By Simon Hughes, partner at Taylor Watson (www.taylorwalton.com)
Just as dire predictions about the UK economic recovery and news of stalled Brexit negotiations are driving a pessimistic out-look amongst business owners, along comes the Office of Tax Simplification (OTS) report to further darken the mood.
The report, the first to consider Capital Gains Tax (CGT) specifically, was undertaken in response to the Chancellor’s request ‘to identify opportunities relating to administrative and technical issues as well as areas where the present rules can dis- tort behaviour or do not meet their policy intent.’
The report offers suggestions, which if accepted will fundamentally change the capital gains tax rules, going so far as to suggest aligning CGT rates with income tax rates, which will significantly increase the tax paid when a business is sold.
Another blow to those thinking of selling, having only just recovered from the reduction in March of the Business Asset Disposal Relief limit from £10 million to £1 million, with any balance of CGT payable at a rate of 20%.
If as suggested the rates were to be aligned in the Budget, this 20% rate would be increased to 45% and owners will pay a huge increase in tax following the sale of their business.
Still time to get a sale arranged
Whilst the uncertainty around Brexit remains and the economic impact of the pandemic is expected to extend into 2021 and beyond, it may not be the easiest time to sell a business, but for those ready to sell, there remains a window for still extracting maximum personal reward from any deal.
If you are already in discussions with a potential buyer, it’s crucial that at the earliest possible opportunity you require them to execute a Non-disclosure Agreement and only then proceed to full legal documents once the prospective transaction is well-described in a ‘heads of terms’ agreement.
If you are trying to sell now before any changes to the CGT rules it’s critical to get the advice of experienced corporate lawyers who will ensure that as the seller you do not make easy or unnecessary concessions early on in the ‘heads of terms’, before the deal becomes binding.
With the right advice at an early stage, there is more likelihood of being able to get the buyer to commit to key points crucial in maximising the value you can generate, which might include:
• Cash at Completion: this maximises the up-front payment made to you and minimises any extended earn-out;
• Security for deferred payments: if any payments are to be deferred, it is important to establish what security the buyer can offer;
• Clarifying what the price really means: it is also crucial from the outset to properly describe the interdependence of price i.e., whether it assumes a cash-free, debt-free asset and whether a target level of working capital is required;
• Locked box vs Completion Accounts: proposing a Locked Box structure instead of completion accounts.This generally favours the seller by accelerating any asset-value disputes to a point, before signing the share purchase agreement, when you have more bargaining power, rather than after completion when the buyer arguably has greater leverage;
• Liability limitations: establishing the level of financial-based and the duration of time-based limits on the seller’s warranty liability;
• Buyer’s ability to fund: establishing whether the buyer requires third-party financing to complete the deal and whether that introduces greater uncertainty to the prospect of a deal;
• Timetable: setting timetable expectations and limits on any exclusivity period
These are just a few considerations and a conversation with an experienced corporate law team, will undoubtedly throw up a lot more pertinent ones, but the key thing is to seek advice early in the process, long before you talk to anyone, even close associates, about selling your business.
If you hope to sell your business, any corporate lawyer will be happy to talk you through the process and explain what is possible in the time available to ensure you extract the maximum value from the sale, whilst making the process as painless as possible. But don’t wait too long.
About the author: Simon Hughes is a partner in Taylor Walton’s Corporate & Commercial team. He has 25 years’ experience advising business owners and management teams on mergers and acquisitions, leveraged buyouts, restructuring and other corporate transactions.