The number of company owners and directors wishing to sell their
companies or change their shareholding position is
increasing. For some, the Credit Crunch has brought forward
plans for changes to their business. For others, this is the
last recession they want to experience and they want to get out of
the rat race. The question I am often asked is: "what needs to be
done if some (or all) of the shares or assets in the business are
to be sold, can't I just shake hands and walk away?"
Forgoing any formalities and just shaking hands and waving
goodbye is not a good idea. When the pitfalls are highlighted
to each party they invariably agree that a comprehensive contract
is required to lay out exactly what is and is not being sold.
The first question to answer is: whether the a) assets of the
company (buildings, stock, goodwill etc) or the shares (everything
in the company, including debtors and creditors) are going to be
sold.
A Share Sale:
If the share sale route is chosen, most of the work will be
devoted to defining the value of the company, the shares, and
agreeing the risks or liabilities that are passing with them.
Share transfers are described as being 'warts and all' sales,
not only do you take the value in the company but also the debts.
Companies change hands for £1.00 from time to time; potentially the
company could be worth millions but the debts and liabilities have
cancelled out any value and the buyer inherits the liabilities.
They key is getting the balance of interests right, departing
shareholders want to have a clean break whilst remaining
shareholders want to share the misery if the inland revenue demand
more tax than was expected. In all likelihood the company won't
have the cash reserves to make a lump sum payment so earn-out
provisions or instalments are needed. What's fair in these
situations is up for negotiation but clean breaks are rare and the
transactions are higher risk.
An Asset Sale:
Asset sales are lower risk and they can be closer to a 'clean
break' transaction. The ownership of the assets should transfer
without any of the businesses' liabilities, if the business has
unpaid bills it remains the seller's problem. So long as the assets
are carefully valued and no liabilities are inherited, the buyer
shouldn't have any nasty surprises. The downside is that tax
liabilities can be higher and the buyer will be the new owner
whereas in share sales the owner (the company) remains the same.
New owners may not inherit the relationships with customers and
suppliers the previous owner had so picking the right format is
critical.