Sell the shares or assets. The pros and cons

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Published: 24 Sep 2020


Weighing up the pros and cons of selling the company shares or the business assets

There are two approaches you can consider when selling your company:

  1. Sell the company shares or
  2. Sell the business assets

It’s not always obvious which is the most appropriate route. That would be too easy!

There’s no “one size fits all” solution, as the circumstances can vary from sale to sale. Also, the interests of the buyer need to be taken into account.

This can lead to a trade off or compromise between both parties to achieve an acceptable solution. So, it’s worth looking at the pros and cons for each approach to smooth the negotiations and expedite a sale.

The seller’s perspective

Selling the company shares is invariably the seller’s preferred option. Its clean, neat and invariably tax effective.

If it’s a trading company, as opposed to an investment company, entrepreneurs’ relief of tax at 10% (as opposed to 20% normally) on the first £1M of lifetime gain per shareholder can be claimed.

Again, the seller can end up with a “double tax charge”, if the buyer only wishes to cherry pick certain assets out of the company and leave the seller to liquidate the company in order to realise the value of the company shares.

Tax would be payable:

  1. By the company at 19% on gains on assets sold to the buyer and
  2. By the shareholders from gains at 10%-20% on liquidation of the company. Also, the shareholders would need to bear the costs of the liquidation.

The buyer’s perspective

However, life is never that simple.

The buyers may be attracted by the company’s business, customer base, intellectual property and patents, but they are not too impressed with the company organisation and management: they feel that there may be too many costly “skeletons in the cupboard” and only an expensive due diligence exercise by their lawyers and accountants could put their minds at rest.

This concern can be tempered by indemnities given by the shareholders of the company to be sold, which may be covered by secured guarantees or a retention of part of the proceeds on the sale of the shares for the period of the potential liability.

Secondly, although the Stamp Duty of ½% on the sale price of the shares is payable by the buyer, this may be considerably less than the Stamp Duty Land Tax that would be payable by the buyer on commercial land and buildings bought out of the company, if the buyer did not want to buy the company shares.

For example, a £1M company purchase with business property of £500K, Stamp Duty would be £5,000, but Stamp Duty Land Tax would be £14,500.

A solution that’s acceptable for both parties

So there could well be room for negotiation on the price for the seller to persuade the buyer to purchase the shares as opposed to the business assets, with such a price reduction being partly or wholly financed by a reduced tax liability for both parties!

If you wish evaluate the pros and cons for a particular company under consideration for sale, please contact David Cane by email or telephone David on 07749 080 806.