The importance of pre transaction planning

The sale of a business is a process with a timeline.

Previous articles have looked at the importance of addressing due diligence [Improving value through financial and tax due diligence] and aligning the equity interests of the stakeholders [Realising value: the importance of correctly structuring equity ownership] at the commencement of that timeline (ideally at least two years in advance of a sale).

What of pre-transaction planning? This is the planning entered into before a potential purchaser has been identified (or even actively sought) and is distinct from the planning to be entered into in the course of negotiating the deal (the subject of a forthcoming article on “locking in value” in the course of the contractual negotiations).

To give this planning phase a time frame it is broadly the 12 months prior to entering into Heads of Agreement (although such prescience is unlikely to be available save with the benefit of hindsight!).

The pre-transaction period is a time to finalise the structure of the business to be sold and prepare the vendors for that sale.

In terms of preparing the business for sale a number of potential issues may need to be addressed.

The business may have acquired assets that are not to form part of a future sale. There may be property interests which are to be retained, either directly in the ownership of the shareholders or by way of transfer into a “Prop Co” in common shareholder ownership.

For companies that have previously been “lifestyle” businesses there may be private assets (cars, yachts and other playthings) to be extracted into appropriate direct shareholder ownership.

IP rights may have been retained outside the company and may need to be restored in advance of a sale (or may be held in the business and need to be extracted).

The importance of addressing what is to be sold extends beyond simply cleaning up the balance sheet. The business may comprise different trading divisions at differing stages of development and with different potential destinies.

The ability to hive-down or demerge such activities into separate but common shareholder ownership will be an important consideration in this pre-transaction phase.

Conversely there may be businesses that for historical reasons have been carried on as separate divisions or in separate but associated ownership where these should be combined.

Any asset extraction, reorganisation or restructuring of the business should take place now comfortably in advance of Heads of Agreement. With an appropriate tract to future time “tax clearances” may be obtained to enable such restructuring to be entered into on a tax neutral (or as near as may be) basis.

Once “arrangements are in force” (tax speak for a possible sale) these clearances may no longer be available and certainly will prove more difficult or impossible to obtain.

In many cases unnecessary tax costs will be borne to facilitate restructuring that should have been dealt with well before “heads”.

Leaving aside the tax costs unnecessarily incurred, management time will be better employed in the immediate pre-sale period engaging with the potential purchaser rather than restructuring what is to be sold.

Dealing with such matters creates pressure on the management team in delivering the sale and gives an impatient purchaser a negotiating advantage at a crucial stage in the sale of the business.

Similarly, this pre transaction phase should be used by the vendor shareholders to consider, on a more holistic or strategic level, their financial and tax planning in advance of the intended sale.

The founder shareholders in particular should give some initial thought to their personal tax and wealth management. In terms of the former, the availability of entrepreneurs’ relief is a key consideration.

Entrepreneur’s relief gives a favoured 10 per cent rate of CGT and is available for shareholder’s holding at least 5 per cent of the share capital (tested by reference to an entitlement to both 5 per cent of the voting rights and 5 per cent of ordinary share capital).

In addition the shareholder must be an employee or director and all of these conditions must be satisfied throughout the 12 months to the date of the sale (coincidentally the pre transaction phase for present purposes). Satisfying these tests only at the time of sale is insufficient and too late!

While accessing entrepreneurs’ relief is likely to be the main focus in tax planning for an exit (at an acceptable tax cost at least) consideration should be given in this pre transaction phase to wider planning beyond the immediate CGT liability.

Where that planning involves passing wealth to family members, including children and grandchildren, either directly or by way of suitable family trusts then consideration should be given to making those transfers now.

Shares in a trading company are favoured for tax purposes and particularly so for inheritance tax.

The shares in a trading company will typically qualify for 100% relief from inheritance tax as business property (under the business property relief provisions).

Implementing these gifts now, particularly if a family trust is to be utilised, will give an IHT free transfer as business property as compared to gifts out of post-sale cash which potentially results in a lifetime inheritance tax charge at 20 per cent.

IHT planning should not commence at precisely the point that a tax favoured asset is exchanged for a non-favoured asset!

The pre transaction phase is one in which the essential groundwork and planning for the targeted sale is put in place: both as regards the business to be sold and the vendors’ strategic financial planning arising out of the expectation of such a sale.

It is key to a successful outcome of the eventual sale: planning overlooked now may not be recovered once the pace of events increases following first contact with a potential purchaser.


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Neil Simpson

Tax Partner at haysmacintrye, Neil advises on a range of tax issues focusing on transactional matters and tax structuring, particularly for early stage businesses and those preparing for, or seeking an exit. He has wide experience of advising on the impact and mitigation of direct taxes in the course of business transactions generally and those related matters as they impact on the owners and their key employees.

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Tax Partner at haysmacintrye, Neil advises on a range of tax issues focusing on transactional matters and tax structuring, particularly for early stage businesses and those preparing for, or seeking an exit. He has wide experience of advising on the impact and mitigation of direct taxes in the course of business transactions generally and those related matters as they impact on the owners and their key employees.