I am buying into an accountancy practice (limited company) and taking my client list with me. I will be paying some cash consideration to the existing director for their shares. We will each own 50% of the shares. I’m confused about the correct journal entries that should be made at the date of transfer. Can anyone shed some light please?
For ease:
Existing LtdCo clients = £100k
My clients = £40k
Cash consideration = £30k ((£100k + £40k / 2) less £40k clients I’m bringing)
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You overthinking. A company is issuing new shares for £30k cash. If you are an accountant you should not need to ask how it will account for that transaction.
I'm reading it differently.
No entries required.I will be paying some cash consideration to the existing director for their shares
Capitalised or not, it's clear that the value of the client list is part of the consideration.
If the company was buying the clients from you it would have an intangible asset to capitalise. But it isn’t, is it?
If the company is paying you for you to introduce your clients to it, that is an important part of the transaction that you have forgotten to mention in your question.
So this forms part of my overall question. Who pays for what... because for the company to own my clients the company buys them from me....
But then what happens?... my heads a blur
Your new co-director seems to be the proud owner of £40,000 worth of client list. He might like to consider what he wants to do with this.
At the moment, the company seems to be getting the benefit of something it hasn't paid for. There's nothing wrong with that but I wonder whether that was the outcome originally anticipated.
You are acquiring a half share in a £140k practice in exchange for your existing 100% interest in a £40k practice and £30k cash. There is nothing obviously wrong with that deal, but if you are not happy with it - e.g. if you want the company to pay you a capital sum - you need to take that up with the other party.
You are acquiring a half share in a £140k practice in exchange for your existing 100% interest in a £40k practice and £30k cash.
The OP's co-director, on the other hand, started with shares worth £100k and is selling half of those, worth £50k.
He gets £30k in cash and his new holding is worth £70k, or £20k more, following the acquisition of the new client list.
Yes, that’s the transaction as I described it, albeit from the purchaser’s point of view.
I think this is where it is confusing me. It doesn't sit quite right but for some reason I just can't fathom how it should actually work.
We've established that the company needs to buy my clients. So... If the Company buys my client list for £40k I end up with £40k in my pocket. But then I need to buy into the Company. But by buying in after the purchase of my list, aren't I paying for my clients half over?
We’ve not established anything. I think that you and the director need to sit down and decide between yourselves what you actually want to happen, money wise. Are you getting your shares just for your client list? In which case then you’ll probably sell it to the co, then use that money to buy the shares from the dir/s’holder. Is there cash in addition to your client list?
The reason that you’re confused about the Accounting entries is because you seem a little confused about what’s actually happening.
Here's how I would deal with what you propose. The "company" would pay you 40k for your clients ( debit intangible assets 40k credit bank 40k )
Then, your co director sells you 50% of his shares, you give him 70K. (40 which the company paid you and 30 which you presumably have already).
That is IF I understand what you propose correctly.
Looking at it this way may help you to get your head around it.
Simple.
40k has come out of the company, but it's shared 20k to the other guy (who has 50 pre-tax k in his pocket instead of 30) and 20k to you (you've ended up with 10k pre-tax net outlay instead of 30).
ERS doesn't look relevant - big plus. Money coming out of companies sparks TiS thoughts, but surely not in this type of scenario? So I thinks it's CGT pure and simple on the 90k proceeds.
lesley.barnes wrote:
I can't get my head round whether you are inflating the value of the company and then paying for your share of fees that you've put in.
So this is the issue I have with the transactions you’ve described.
The situation we’re thinking about at the moment is as follows:
1. I pay the director for 50% of the current company - 50k
2. The company pays me for my business - £40k
The EndJobs a good un (until someone tells me otherwise obviously!)
That’s fine (for you) provided:
(a) the company has £40k spare cash, and
(b) the other party agrees to let you have 50% of his shares for £50k.
As to whether (a) is true, we have no idea because you haven’t told us. Perhaps the deal you originally described was set up that way to get round the company having no spare cash.
As to whether (b) is likely, if I were him I would say that the value of the company including £40k surplus cash was £140k, and I would want you to pay £70k for a half share.
Mission creep extraordinaire. We've been told what's been agreed and we're still not happy.
Juncker "Zis is ze deal"
John "If I wuz you, Mr Juncker, I'd ask for anuzzer 20 bn".
As to whether (b) is likely, if I were him I would say that the value of the company including £40k surplus cash was £140k, and I would want you to pay £70k for a half share.
His company is only worth £100k - how does he justify £70k for a half share?
It's stated that the company is worth £100k, prior to the "merger".
Half of it is worth £50k. How much cash it's got is of no relevance to the value of the shares.
We don't know where the funding will come from for the £40,000. The directors may be funding it by loan accounts. It doesn't have to be paid for now.
How much cash it's got is of no relevance to the value of the shares.
That's nonsense. If I had a company worth £100 and I introduced £10 gazillion of capital paid for in cash, do you think I would still sell it to you for £100?
lionofludesch wrote:
How much cash it's got is of no relevance to the value of the shares.
That's nonsense. If I had a company worth £100 and I introduced £10 gazillion of capital paid for in cash, do you think I would still sell it to you for £100?
Depends. I can buy just about any soccer club for buttons.
If I'm prepared to take on the debt, that is.
It's quite simple. You are giving the current owner £30k to buy 50% of the shares which he will transfer to you. (He will realise a capital gain on the disposal etc). Or the Company issues you with new shares (the same nominal value as the current owner). You pay the nominal value to the Company and the rest of the £30k is shown as a share premium.
The fees you are introducing go into the Company's client base. You own 50% of the Company therefore you've not sacrificed anything. Don't forget the Co is a separate legal entity.
I see what you mean about not being able to get your head round it. Other people have said what the accounting entries are for what you want to do.
I can't get my head round whether you are inflating the value of the company and then paying for your share of fees that you've put in.
Looking at it a different way the Company is worth £100k as it stands now - if you were to buy into it you would hand over £50k for half the shares. That would be 40k worth of fees and £10k cash. I'm probably as confused as you it just doesn't sound right.
Manchester_man's breakdown of the transaction draws out two important points that you must not lose sight of when you put it together again:
1) there are three parties to the deal, you, the other shareholder and the company;
2) you are disposing of a 40k business and you have tax to think about on that disposal. (Specifically, you are not giving the business away: you are receiving full value whether or not 40k of cash changes hands as in M_m's breakdown).
Oh and 3) to make sure that you receive full value, you need a mechanism in the deal to make sure your 40k business ends up in the company, not in the other shareholder's hands.
M_m's approach is the simple way to do that.
Oh and 4).... just kidding. I'm not in Spanish Inquisition mood today.
Could you get s162 to apply on the transfer? Your question wasn't about tax, but you should think about the tax.
How about this?
1. Company creates a new class of share - B share (assume existing shares are A shares). Nominal value £0.01
2. Company issues 1 x B shares in consideration for your clients. Journal entry:
Intangible asset dr £40k
Share capital cr £0.01
Share premium cr £39,999.99
3. Company issues 1 x B share to co director at par
4. Co director sells 50% of his A shares to you for £30k
I think that you would then end up in the position that is intended. (ie each own 50% of the Ltd co, value of ltd co reflects the acquisition of the clients and you have paid the co director £30k).
Okay, change it to be as follows:
1. Company creates a new class of share - B share (assume existing shares are A shares). Nominal value £0.01
2. Company issues 2 x B shares in consideration for your clients. Journal entry:
Intangible asset dr £40k
Share capital cr £0.02
Share premium cr £39,999.98
(Intrinsic value of B shares = £20,000 each)
3. Co director sells 50% of his A shares to you for £30k plus 1 x B share
If that facilitates s162 and avoids ERS, then it could be the way to go.
(I'm not immediately seeing how it does either, but I've given my brain Sunday off for bad behaviour, so I'll trust you on those points.)
I think this, or something like this, could be made to work and save - or at least postpone - tax of c£6k (if not more) compared with the other suggestions discussed in this thread.
Actually, M_m's approach doesn't give you full value... the other guy gets 40k out of the company.
Your exchange with the company needs to be for new shares.
Actually, M_m's approach doesn't give you full value... the other guy gets 40k out of the company.
Your exchange with the company needs to be for new shares.
I agree. If your price is clients + £30k, then the other director (we’re all saying director, when of course we mean shareholder) only comes out of it with £30k.
One of the advantages of a business partnership is the opportinity to discuss and brainstorm topics.
Do you feel able to do this?
Does your co partner feel able to reciprocate.
Businesses flourish on good open relationships.
I mention this because the success of your new venture will pivot on such things.
Do you think your partner would know the answer to your question?
If not your combined business has a knowledge and skills gap.
Imagine if you were advising a client on a similar subject. How would you resolve It?
@ rebeccajessop (OP)
[1] I assume that the “less than £10k” (per your post at 22.40 on 7 July 2019) Net Assets figure does NOT INCLUDE any “Goodwill/Client list” (or howsoever titled) assets. If so, of course, potentially you gain [see caveat per [2] below] by less than £5k (ie one half of “less than £10k”] on the proposed deal.
[2] I would recommend that you engage a “Practice Merger Broker” for guidance if, as seems the case, you have any doubts on the arrangement. Prima facie, a Share Sale Agreement (for the effective merger) and Shareholders’ Agreement (to protect your interests for the future) seem advisable.
Since YOU are the party taking on the greater risk (re the reliability of the “less than £10k” Net Assets) you really need the comfort of the guarantees which a Share Sale Agreement should provide, if professionally prepared.
[3] Ignoring (for simplicity) the “less than £10k” (such figure, from the reading of your opening question, is possibly to be disregarded in any event by agreement between the parties) no JOURNAL entries are really required if the “deal” is (the Share Sale Agreement should incorporate these terms) as follows:-
(a) Your selling a half share in your Goodwill, to the other party (the director/shareholder personally) for “£20k”.
(b) The director/shareholder selling half his shares to you for £50k.
(c) Your personally paying £30k to the director/shareholder [ie for (b) less (a)].
The Financial Statements for the company will thus still not include, after the merger, any Goodwill. (it would be inconsistent for the deemed Goodwill of your practice to be shown as an Asset when the Goodwill of the existing company is not so shown).
[4] It seems possible that the “less than £10k” takes account of either a Credit or Debit balance on the director/shareholder’s Director’s Loan Account. One needs to therefore know the quantum of that figure [and its terms re settlement and interest (if any)] in order to determine how it should be dealt with in the Share Sale Agreement.
Basil.
Might keeping the GW (which, presumably, means the governing client relationship) outside of the company, as you envisage, have any PI consequence?
Alternatively, how to you transfer that governing relationship to the company, without transferring the associated goodwill?
@ Tax Dragon (your post at 13.32 today).
I do not consider that there should be any PI problems arising from not recognising Goodwill in the Financial Statements of the company, either re the £100K "existing" Goodwill/Client List or the £40K Goodwill/Client list introduced by the OP.
PI matters are governed by the contractual relationships with the clients (for such purpose Engagement Letters should (i) hopefully already be in place re the existing "£100K" clients and should (ii) hopefully be put into place immediately upon the introduction of the "£40K" clients into the company).
On the basis of my suggested accounting entries per my last post (more strictly, there being no requirement for such entries) and indeed the fact that recognising the Goodwill would be contrary to the ever-shifting sands of Company Law re Financial Statements, I do not foresee a problem.
Basil.
In this post you are talking about the 40k clients being introduced into the company. In your 13.02 post you said "(a) Your selling a half share in your Goodwill, to the other party (the director/shareholder personally) for “£20k”."
How do those two very different scenarios reconcile?
@ Tax Dragon (your 22.01 post).
Forgive me if I didn’t express myself clearly, but I must assure you that there was no change of scenario in my last post.
When I referred therein to the “£40K” clients, I was simply identifying those of the OP’s CLIENTS who were to become clients of the company [since she had indicated that those clients constituted her “client list” (per her opening question)] when of course the Engagement Letters were put in place.
Basil.