

And the third year seems to be the toughest

survival rates

Asset Lives

Asset Lives… they matter

How long you plan to use an asset affects the Depreciation going through your accounts… which means asset lives matter to your Profits and your Balance Sheet.

Assets are depreciated over the period you expect to use them…

If you expect to use a £100,000 asset for 4 years… this year’s Depreciation could be £25,000

If you decide instead you’ll use it for 5 years… this year’s Depreciation could be £20,000

That’s £5,000 extra profits Tax Free… (because Depreciation of Tangible Assets has nothing to do with tax)… and at the end of the year the asset will be carried in your Balance Sheet as worth £80,000 instead of £75,000

Profits up… Balance Sheet strengthened… a win win

All about Judgement

How long you’ll be using the asset is down to you… it’s all a matter of judgement (or educated guesswork)… and you can review asset lives every year...

So when you buy, say, a £100,000 asset you may expect to use it for 4 years… the Depreciation cost each year for the next 4 years will be £25,000

After 2 years it is in your Balance Sheet as an asset of £50,000

BUT… you realise you can now get another 5 years out of it … (perhaps because of repairs you’ve done, or you were being too cautious when you made your original estimate)

… so the Depreciation in year 3 will drop from £25,000 to £10,000 … !

Asset Lives… Definitions

The Useful Life of an Asset is defined by FRS102 as either…

1  The Period over which an asset is expected to be available for use by an entity… or

2  The number of production or similar units expected to be obtained from the asset by an entity

If you bought a £200,000 lorry you may have a policy of selling all lorries after 4 years… in which case you are using definition 1. and will depreciate the lorry over 4 years… so in the first year Depreciation would be £50,000

If instead you have a policy of selling lorries after 100,000 miles, you’re using definition 2…. and if in the first year you clocked up 50,000 miles… then the first year’s depreciation charge would be £100,0000

FWIW

Repairs & Maintenance do not stop the need to Depreciate assets… but they may change the expected Useful Life of the asset and so will either impact the Residual Value.. or prolong the period that the company will use the asset (and so reduce the Depreciation charge each year)

Useful Life… An asset’s life in this context is not the total expected life of the asset… but the period that the company will get use from it… (“the period from which the entity expects to consume economic benefits from the asset”).

FRS 102 para 17.21 gives 4 points to consider when determining the Useful Life of an asset

 

 

 

 

 

Residual Value… there’s real value in there

Accounting rules mean your profits get hit by Depreciation… but you don’t have to take that lying down.

Ask your accountant how they handle the Residual Value of your assets… it could boost your Profits… tax free.

Residual Value… definitions

Your company’s depreciation policy is “the systematic allocation of the depreciable amount of an asset over its useful life”*…

… a few strange technical phrases in there.. but it’s the ‘depreciable amount’ that I’m interested in here… because that’s defined as “the cost of an asset… less its residual value“*

and ‘residual value’ is in turn defined as “the estimated amount that an entity would currently obtain from disposal of an asset… if the asset were already of the age and in the condition expected at the end of its useful life”*

What’s it mean?

You take the cost of your asset… and then deduct the expected value of that asset when you stop using it… before working out the annual Depreciation cost of using that asset

… say this year you bought a company Car that cost you £100,000… and you expect to use it for 4 years…

… some accountants would charge £25,000 Depreciation against this year’s profits for using the car… (£100,000 spread over 4 years)

BUT

… at the end of the 4 years the car still has Residual (second hand) Value… estimated today to be, say, £40,000

So the REAL cost of using the car this year should be…

Original Cost £100,000 – £40,00 Residual Cost … =  £60,000  spread over the 4 years you’ll be using it…

That would make this year’s Depreciation charge £15,000… instead of £25,000

So accounting for the Residual Value of your company car when you stop using it has generated an extra £10,000 Profit… tax free… and a stronger Balance Sheet too.

Who decides the Residual Values… & how?

You’re responsible for your accounts so it’s really up to you.. but best to get your accountant on board…

…  under the new FRS102 rules Residual Value is calculated by looking at the price your asset will fetch at your year end date… but making allowance for the age & condition it will be in when you stop using it…

(so… your £100,000 car may have been new this year … but at your year end you can figure out its Residual Value by looking at prices for a 4 year old version of the same car)

Objections?

How can there be?… rules is rules and the new FRS102 says Residual Values should be considered regularly to make sure they stay up to date… so you can revisit any old Residual Values your accountant’s been using…

… and if your accountant hasn’t been using Residual Values before… get them to start doing it… changing the way they depreciate your assets would be considered a change in an ‘estimate’ so needs no extra disclosure or any restating of old numbers…

FWIW

The old rules said Residual Values should be based on prices prevailing at the date of acquisition (or revaluation)….

The new rules say Residual Values should be based on prices prevailing at the Balance Sheet date*

*FRS102 Glossary of Terms

also FWIW…

A change in depreciation method is accounted for as a change in an estimate … IFRS 102 para 17.23

Dividends instead of Salary

Dividends instead of Salary… don’t do it !

There’s only one reason to pay yourself Dividends instead of Salary… to avoid a bit of tax / NI… but here’s 5 reasons not to…

Dividends are not ‘relevant earnings’ for pension purposes.. so payments into your pension can’t be deducted from any Dividend income… but they can be from any Salary

Salary makes your affairs simpler, clearer… with tax paid as you go along… minimising lumpy shocks & payments of extra tax in January & July

Funders don’t really get you paying out their money as Dividends… try telling some of them you’re paying yourselves that way to avoid paying some tax & see how they like it… particularly if you’re trying to raise new money… (I know a Bank Manager who absolutely hates it)… and if you’re looking to work with Venture Capitalists & Angels they’ll often put constraints on the company paying out Dividends

R&D tax reliefs are now so generous that companies will often forego a Grant to keep the tax relief… a Salary for someone working on R&D (that’ll be you too as the company Owner Manager) attracts a lot of relief… Dividends don’t count

Overdoing the Dividends can turn ‘Profits to Losses’… not strictly so… but taking out too many Dividends in any one year can shrink your Balance Sheet… making it look like your company made a loss… when it may have made a Profit… which’ll hurt your Credit Ratings

So… as the tax regime around Dividends gets tightened up… and the smell around some forms of avoidance gets stronger… maybe it’s time to have a word with your accountant… and make sure your Dividend payment policy still suits you…?

 

Source Documents & Calculators

New Dividend Tax Regime

Cracking Tax Calculators to play with

Simple explanation of Pension & Divs for tax year April 2017 and how the company can make tax deductible contributions to your pension… even if your low Salary means you can’t

The picture with this post comes from Salary Versus Dividends & Other Tax Efficient Profit Extraction Strategies: Written by Nick Braun

Capital Allowances

Capital Allowances… have you any waiting to be claimed?

If you’ve spent money on assets you have the right to Capital Allowances… which help reduce your tax bill… but are you claiming all that you can?

Sometimes keeping up with all the rules & wrinkles can be a tad too much for smaller accountancy practices… particularly the rules related to property…

e.g. did you know you can claim capital allowances for fixtures & features on buy to let properties?… without invoices for the work done?

There are specialist tax firms who’ll take a look at an Owner Managed Businesses assets to figure out :

1. if there are claims to be made… and

2. if claims are being made are they being maximised

And they bill on a no-gain-no-pain basis… so what have you got to lose?

Here’s a firm who’ve had a lot of success maximising Capital Allowance claims… Leeds Based

The C3 Group .  and here’s a flier introducing you to Peffs

Permanently Embedded Fixtures & Features (PEFFs) may be claimed on most types of commercial property, from retail or industrial units to offices and factories, to bars, hotels and restaurants. They can also be claimed on more specialised commercial properties such as nursing homes, doctor or dentists surgeries, sport centres and even data storage centres. PEFFs can also be claimed on residential buy to let properties that are let to more than one unrelated persons such as student accommodation.

Why not check it out & claim all the Capital Allowances you can?

R&D Tax Relief

R&D Tax Relief… use it to raise money?

R&D Tax Relief isn’t just a great way to get HMRC to help fund your Research and Development… you can use it to raise money

Already Claiming?

26% of declines by banks are because of affordability… which means your business plan & forecasts haven’t convinced them that you can afford the borrowing you’ve applied for …

So make sure your plan takes into account that you’ll be paying out less in tax every year you’re doing R&D… or even getting money in from HMRC… (because if you make a loss you can surrender your tax relief for cash from HMRC)

I’ve recently seen business plans from two companies that already claim R&D Relief… and will keep on claiming it year in year out… but their forecasts didn’t take that positive ‘cash-flow’ and profit effect into account…

Not Claimed R&D Tax Relief yet?

Why not? HMRC really are keen for you Owner Managed Businesses to do it.

So much so they’ve recently introduced ‘Advanced Assurance’ ...

If you’ve never claimed R&D Tax Relief before… have Turnover less than £2m… and less than 50 employees… you can go online and see if your R&D plans qualify for this cracking tax break…

… and they will give you a written confirmation that your plans will qualify for up to the next 3 years…

… so when you model your cash flow & profit forecasts you can take account of the reduced tax you’ll pay… or the tax that HMRC could actually end up paying you…

… that will make your plan more realistic… and any funding you’re trying to raise will look more affordable…

DIY

Like me, HMRC are aware that a lot of you have accountants / advisors who aren’t working the R&D wrinkle for you… so they’re happy for you to go DIY… take a look… the Advance Assurance is all done online…

 

 

 

 

 

Offshore

Offshore Furore

When I was a trainee accountant I sat in a meeting where a client asked one of our Partners to put some of his money Offshore…

The Partner thought about it… then stunned the room by waving at the door and saying “That’s the way Offshore… f*ck off”

Lord knows what that Partner would say to the Prime Minister…

Evading the discussion about Avoidance

Avoidance is legal, evasion is not… but one man’s avoidance is another man’s evasion… whatever the law actually says… and that’s the problem for the PM…

Punting money abroad to manage your tax liability seems tacky, dirty, or downright dishonest to a lot of Brits…

But do they feel the same about putting money into a pension & getting a tax break… or into an ISA where the income is tax free…

Or is it really all about availability… ?

If avoiding tax Offshore was available to all and pushed & promoted by the Chancellor as Pensions & ISAs are … would the PM be having such a tough time… ?

Who’s next in the firing line?

It’ll be interesting to see if this spills over into a more general look at other wrinkles that help some pay less tax… wrinkles that aren’t available to all…

e.g. you guys taking Dividends instead of Salary to avoid National Insurance

e.g the ‘Entrepreneurs-only’ 10% tax rate on Capital Gains made when selling your business…

Both completely indefensible in my book…

But like I say… one man’s ‘let’s do it’… is another Partner’s ‘f*ck off’