What about the structure of your business in a sale?

Business Structure

This is a mine field and you could write a book on this topic alone but our scope is to summarize and give you a good overview. Many of the structures will change as the business is larger so lets start in the smaller end of town the highest risk which is the sole trader and partnership if you are one of these businesses seek legal advice IMMEDIATELY! In today’s litigious world its not a wise move to continue in these structures.

The majority of people will have a company of some sort and they vary in type from one country to another but are essentially similar with variations from a tax perspective. What is the most advantageous structure for you to sell your company?

Lets just cover the types of sales you will come across.

An Asset sale – this is when the buyer will purchase the assets from you this may also mean the assets and liabilities. If this happens you will end up with a shell which is the company that you need to manage in some way either keep or close it.

The next type of sale is a Stock or Share purchase when the buyer will purchase all the shares of the company so that everything the company owns will now transfer to the buyer which will now be the new shareholder/s. The definition of shareholder may vary it may be an individual, a group of individuals or a company. The larger the company the more likely the sale would be a share or stock sale as the transaction is less disruptive to the overall operation of the business in my opinion. For now its a matter of understanding the basics.

Shareholders

How many shareholders do you have in your company? if its only one then the preparation is simple however most companies will have more than one shareholder if so do all shareholders agree to a sale? what if the sale price is not agreed by all shareholders? do you have a shareholder agreement? if not this is a wise move so that you can be sure that all parties are on the same page. Do you have multiple companies? if so how will that impact a potential sale? and how will each shareholder for the companies in the group impact, hinder or block a possible sale. If you have a good shareholder agreement that will include a predetermined valuation method then the chances for disagreement will be lessened or at least one party can buy out another party.

A lesson I learned many years ago where I was in a partnership with someone in a 50/50 shareholding and no written shareholder agreement, so long story short my partner wanted to buy the balance of the company at a value that was not realistic  or anywhere close to fair market value and would not sell his shares to me so he forced the company into a voluntary liquidation then proceed to buy the company at a fraction of the price from the liquidators.
As Ronald Reagan is famous for saying “Trust but Verify!” so Trust your partner and be professional to create a solid shareholder agreement that will cover any potential change in the circumstances for the future. cover all the what if’s that may occur.

Prepare for Sale by Shares.

So what is the definition of Goodwill? if you ask 10 people you will likely get 10 answers and there are 2 real answers in my opinion one is a financial answer the other other is Non Financial. Financially when you see goodwill on a balance sheet it should be created from a company purchasing another company in the past and the difference from the purchase price and the net assets on that balance sheet will be goodwill.

From a non financial perspective your brand name linked to products or services will have goodwill as part of its value as will Customers but many people forget about the goodwill from suppliers, so if the buyer doesn’t purchase the companies shares then he will need to contact each supplier and in the new company fill out a credit application and you may not have the terms that the previous owner has built up over many years with a net result of negative cash position. So as you are preparing to sell if you have your company set up for a sale by shares then you may increase the number of potential buyers you expose yourself to and maximize your goodwill.

At the end of the day if you sell by a share sale you will get a check and not have to spend hours or months with additional time winding down the shell of the company you are left with, its simple you get a check and you can walk away. You may also have more tax advantages in this type of sale so contact your accountant and discuss it.

Lets say you have a ISO 9001 or other certification then as far as I am aware this is not transferable to another company so the cost to a buyer will increase if he needs to be re certified.

Prepare for an Asset sale

As I have come across may people in the course of looking at prospective businesses to purchase there are many sellers that have not been educated about the same process and what an asset sale is, they thing they will sell part of the assets of the company then pay off the creditors keep the debtors and by doing so they reduce the chance of a sale and still need to do plenty of work after the sale to collect debtors and pay creditors. this also runs the risk of the past owner treating the customers poorly to collect the outstanding money at the expense of the new owner. At the end of the day the current owner should be looking at the net result of a sale and dont forget the work involved in doing all these bits and pieces.

If the sale is an asset sale then in my opinion look at your balance sheet and take out anything from the balance sheet that is personal and sell the rest all the assets and all the liabilities later we will look at different valuation methods and what this will mean as a net result.

Recommended Structure for simplicity of a sale

My personal opinion for the best structure of a company that takes advantage of your tax position and at the same time maximizes the ability to show the true profitability of the company without extra work is to have the main operating company which is owned by a parent company so that 100% of the shares are owned by the parent company. This way to sell the operating company at some future date rules out the shareholder issues previously discussed, and on the accounts of the operating company is an account called Management fees that will go to the parent company. Many company owners can take too long preparing and re configuring the accounts to take out or add back all the personal items that have shown up and as a result there is additional cost and unneeded delay in having a clean set of accounts ready to show prospective buyers.

The only real disadvantage is the additional cost to run the accounts and to do the tax returns of the parent company. Unless you have a very small company then it is worth the cost as you are always ready to show the true profitability of the company at any time by adding the management fees to profit of the operating company so the calculation of real profit is simple and clean.

I have seen so many poorly structured companies that have a family trust account as the main operating account and there are so many personal items that no one can ever get to the real profit without too much time, this results in either no sale or a poor valuation for your company, the next issue that is so common is that there are so many add backs to show the true profit that it looks suspect from a buyers perspective. Another common issue especially for a company with high labour costs is to have a separate labour hire company that is responsible for all the labour costs so its a risk management structure that if there are any legal issues from past or present employees it wont wipe out the operating company.

I can see the merits in this from a risk perspective but it creates a very cloudy picture of the true position of the operating company. So hire the right legal people and have a structure in your main operating company do get it right the first time.

In summary create the main operating company which is 100% owned by a parent company and send a high percentage of the profits to the parent company as management fees this will include ALL personal expenses that may be in the company. This way you wont need to find and track all the personal expenses at some future point. Your accounts will be ready to sell at any time if you keep it simple and easy to manage.

If you set up a parent company then the board and the shareholders combined will approve the sale so there is less chance a sale will be blocked by a disagreement.

Personal assets like vehicles and any other items are not on the balance sheet of the operating entity and instead managed in the parents companies accounts, you may choose to charge any costs for this within the management fees of the parent company.