Getting ready to sell your business

By Toby Walker

Associate Solicitor

07 June 2023

Article Insights

Are you considering selling your business in the next few years? If so, it is worth considering a number of practicalities in advance so that you are ready when the time comes.

How the sale is structured will be the first key consideration. This can be either:

1. selling the entire issued share capital of the company (commonly referred to as Share Sale) – the shareholder(s) will be party to the transaction; or
2. selling specific assets of the company – i.e. the business of the company (commonly referred to as an Asset Sale) – the company will be party to the transaction.

With a Share Sale, you will be selling the entirety of the company including all the assets, liabilities and any other obligations the company owes. Whereas, with an asset sale, the seller and buyer can negotiate which assets, liabilities and other obligations are sold.

There are a number of tax advantages and disadvantages for each of the buyer and seller in both of types of sales.

Tax implications

(a)        Share Sale

A sale of the shares will create a chargeable gain if the shares are sold for more than the price at which they were originally acquired. This means that Capital Gains Tax (CGT) may be due on the difference. Whilst an individual currently has an annual exempt gain of £6,000, any gain in excess of this is charged to CGT at 20%.

However, there are tax relief options available for those who opt for a Share Sale in the form of Business Asset Disposal Relief (BADR) (n.b. previously referred to as Entrepreneurs’ Relief). If BADR applies, the rate of CGT will be reduced to 10% (subject to a £1m lifetime limit on chargeable gains). In order to qualify for BADR, the following criteria must be met:

1. the company must be trading (or the holding company of a trading group);
2. the shares must have been held by you for at least 2 years before the disposal;
3. the shares must amount to at least 5% of the total shares (and the total voting rights);
4. the shares must also be entitled to either 5% of (i) the profits that are available for distribution on winding up the company or (ii) the disposal proceeds when the company is sold; and
5. you are, on the date the shares are sold and have been for the 2 years preceding, an employee or office holder of the company (or a group company).

(b)        Asset Sale

An Asset Sale is slightly more complex as it usually involves various categories of assets and the sale of each category of asset will have different corporation tax consequences for the selling company.

If an asset is sold for more than its tax written down value (original purchase price of the asset) then it will incur a chargeable gain and corporation tax will have to be paid (at a rate anywhere between 19% and 25%, depending on the profit of the company). A sale which includes intangible assets such as goodwill or intellectual property could trigger a tax charge under the intangible assets tax regime.

It may, however, be possible to offset the chargeable gain of one asset against another. In other words, if an asset is sold at less than its original purchase price, a balancing allowance may arise and could be set off against gains realised on other assets sold.

There is likely also to be a further tax charge when proceeds of sale are distributed out to shareholders. Generally a Share Sale tends to be more tax efficient for sellers than an Asset Sale.

EMI Option Shares

Some companies may choose to reward, retain or attract employees by way of offering shares to such employees, rather than by offering cash by way of bonus or increased salary. This is often done through an Enterprise Management Incentive (EMI) scheme which allows businesses to give their employee the option to buy shares in the company in the most tax efficient way possible.

Granting EMI options provides employees with an incentive to remain with the company until a sale, thus participating in the distribution of sale proceeds.

EMI option schemes come in the form of either (i) an HMRC approved EMI option scheme or (ii) an unapproved share option scheme.  An EMI option scheme that is approved by HMRC offers potentially significant tax advantages to both the company and the employee, in their capacity as an option holder. Whereas an unapproved share option scheme does not come with any tax advantages.

To enable an EMI option scheme to be approved by HMRC, it must meet the following requirements:

Valuation of a Company

It is important to understand the different methods available for valuing shares in a company to ensure that offers received from prospective buyers are fair.

There are numerous factors which can affect the valuation figure, including, but not limited to, gross earnings and profits, asset base, levels of cash, debt and working capital, customer and supplier base, employees, the industry you operate in and market conditions.

Whilst there are a number of ways in which a company can be valued (depending on type of company/ business operated), the most commonly used method is the EBITDA multiple: this involves applying a multiplier to the EBITDA of the business (earnings before interest, tax, depreciation, and amortisation).  The multiple to be applied will vary by industry sector and guidance will need to be sought from a financial intermediary.

Should you which to discuss any corporate matters, including selling or buying a business or company or the implementation of EMI option schemes, please do not hesitate to contact our Corporate & Commercial Department on 0330 024 0214.

Disclaimer: General Information Provided Only
Please note that the contents of this article are intended solely for general information purposes and should not be considered as legal advice. We cannot be held responsible for any loss resulting from actions or inactions taken based on this article.