For the majority of owner-managers, the time will come when they either want to take in equity investment from outside or sell the business to a third party. The reasons can vary from a need to raise additional capital to fund growth to a wish to retire in financial comfort having spent a lifetime building up a business. Whatever the reason, careful planning is required to maximise the value of the business and minimise the tax exposure of the shareholders.
According to Matheson tax partner Aidan Fahy, there are four broad headings to the process: the structure of the business; planning at shareholder level; employee and pension planning; and planning for the deal.
Structure
“You have to ask what’s there at the moment and if some form of pre-sale restructuring is required,” says Fahy. “There could be a mix of business and investment assets which need to be separated out. There might also be different businesses within the one company which need to be split up.”
It could be the case that the owner wishes to retain certain land and buildings, or even certain elements of the business, following a sale and this requires advance planning. “It might be the case that land and buildings don’t have to travel with the business and you might have to look at hiving off or hiving down certain parts of a business into a new company,” Fahy points out.
This makes for a clean deal where the purchaser or investor knows exactly what they are getting for their money.
In certain cases, it can also be advantageous from both a business and tax-planning point of view to create a holding company which would own the different businesses and assets.
Shareholders
Shareholders will likely be concerned about their own immediate tax exposure as well as the tax implications for their estate-planning arrangements. Fahy advises individuals in this position to take advice and make sure they are in a position to take advantage of the various succession planning, capital acquisitions tax and capital gains tax reliefs which are already available.
In effect, they need to look ahead several years and ask what they have to do now to avail of the reliefs when the need arises.
Share-capping is another option to look at. “You can create a new class of share in a holding company to which you allocate all the future value with the existing shares having all the current value of the company. This can have advantages when passing the asset on to the next generation.”
Employees and pensions
“It is to be expected that in any deal a significant proportion of the value of the business will be driven by a small number of key employees,” Fahy notes. “You have to ask if they are being appropriately incentivised to remain on with the company post-sale. Often, some kind of share-incentive scheme is put in place, but care has to be taken to structure this properly to minimise tax liabilities, preferably well in advance of a transaction.”
Steps should also be taken at this stage to ensure the owner and other shareholders have adequate pension provision. Fahy explains it is often the case that when business owners approach retirement they find they have been investing in the business over the years to the detriment of their own pension arrangements. Given that businesses can make pension contributions for employees very tax efficiently, the period running up to a sale is often a time when pension arrangements for owner-managers and key management are enhanced.
Deal planning
Finally, the deal itself needs to be planned. According to Fahy, a critical element here is the data room – the physical or virtual space where all documentation and information relating to the company is stored for inspection by would-be investors or purchasers. “This gives the purchaser all the knowledge they need about every aspect of the business and will allow a deal to proceed smoothly,” he says.
He also stresses the importance of taking professional advice throughout the process. “If you take advice and get the corporate structure and the tax elements right at the very beginning, you stand a much better chance of achieving your objectives for the deal.” This is what Fahy and his colleagues in Matheson see working well in practice, and he comments that when brought in early in a process, they are always able to “add value to the deal and maximise returns for key stakeholders”.