One of our clients is a Ltd that the current shareholders plan to sell. We currently complete both bookkeeping and year end accounting for them. The sale is expected to be a low 7 figure sum and will have a broker involved, so it's reasonably substantial.
I've not had a client sell before, so do not know what to expect. Can anyone give any pointers? Obviously the buyer will want up to date management accounts and various financial information. Is there anything else I should be aware of? How much will they scrutinise our figures and at what level (e.g. can the buyer ask to look at the bookkeeping files)?
Also, I have read in passing that there are ways of structuring the sale in a more tax efficient way than simply selling the shares to the buyer. I plan to engage someone with expertise here if the client wants, but if anyone can suggest places where I can find out more on this in the meantime I would be grateful.
Edited to add: it will definitely be a sale of the shares in the company by the shareholders, it will not be the Ltd itself selling its assets etc.
Replies (12)
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The seller will either sell his shares or the company will sell trade and assets. If the later, the shareholders will be left with a company full of cash and can wind the company up after the company has reported its own gains and paid its own tax.
It is almost always better for the seller to sell shares, but the buyer will more likely want to buy assets (maybe not, depeneds on the type of company).
The price for either sale of shares or sale of assets will generally be different.
The purchaser and market conditions will likely dictate what is being bought.
Either way the company should have good reporting in place and be ready for the sale process. The marketing people will be able to provide further info.
The buyer will ask any question he wants and will have a good look into all material contracts and figures.
You should consider a corporate finance manual as these can provide welcome tips and breakdown the jargon.
Will it be a clean break sale?
Will your clients have to work for a time?
Is there any deferred element to the consideration?
Will there be any performance related element to the sale price?
I suspect what you are thinking of is qualifying/nonqual corporate bonds.
Your clients are probs better of getting the cash if they can.
Other Things
I had a client who sold his business last year, and he was offered substantially less than he thought it was worth. Of course it was only worth that figure while he was working in the business. I realised later that the lower figure he eventually agreed was quite fair for the buyer, as they were not going to be working their socks off every night as he did, so would make substantially less profit out of it.
There were so many caveats in the agreement - one of 2 years for any employment issues arising from employees who worked there before the purchase and some others I didn't hear much about. He had a short period where he needed to work in the business, but that soon ended. I am not in touch with him now, but I do wonder whether the buyer was going to keep all their promises.
Due diligence
Under normal due diligence a purchaser will want to scrutinise as much as possible in relation to the business.
This means they will want to see (but not limited to):
accountsprojections/forecaststax returnsbank informationinsurance documentation and claims infoemployment contractsinfo regarding legal/trading/employment disputescontracts with customers and suppliers including leasesvaluation methodology
As long as they have signed a suitable confidentiality agreement they will be able to ask all the files you and the client keep in relation to the above.
Anything that remains unclear or can't be settled immediately regarding contractual, legal or tax unknowns will be dealt with in the Share Purchase Agreement as part of the warranties of sale.
The SPA will also deal with the current shareholders exit, how and when they will be paid the consideration, who bears with the transaction costs, if they will be required to undertake a handover period etc.
The possiblities are endless really and the result depends on how good the professional advisors are on both sides.
Jumping on the back of this thread
Hi Johnt27,
You seem pretty aware of corporate finance. Can you help me?
I've been working in due diligence at E&Y for the last six years but decided to leave to start an online firm doing compliance. I keep thinking I should continue doing due diligence in some form though but know very little about how to get into a position to do so as my only experience is of £50m+ deals and having clients come to E&Y because they are E&Y.
So any ideas how to break into the local DD market? I presume most work is referred from brokers or lawyers. Is this right or is it more a case of having a normal accounting client that wants to make an acquisition? Or as an alternative should I be trying to find clients that want to sell up in a few years so would value an accountant that knows how a bidder will try and chip away at value?
Any guidance would be much appreciated.
Selling your business
Do not let your clients do this without taking advice from professionals at selling businesses. The amount they walk away with - after tax! - depends a great deal on how the sale is structured. The valuation of the business depends on factors they may never have thought of. For example, if they over pay or under pay themselves or over work or under work, or employ relatives who do no work at all, the valuation will be adjusted accordingly to restore the costs to genuine arm's length costs.
The purchaser will want to carry out due diligence and may want to scrutinise ALL the company's records, so they need to be comprehensive, accurate and tidy. The sellers will have to guarantee that there are no hidden liabilities or adverse issues not brought to the purchaser's attentiion and will be liable for any shortfall caused by such issues.
One of the key areas for the selling adviser
Is to review (and usually challenge), usually in tandem with the seller's legal advisers, the warranties and indemnities in the SPA. If you have not had any experience in such matters, you really do need the input of an expert. Even in our own practice we usually have a team of individuals working on this - whilst I will overview the tax issues, I wouldn't dream of commenting on employee and HR matters. In short, it's no small exercise.
Timcaprica
I would say you are in an ideal position to set up a niche practice specialising in DD, and separate from your existing firm.
I would say you have two pillars to build upon, the first being your experience, which v few independent firms will be able to match.
The second point I would sell on is that fact that you are truly independent as you are not expecting a future income stream from the "new" client once the DD is finished. This could mean that a more generalist firm might be reluctant in advising a potential purchaser to walk away from a deal, as it would mean no fees going ofrward.
You would not pick up the type of client who didn't want to pay a decent fee for purchasing a business, but, hey, thats no great loss anyway.
Just a thought.
No problem
Thank you all for your valuable input.
It's always nice to be involved with, and to be able to help with, a real and interesting issue.