Where shareholders are looking to receive a tax efficient payment, perhaps linked to a reducing role or incoming management team, a solution is on hand. In the current climate, many shareholders are finding it increasingly difficult to manage a successful exit on acceptable terms if a trade sale is not possible or the business is not appropriate for private equity investment.

Prior to the current economic crisis, businesses were more likely to sell the company for a good price or attract debt finance in order to help the next generation (whether family or second tier management) buy a stake in the business. With the lack of availability of bank finance, this is often no longer the case.  

So what are the alternatives?

Businesses with shareholder(s) who wish to de-risk have some options to structure transactions with no (or minimal) external finance. As another incentive, these Owner Managed Businesses may also be able to take advantage of the current tax legislation which permits a 10% tax rate on capital gains (“Entrepreneurs’ Relief”) .

The options:

  • current shareholder(s) receive a cash out from any cash reserves in the business;
  • a new shareholder structure is put in place to include the current shareholder(s) plus any current or incoming management (‘Newco’);
  • the new shareholders will pay nominal amounts for their stake in the business with no adverse tax consequences; 
  • an acceptable payment profile is agreed with Newco and its stakeholders to pay deferred consideration to the selling shareholder(s); and 
  • business owners may also find a partial exit which enables them to focus more aggressively on growth with a wider management team, driving the business forward to achieve a higher eventual sale price.

There are some points to consider:

To ensure the selling shareholder(s) obtain entrepreneurs relief, certain conditions must be met which include ensuring the transaction is undertaken for genuine commercial reasons and tax clearances should be obtained. Capital Gains Tax will be paid on the total consideration (initial and deferred) but if appropriate documentation is used:

  1. the tax charge can be deferred until all the deferred consideration is received; and/or
  2. any tax which has been paid on the deferred consideration (which is then not paid by Newco) can be reclaimed.

If finance is available, the above structure can be accommodated alongside any debt finance or private equity investment.