When selling your business, you want to maximise the value and pay the least amount of tax. But know you have covered all the bases. We will look at an asset sale and a share sale. Plus give you some Tax Tips that can help get things straight in your head. The focus will be on
- Asset Sale
- Share Sale
- Stamp Duty
- Retirement Relief
- Entrepreneurs Relief
- Selling the building
Barry White is 57 years old and runs a packaging company in Passage North. It’s a good business and profitable despite having a few difficult years. 2022 was an imperfect storm of price increases, staff problems and much lower margins. Despite this he still turned a profit and continues the good fight. Lately, he has felt drained and is looking to kick back a bit and would like to explore his options.
Barry plays cards in Moloneys on Wednesday nights with a few close friends. He tells the lads that he’s thinking of selling and looks for their thoughts. As the pints go down the number of opinions increase.
“Tommy, in town, sold his business for €2 million and didn’t pay a euro in tax and is living in Colombia now”.
“Well Mary Duck sold her business for a million and Revenue took most of it. She hadn’t enough to get the bus to Cork not to say Colombia”. Although the lads are well-intentioned the plethora of advice isn’t helping Barry, so he goes to a tax advisor.
Background
Barry set the business up in 2010. He was a sole trader at the outset and profits were increasing year on year. Because of this he transferred the business to a company in early 2018. He owns 100% of the shares. The company has 10 staff, up-to-date plant and machinery, 3 vans and contracts with some large companies. It has some loans too on the equipment and a van. The company owes him €50000 from the time he set up the company.
Barry and his wife Beryl own the unit where the company trades from and they get an annual rent of €20000. They bought this in 2015 for €80000. Their auctioneer thinks it’s worth €300000 now. They spent €50000 on fitting it out with offices, toilets, storage, etc.
Asset Sale
The company can engage in an asset sale. It owns the contracts, plant and machinery and employs the staff. Depending on what a potential buyer wants there are two ways of selling.
- Asset sale. The company sells the assets or
- Share sale. Barry sells his shares.
Let’s assume a value of €600000 for the goodwill, being the customer contracts. Plus, the plant and machinery is worth €200000 but cost the company €300000. In 2020 the company bought a customer list from a competitor for €220000 including Stamp duty,
| Goodwill proceeds | €600000 |
| Less cost | €220000 |
| Gain | €380000 |
| Tax Payable 33% | €125400 |
There is no Capital Gain Tax on the sale of the Plant and Machinery as it will sell for less than the cost price. After tax, the net proceeds from the sale is €674600. On clearing the loans and other small creditors there is €600000 left in the company.
Share Sale
Barry can engage in a share sale. The value of the shares is €725000. Assets of €800000 less the loans and creditors of €75000.
As you can see it is better for Barry to sell the shares than the company selling the assets. The difference between the two values being the CGT the company paid on the sale of the goodwill.
The other main difference is where the cash is. On an asset sale the balance of funds, being €600000, is in the company. But if Barry sells his shares, he gets the money. This will of course be subject to tax. Getting the money out of the company will also have tax implications.
Stamp Duty
Stamp Duty is a cost for the purchaser and the cost varies. On an asset sale, the stamp duty is more expensive for the purchaser.
There will be no stamp duty on the purchase of plant and machinery as that can pass by delivery. The stamp on the goodwill is at 7.5%.
| Goodwill | €600000 |
| Rate 7.5% | €45000 |
| Total cost of Goodwill | €645000 |
On a share sale, the stamp duty cost of buying the share is 1% which comes to €7250. So, there’s a saving of €37750 for the purchaser when buying the shares.
Retirement Relief
While Barry is over 55 and meets the age condition for Retirement Relief, he won’t get it. He fails the other two tests as he
- Doesn’t own the shares for 10 years.
- Isn’t a working director for 10 years of which 5 must be as a full-time working director.
But what about the period as a sole trader I hear you ask? That period doesn’t count as when setting up the company Barry sold the assets to the company for cash. Remember he has a director’s current account balance owing to him of €50000. When setting up a company like this the sole trader period doesn’t work for Retirement Relief.
He owns the shares for 5 years and is a full-time working director for 5 years. As a result, he won’t qualify for RR until 2028. It’s a pity because the €725000 could be tax-free had he qualified. All is not lost as there is another relief for Capital Gains Tax.
Entrepreneurs Relief
Barry will qualify for Entrepreneurs Relief [ER]. He meets all the conditions. He
- Sells shares in a qualifying company
- Owns the shares for more than 3 years
- Owns more than 5% of the company
- Spends more than 50% of his time in a managerial or technical capacity running the business
On a share sale, it should be straightforward. The benefit of ER is a reduced 10% rate of CGT on a gain of up to €1000000. This is a lifetime limit.
| Share sale proceeds | €725000 |
| ER CGT rate 10% | €72500 |
| Net proceeds after tax | €652500 |
ER on Asset Sale
On an asset sale, Barry must be careful that he follows the correct procedure to get the relief. Post the asset sale there is only cash left in the business. There could be debtors to collect and small creditors to pay. Plus, the staff issue will be important. Will the purchaser take the existing staff on or not? If not, then there will be layoffs and potential redundancy payments.
To wind up the company Barry must appoint a liquidator. The key to getting ER is that Barry appoints the liquidator at the time the company is trading. Per the Revenue Tax and Duty Manual
“Relief can apply on the liquidation of a company, provided
- the company is carrying on a qualifying business up to the time the liquidator is appointed, and
- the liquidation is completed in a reasonable period. Revenue regard 2 years as reasonable
Functions of a liquidator
Once you appoint a liquidator that person takes control of the company. That means controlling bank accounts, dealing with staff, collecting debtors, and paying creditors. The goal is to arrive at a position where all the liabilities and debts are gone. For example, the liquidator would be responsible for paying the CGT.
After all the debts, loans, and liabilities there should only be cash in the company. There is €600000 left in the company after paying the CGT. Let’s assume redundancy costs and liquidators’ fees come to €50000. The net cash position is €550000. Once the liquidator is happy, he/she will make the cash payment to Barry of this amount. From a tax perspective, the payments from the liquidator to Barry are payments for his shares.
| Payments from Liquidator | €550000 |
| ER CGT Rate 10% | €55000 |
| Net Proceeds | €495000 |
Selling the building
Barry and Beryl own the building and are happy to hold onto it as they think they’d get €30000 rent per annum. However, they would like to know if there are any reliefs on the sale and what taxes they’d pay if they get an offer.
Unfortunately, there are no reliefs on the sale. So, no Retirement Relief or Entrepreneur relief. A building owned outside the company is a non-qualifying asset for the purposes of ER. It is possible to get RR on the sale of a building you own outside the company if you sell that at the same time as the shares. You must own that for 10 years and sell it to the same person to whom you sell the shares.
The tax would look like this
| Sales Proceeds | €300000 |
| Less Legal & Accounting | €10000 |
| Net Proceeds | €290000 |
| Less Cost in 2016 | €80000 |
| Enhancement Expenditure | €50000 |
| Gain | €160000 |
| Tax Payable 33% | €52800 |
| Net Proceeds | €237200 |
Summary
As you can see there are a lot of moving parts for Barry when selling your business. The main point of the blog is to help you understand the different types of sales. Barry is better off if he sells his shares but a purchaser may not want to buy the shares.
There could be many reasons for that. Such as not wanting the equipment and staff and only wanting the customers. Another buyer could be happy to get the shares, but they will do their due diligence. Lack of up-to-date numbers, poor bookkeeping, and tax compliance will drag down the sales price.
Barry sells the business and the lads down in Moloneys get wind of it. It’s cards night and Pa is at the juke box. Barry walks in and Pa presses play and the singsong starts.
“Barry White saved my life
And if Barry White saved your life
Or got you back with your ex-wife…..” Fun Lovin Criminals
If you are thinking of selling it’s good to plan for this. Get a valuation, have up to date numbers, and see what way the taxes look based on the valuation.
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