We’ve asked Chartered Accountant Nigel Gorski to write a series of articles to help people who are considering selling their business prepare for the sale. Nigel’s second article explores the things to think about when considering selling all or part of your business.
This is the million dollar question. Many business owners will own limited companies and others will be sole traders.
The answer to the sole trader question is easy – it’s usually the trade with any plant, machinery and stocks together with transferring any lease agreements over. The profit you make on selling compared with the value of those items is called goodwill – it covers things like your brand and the value of your customer portfolio and its value is heavily dependent on what a purchaser will pay for it. For sole traders, and profit on goodwill is not taxed in the same way as your trading profits and is treated as a ‘capital gain’. This can be highly beneficial, as the first £11,000 of profit (for 2014/15) is potentially tax free (subject to your personal tax position), then anything above that can be subject to tax rates as low as 10%. This is called Entrepreneur’s Relief and we will cover that in a future article. When the sale is over, you can expect a clause to prevent you from setting up in competition for a period of time.
For limited companies, it gets a bit more tricky. You have two options:
- You can sell the shares in your company parting with your company lock stock and barrel; or
- The company can sell the trade – this is similar to the sale of a sole trade above but has different tax consequences
The capital gain when you sell the shares in the company will be based on the value you get for them versus the amount you paid for them. Assuming you meet the conditions, the gain could qualify for Entrepreneur’s Relief in the same way the sale of the sole trade does. Because the company continues (only the shares have changed hands) with the same tax references, VAT number and PAYE reference, it is likely that a purchaser will want warranties from you and to conduce extensive due diligence to ensure that there are no nasty surprises round the corner.
To avoid the due diligence and warranties you might choose for your company to sell its trade, usually the customers, stock, assets and sometimes brand and website – this can trigger a Corporation Tax Liability of at 20% of the profits. You retain the shares and once everyone is paid off potentially seek to wind up your company.
As you can see careful planning and good advice are needed to secure the best result for you.