Sale of company and loan notes

Worried about the solicitor!

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Opinions or experiences please.

My client is selling his company for cash plus loan notes. Loan notes to be redeemed equal to a sum of 50% of EBITDA for the next 4 years.

My opinion is that my client is selling his shares (100%) and receiving cash from NewCo/Holdco plus "four pieces of paper" being the loan notes. And then every 12 months my client will waive each piece of paper at the buyer and redeem these for a sum.  The solicitor is saying that ONLY upon drawing up the accounts each year will my client be issued with a loan note which can then only be redeemed 6 months later.........apparantly you can't issue a loan note for an  unspecified sum.

In which case what is my client receiving now? The structure is cash plus loan notes. The solicitor says cash plus "an amount equal to 50% of profits each year, to be satisfied by loan notes each year"........They are non QCB so a CGT bill each year, not this year. But is the solicitor's comment "an amount equal to......." going to arse this up?

 

Thank you.

Replies (8)

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By Accountant A
27th Oct 2016 11:52

Who suggested that structure and why?

The loan notes do not obviously have the characteristics of a "normal commercial loan", do they?

http://www.taxadvisermagazine.com/article/policing-boundary

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By HeavyMetalMike
27th Oct 2016 12:18

I suggested it. It's brilliant but perhaps a bit too difficult for the solicitor.
What does it matter about "normal commercial loan"......?
It's still a loan to be satisfied by 50% of EBITDA.

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Replying to HeavyMetalMike:
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By Accountant A
27th Oct 2016 12:24

HeavyMetalMike wrote:

What does it matter about "normal commercial loan"......?

Err, it matters because it's part of the definition of a Qualifying Corporate Bond on which the 'structure' seems to rely.

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By HeavyMetalMike
27th Oct 2016 12:38

But I don't want a normal commercial loan. I want a non-QCB.

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By Accountant A
27th Oct 2016 17:46

What is the structure intended to achieve, as a matter of interest. Absent any QCB angle, is there some reason why it isn't just a contingent consideration case?

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Replying to Accountant A:
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By HeavyMetalMike
27th Oct 2016 22:20

Thank you, Sir.
The simple aim is 10% tax AND to match CGT with the years of being paid. Hence seller receives cash plus loan notes, these being redeemed every year equal to 50% EBITDA. The loan notes being non-QCB means tax gain each year not all in 16/17. Seller still owns >5% of holding co so fait acompli for ER every year........I have "cleared" this with a rather tax chap. Now just need the solicitor to keep up!

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By Accountant A
28th Oct 2016 15:53

I have some sympathy with the solicitor. A loan and therefore a loan note is usually regarded as a transaction where money is lent. In your structure, no liability to repay cash arises on the purchaser until such time as the accounts show that there is a positive EBITDA to pay. That's obviously uninformed by the full technical analysis. What you are proposing is an agreement by which a loan may come into existence at a future date. Whether that is a current loan note at the time the sale is concluded is, if I understand correctly, the key point. Very interesting technical point though.

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By HeavyMetalMike
28th Oct 2016 11:41

Thank you. Solicitor (yesterday) just wanted the easy option of estimating EBITDA for 3 years, and having loan notes for these amounts (specified sum, easy I get that), and then in the 4th and final payment having a sum equal to £1.xm less what's already been paid. I'll let you know. There must be a solution. I can't see why you can't have a loan note redeemed for EBITDA, although as I type this I do see your point, what would the creditor be in the accounts?? (the sale is £1.xM minimum OR 4 x 50% EBITDA).
I'll be in touch.

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