I am meandering my way through Sean Gallagher's book 'Secrets to Success'. The book is excellent. The focus is on the success stories of many Irish businesses that we know something about, but not a lot. I recently read about Done Deal. It was set-up in 2005 by Fred Karlsson and his wife Geraldine from Co. Wexford. Fred was a computer programmer. Before they left Sweden, they sold their furniture on a Swedish website like Done Deal. When they got here, they were looking to buy furniture for their new home and noticed no such website existed here.
Sean visited the office of Done Deal in 2014. At that time, they had 33 staff and an annual turnover of €9 million. What surprised Sean was the friendliness of the staff and the decor, gym balls instead of chairs. A true tech venture. In 2015 Fred & Geraldine sold the business to the international media group Schibsted. At the end of each interview, Sean asks what advice you would give to other business. I liked what Fred had to say about selling your business.
Build your business to sell, even if you never intend to
"Build your business so that it is saleable. This does not mean that you have to sell, but it is good discipline to put in the structures that ensure a business can thrive when you are not there. Central to this is building the right team of highly talented and motivated staff. Hire well and create a company culture that empowers and supports your team"
Last week we looked at an overview of some options to exit your business. In case you missed it see here
This week we will look at selling the assets of your business and how that can work.
What are the assets in your company?
The assets are what you use to generate profit in your business. Your equipment whether they be laptops, desks, or machinery. Your premises and customers. And your most important asset, your staff. You don't have to own the premises. It could be a premises that the business rents but the purchaser needs it.
The purchaser is buying the future profits of your business. These profits come from existing contracts with customers. The staff use the equipment to generate the income that results in profits. The staff also have built up a knowledge and relationship with customers. In most cases, it will be in the interest of the purchaser to move some or all the staff over.
Why is it good for the purchaser to buy the assets?
It can be more beneficial for the purchaser to buy the assets of your company rather than buy the company itself. Some of the reasons for this are;
- There is less risk for the purchaser as they are not buying the company and its history
- The purchaser will have to do less due diligence as they are not worried about the tax history of the company
- The purchaser has less worry over staff or customer claims as these would be against the company
- The purchaser has the funds to pay for the assets whereas the shareholders may not have
- If easier for the purchaser the deal can be quicker
- It may be easier to get approval for the deal at corporate rather than at shareholder level
In most cases, the preference for the seller is to sell the shares in the company rather than the assets. If the seller sells the assets the money is in the company. If the seller sells his/her shares in the company the money goes to the seller and not the company. If the money is in the company the seller has to get that out.
I wandered lonely as a cloud! To see the full poem
Bear with me. Let's look at an example
Wordsworth Ltd, an online retailer of books, and school supplies is successful. A bigger player, Grisham Ltd, wants to buy the business. Grisham wants the large contract that Wordsworth has with the Department of Education. William and Mary Wordsworth are husband and wife and they own the company 50:50. He is 52 and Mary is 38 and both are directors. Both are working full-time in the company for the last 10 years when they set it up. It has the following assets;
- Office with 20 staff
- Two warehouses to store stock plus warehouse staff
- Desks, chairs, laptops, IT equipment & systems
- Vans and warehouse equipment
- Stock worth €150,000
- Debtors of €200,000
The average profits of the business for the last 3 years were €500,000 per annum. Wordsworth ltd leases the office and warehouses. Grisham Ltd makes an offer of €2 million for the assets of Wordsworth Ltd. The deal is as follows;
- €150,000 for stock
- €250,000 for all furniture, equipment and vans
- €1,600,000 for Goodwill
- All staff move over
- Existing leases move over
Grisham Ltd agrees to pay in the following manner;
- €750,000 upfront
- €750,000 after 8 months, once a new contract is signed with the Department of Education
- €500,000 on the first anniversary of signing
How the Taxes work - Grisham Ltd
The extra tax costs for Grisham will be stamp duty on Goodwill. Stamp Duty is a tax on documents and the document here is the Asset Purchase Agreement. Grisham will have a stamp duty liability of €120,000 which is 7.5%. If Grisham bought the shares rather than the assets the stamp duty liability would be 1% or €20,000. For Grisham the base cost on a future sale of the goodwill is €1,720,000 being the price plus the stamp duty
The only other stamp duty cost will be on the new leases that it will sign on taking over the office and warehouses. There will be no stamp duty on the stock, furniture, equipment, and vans as they can pass by delivery.
There should be no Vat issues for both companies on the transfer. Vat on the transfer of a business relief would apply. For more information Click here
Grisham can claim capital allowances on the equipment, furniture, and vans it buys.
How the taxes work - Wordsworth Ltd
The main tax cost for Wordsworth Ltd is Capital Gains Tax on the sale of the Goodwill. This is as follows;
The CGT will form part of the Corporation Tax liability of the company for the accounting period. Assuming the accounting period is 31 December 2021 this tax will be due by the 23rd of September 2022. To avoid interest charges, Wordsworth needs to meet their preliminary tax requirements.
There will be no CGT on the sale of the furniture, equipment, and vans provided the sale price is not more than the cost.
There will be no Vat issues once Transfer of Business rules apply, as already mentioned.
There will be no stamp duty as that is for the purchaser.
All that will be in Wordsworth is cash after the
- payments come in for the sale of the business
- Debtors pay what they owe
- The company pays creditors like Revenue and suppliers
Next week we will take a look at William and Mary's options and what they need to do if they want to get the money out.
The above is to give you a flavour of how an asset sale works and the taxes involved. There are advantages for the purchaser and disadvantages for the seller. The circumstances of both will determine how they structure the deal. Familiarity with the business from a legal and accounting side will be vital for a smooth sale. Proper planning well before this can result in significant savings. If Fred and Geraldine can do this, why can't you?
Interested in getting help to sell your business? Call Deirdre on 051396703 or contact us. Tell us about you and your business to see if we can help