When the idea of selling the company matures in the mind of a business owner, there’s still a long way to go before the company can be successfully sold. There are many legal and tax matters to be seen to as part of the process – and these should not be left to the last minute. We discuss a few of these here.
Decide exactly what you want to sell
A private company often contains an eclectic mix of business interests of the owner. Sometimes even assets used for private purposes are incorporated in the company. And sometimes it turns out that the owner would prefer to keep part of the business (such as the property that’s being used for running the company) and only wants to sell the company’s operation.
It’s therefore a good idea to “clean up” the company before selling it, and to keep only those assets in the company that the owner actually wants to sell or that will provide added value to the buyer. However, if one wants to do this in a tax efficient way, that often makes the process extremely time-consuming: while setting up a holding company can be done in a matter of weeks, a possible split or merger can take up to half a year. So, it doesn’t hurt to start tidying up as soon as possible.
Don’t rely on the owner’s memory when it comes to contracts
In the case of privately held companies, the firm doesn’t always have detailed contractual documentation in place. As such relationships are based on trusts in each other, the parties to a contract often don’t think it necessary to put everything in writing. At other times, the parties simply forget to record their agreements in writing.
But what may be perfectly fine for the founding owners, it may be far from sufficient for professional investors or new owners. The lack of detailed, written contracts during the pre-sale legal due diligence phase is a serious source of risk, and it can easily erode any previously agreed sale price. Further, if someone tries to put its contracts in writing at the last minute and is already tied to various transaction deadlines, it is starting from an extremely bad bargaining position vis-a-vis the other contracting party. It’s therefore well worth launching this process as soon as possible.
Are minority shareholders likely to be a problem?
The seller is not necessarily the sole owner of the company being sold. There can be several reasons why there are minority owners in the company in addition to the main shareholder. While the lineup does not necessarily mean a problem for the seller, prospective buyers may not be willing to take on the extra hassle of having to deal with the minority shareholders. Even if they’re often unable to have a meaningful say in decision-making, they can, due to their minority rights, give the principal owner a hard time.
It is therefore advisable to consult with the minority shareholders well before the transaction, to find out whether they would like to be involved in the sale in some way. One solution might be to buy the minority owners out before the sale. It’s worth bearing in mind that as soon as small shareholders get wind of the company sale, they can squeeze out significantly better terms for the purchase of their own stake – and they can even stymie the sale process altogether.
How can we incentivise management?
When an owner gets close to an exit, there is often the opportunity to share a portion of the profits from the sale with key employees or members of the management who’ve contributed to the company’s growth over the years. In other cases, it may be worth motivating management specifically in the interest of ensuring a successful sale.
From a tax point of view, however, it makes a difference which form of incentives we choose. In order that a company can develop a reward system that’s favourable from a tax point of view, it’s often necessary to think and act ahead of time. If the question of how to remunerate management occurs to the owner a few months before the sale only, it’s difficult to prevent the reward thus paid from being classified as employment income. If, on the other hand, the owner thinks about this in time, there are a number of options available to provide such payments in the form of a more favourable capital gain for example, by setting up an ESOP (employee shared ownership plan).