The reason why a vendor will be so keen to sell his shares rather than for the company to sell its assets is principally tax. In essence, if a vendor sells his or her shares then, provided the company fits within certain criteria set out by HMRC, he or she will pay capital gains tax at the rate of 10 per cent on the gain between what was paid for the shares and what they were sold for less transaction costs. This is known as Entrepreneurs’ Relief. (There are some exceptions to this rule but generally in the case of a typical owner/manager, this is the case.)
On the other hand, if a company sells its assets, it will pay corporation tax on the gain it has made on the asset sale (there is no capital gains tax for companies), being the premium paid over the assets’ book value. The cash then sits inside the company and can generally only be distributed to the shareholders by way of dividend or by liquidating the company and distributing the cash reserves to the shareholders.
These are some of the advantages of pursuing a share sale:
Appearance of continuity of business. A change of name or trading style may give the impression that the business has changed hands or, worse, gone bust and done a phoenix.
There may also be customer and supply contracts, which will be difficult to rewrite in the name of a new company.
It may be easier to get a landlord to agree to the change of shareholding rather than having to enter into an assignment of the property lease; and it will almost certainly be considerably less expensive in terms of legal fees.
Intellectual property rights (‘IPR’) traditionally are messy and complicated, particularly copyright in software. It may be almost impossible to create a chain of title and even more difficult to get all parties to agree to an assignment from the company to the purchaser. It may be considerably easier to ‘let sleeping dogs lie’.
A purchaser may prefer to leave the company’s banking arrangements in place; this is particularly the case in respect of leased plant and machinery and term loans, although a bank will normally want to be satisfied as to the probity and creditworthiness of the purchaser.
The company may have historical tax losses inside it, which a purchaser may find useful. A vendor may try to increase the price because of these tax losses, although that is difficult to do and most purchasers will not pay a premium for them.
There may be other contractual arrangements also in place with the company which could be difficult to assign to a new company, such as options arrangements with staff, other employment contracts, future royalty contracts, licences etc.
As stated previously, the sale of shares in a company, for which the vendor gets Entrepreneurs’ Relief, attracts a 10 per cent flat capital gains tax rate provided the shares have been held for more than a year.
If a company sells its assets, it pays corporation tax on the gain and the shareholders pay income tax on any dividend distribution of the asset sale proceeds.
Stamp duty is 0.5 per cent on a sale of shares and on other property (such as debtors and real estate) it is a sliding scale up to 7 per cent.
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