How to put more money in your pocket from selling your business
Quite often, the net proceeds receivable by the owner from the sale of a business are significantly less than were expected when the selling price was agreed upon with the purchaser. In fact, when the net proceeds receivable by the owner are calculated, the owner often realises that the business is worth more to keep than to sell!
One of the main reasons for this has to do with the way that the sale of the business was structured and the tax effects of the particular structure.
When selling a business that is operated in a company or close corporation (CC), the sale can either be structured as the sale of the business out of the company or CC, or the sale of the shares / member's interest in the company or CC. Very different tax effects arise from each of these options depending on the specific circumstances of each case. Invariably it costs significantly more in taxes (recoupments of wear and tear on assets, capital gains tax (CGT) on sale of the business and Secondary Tax on Companies ("STC") to get the cash into the owner's pocket) when selling the business out of the company or CC than when selling the shares themselves.
Take the simple example of a business worth say R5m, where the net tangible assets fairly valued are worth R3m and the goodwill factor is worth R2m. Assume that R500 000 of wear and tear will be recouped on fixed assets and also that no CGT valuations (at October 1 2001) were done on either the value of the business or the value of the shares. The CGT base cost for the business assets is thus assumed to be 20% of proceeds.
If the owner sells the business out of the company or CC, the entity will be liable for CGT on sale of the goodwill, income tax on the recoupment and STC on the dividend declared to get the cash into the owner's pocket. In this scenario, income tax on the recouped wear and tear would amount to R140 000, CGT would amount to R224 000 and STC R421 455, giving total taxes of R785 455. Cash in the owner's pocket will amount to R4 214 545.
However, if the owner sells his shares for R5m, he will be liable for CGT of only R400 000 (assuming a CGT base cost of 20 % of proceeds) and will receive cash in pocket of R4,6m, a better result by almost half a million.
From a purchaser's perspective, it is invariably preferable to purchase the business out of the company or CC. This allows the purchaser to pick the assets that he is interested in and ensures that he will not be liable for any undisclosed liabilities that may surface in the future. Also, acquiring the company or CC means that the purchaser in effect assumes the seller's latent CGT and STC bills on the net asset value and value of the goodwill.
The seller is therefore usually under pressure to sell the business out of the entity and should ensure that the sale is structured as efficiently as possible to minimise transaction taxes and in turn maximise net cash received. Where significant transaction taxes will be incurred, the seller needs to be aware of this fact to assist him in negotiating the selling price and applicable transaction terms.
*Chris Norris is a partner at Cameron & Prentice Chartered Accountants
Services Subscribe to newsletters News feeds
|
|||||||
Comments
Even if the buyer were willing to buy the company, she would surely insist on a discount on the R5 million, since she will be stuck with the tax liability in the company.
by Puzzled on October 26 2008, 21:21
Find this comment inappropriate? Report it