Where shareholders are looking to receive a tax-efficient payment, perhaps linked to a reduced role or a management team taking more responsibility, 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 climate, 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 an option.
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).
An option:
There are some additional 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:
If finance is available, the above structure can be accommodated alongside any debt finance or private equity investment.
The information provided in this article is intended as a general guide only. It is not exhaustive or tailored to your individual circumstances.
If you would like to discuss a potential deal or other employee share ownership options please do not hesitate to contact richardunderwood@legalclarity.co.uk
or call him on 08456 800 727.