Our team are specialists in mergers and acquisitions. We regularly help business owners who have built their companies up over decades or who have accelerated their startup journey and are ready to exit. We work with corporate finance advisers, accountants and tax lawyers to make sure our clients don’t leave money on the table.
If you’re building a business, how to exit should be on your mind, but there are three key reasons why Seller’s leave money on the table – here are a few reasons why and how to avoid them:
1 Not spending sufficient time on pre sale planning
Selling a business or deciding when to exit is a key consideration for a board of directors or individual founder or co founders. However, the day to day running and growing of the business often understandably pushes pre sale planning to the very back burner until the inevitable happens: an exit becomes a priority either as a result of a change in economic, commercial or personal circumstances, a fall out arises between shareholders or a sensible Buyer comes knocking with an unexpected and attractive offer. This invariably accelerates the timetable and creates added pressure as everyone involved starts to play catch up.
At this point, it is not often possible to put in place sensible planning for example tax considerations which can and usually do take years to properly implement.
Sellers should consider tax issues at as early a stage as possible in order that they can ensure maximum efficiencies are achieved. Individual Sellers will want to consider the tax implications of a share sale on their personal position.
Some Sellers may be employees of the selling company and so careful analysis of their historic position will be needed to understand whether there are any Income Tax implications on sale.
For non-employee Sellers the capital gains tax implications on the sale of shares will be key and in particular whether any reliefs are available to reduce tax. This may involve considering qualifying conditions for Business Asset Disposal Relief (formerly known as Entrepreneur’s Relief) or in cases where the shares were subscribed for under the SEIS/EIS scheme, considering whether the conditions for exemption have been met.
As well as understanding the individual Seller’s basic tax position on sale, it’s important to understand how the shape of any particular deal will impact upon those Sellers. Will the Buyer pay 100% cash on completion or, as is often the case, will there be a form of deferred consideration or an earn out? Each has tax implications for the Sellers. So too do deals in which the Sellers will receive shares in the buying company and any transactions involving non cash consideration should be carefully analysed at the earliest opportunity.
Inheritance tax planning should also be considered before Sellers exit a business to ensure that wealth from sales proceeds can be properly preserved for generations to come.
It may also be that bespoke advice will need to be sought before your shareholders will approve either the price, structure or the sale itself. Our clients benefit from a tax analysis from a specialist adviser to use as a roadmap even before a sale takes place and we are happy to recommend Winslows with whom we regularly work to provide this advice.
2 Not taking advice at the Heads of Terms stage or earlier
Some Sellers only instruct solicitors when they have a deal in principle. This can be to minimise costs or because those negotiations are considered part and parcel of the commercial role of the board, founder or commercial director. “Legals” come later. It is often the case that financial due diligence has taken place and sensitive commercial and financial information provided possibly without an effective NDA in place meaning that key information is not protected.
There are also several tax issues that should be dealt with at the Heads of Terms stage, to ensure no problems are triggered and that valuable tax assets are taken into account in the commercial negotiations.
In addition, without professional advice, the following has often been agreed with costs consequences:
- whether the sale is an asset sale or a share sale
- the price
- the time table
- key assumptions
- exclusivity clauses often with penalties attached
There is no standard form for Heads of Terms in private M&A. They can vary from a simple letter to a more comprehensive agreement and to avoid being caught out by what appear to be standard terms, do take advice on the draft presented to you. Heads of Terms have a moral angle to them and even if they are stated to be subject to contract, it is harder to clawback a commercial position once signed.
3 Not being up to date or accurate with Companies House filings
Company law is technical, requires company directors to comply with specific timetables and there are limited options for forgiveness, especially if you build errors upon errors and the filing history is then fundamentally wrong over a period of time. Failing to file on time within the prescribed guidelines may be corrected by late filing but if you issue and allot shares and get the cap table wrong or include option shares in confirmation statements by mistake or don’t secure proper authority for an allotment or fail to comply with pre emption rights following the prescribed process, the Buyer is rightly going to want these matters to be fixed and if matters can’t be fixed (at a cost to the business), then there will be a negotiation around purchase price or added warranties and indemnities.
Negotiating these provisions costs more money and having them in place exposes the Sellers to additional risk. If Sellers are not also directors, they will usually not provide warranties and indemnities which means directors become personally responsible for any such claims. Their warranty and indemnity insurance may be available but it is not guaranteed and also comes at a price.
Compliance goes beyond company filings and issues dealing with intellectual property (IP) including ensuring consultants and employees transfer this to the business on an ongoing basis through proper agreements or making sure the company owns domain names or trademarks also crop up frequently. Delays in remedying these issues invariably costs time when time is not at a premium and of course results in additional fees. If employees and consultants are no longer involved in the business, this creates an entirely different issue.
One key piece of advice is to carry out an annual review of your Companies House filings to ensure potentially costly mistakes can be picked up sooner rather than later.
“I repeat again what an amazing journey this has been. You and Melody have been there supporting us and pushing us on the whole way through. There is no one with whom we would rather have embarked on this major adventure and no one who could have done it with such charm, efficiency, commitment and perseverance.”
Jennifer Chandler, Managing Directer, on the sale of Marten Walsh Cherer Limited – UK’s leading firm of court and verbatim reporters since 1871.
Our services
We are a boutique and specialist commercial law firm delivering corporate & commercial legal advice to start-ups and scale-ups. If you are launching your first business, exiting or have an established track record and need specialist commercial law advice, we can help. Read about who we have helped here:
https://fortunelaw.com/clients-and-results/
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