Buying a limited company

[skc247]

Hi there,

I'm about to buy a limited company but am getting conflicting advice on what I can/can't do with regard to financing the purchase. Agreed price of company is £900,000, but we get company bank account which has £200,000 in it (more tax advantageous for sellers to sell company this way).

Had planned to inject personal money to make the purchase as a 'director's loan' to the company and pay this back to myself at a rate of 6/7% over 12-15 years. Had planned to repay the 200,000 to myself almost immediately so the net loan to the company would be £700,000.

Have been told by two accountants that this is possible and one that it isn't. The one that says that it isn't says that I can't treat the money as a 'directors loan' as the money goes to the seller and wouldn't form part of the company accounts. Additionally, as there would be no 'directors loan' to the company, I couldn't take the £200,000 out as this would trigger a tax demand of 25%.

Is this correct? If so, is there an alternative way to structure it? Can anyone help?

Thanks in advance.

 

[john1989]

The last seems to be sensible.

It's usually the case that if the buyer is a corporate body that they will pay £ for £ for the bank balance as they can transfer it to the purchaser to help fund the purchase. It's also common if the cash is needed for working capital.

As a non corporate buyer it will cost you to extract the cash by way of taxation. So the cash wouldn't be worth £ or £ for a non corporate buyer.

There's a lot at stake here, I would recommend seeking the services of a tax specialist with experience of company purchases.

 

[Bob]

It appears that what you are proposing is the purchase of the company's shares from the current shareholders for £900K. That money will go to the shareholders personally and not to the company. As has been said, you would not have a director's loan and would not normally be able to withdraw the bank balance without tax consequences.
For a deal of this size you need paid for advice and should be engaging both a lawyer and an accountant, ensuring that they are appropriately experienced, to undertake due diligence and to advise you on the structure of the deal.
Difficult to give any meaningful advice on the limited information supplied

 

[Bob]

@john1989 pressed "Post" just before me but you will see that our advice is very similar

 

[john1989]

Had an eventful evening and I nearly didn't bother posting so it's reassuring that I was on the same wavelength as you @Bob !

 

[Energise Accounting]

What is happening is they are selling you the shares in the company for £900.000 as it is in most cases the most tax efficient way to sell shares in a company.

The market value of the shares is probably £700,000 so I would then inject my own £200,000 as a directors loan.

The outcome will depend on how much interest they have had in the business. Again take advice off someone who has the full picture

 

[skc247]

Thanks everyone for the replies. If I was borrowing the money from a bank, that would also go to the outgoing shareholders, so how would that be treated on the books? Would I not be able to use the £200k in that instance to reduce my exposure to the bank without any tax implications?

Thanks in advance

 

[Bob]

There is a famous company law case Salomon v Salomon & Co Ltd that spelt out the distinction between the individual and the company. You would own the shares in the company and not the individual underlying assets in the company. The shares could be used as security but this needs more tailored advice than you are likely to get on a forum

 

[UK Contractor Accountant]

Why don't you make an offer to buy the assets of the company rather than the shares.

Not so tax efficient for the seller but worth a try?

 

[Energise Accounting]

I don't think salmon v salmon is anything to worry about as your legal representatives would have this covered in a sale agreement after all companies are bought and sold this way on a daily basis, sometimes for 100s of millions of pounds.

Making an offer for the assets is a option however, this will not normally be accepted if the company is doing well but, if the current owners want a quick exit it is worth a try. As mentioned when buying a business on this scale get a good solicitor and Tax advisor.

 

[Bob]

I don't think salmon v salmon is anything to worry about as your legal representatives would have this covered in a sale agreement after all companies are bought and sold this way on a daily basis, sometimes for 100s of millions of pounds.

Making an offer for the assets is a option however, this will not normally be accepted if the company is doing well but, if the current owners want a quick exit it is worth a try. As mentioned when buying a business on this scale get a good solicitor and Tax advisor.

The point of the law case was that OP appears to be confusing who owns the assets. He will not own them personally. The way he is planning, ownership will stay with the company with any consequential tax implications if he wishes to extract them

 

[Energise Accounting]

my apologies @Bob.

 

[Clinton]

skc247, the point about the difference between the person and the company has already been made. You can't repay the bank from the £200K sitting in the company's coffers because the company didn't borrow from the bank, you did. If you want to use the sitting cash to pay the bank you'll need to draw it out in your own name and then pay the bank. I can't imagine that being much fun.

Even if you and the company were the same entity new rules came in on the 18th of last month governing use of money raised in such situations. Money raised from share sale needs to be used for and only for a "qualifying business activity" i.e. can't be distributed as a loan repayment. More details in para 11, Sch 5, Finance (No.2) Act 2015. OK, maybe that's not relevant here.... but under some structures open to you it may turn out to be very relevant.

Setting up a shell and reversing into it may be one option for you to explore.

Also, is it possible to structure the deal so you acquire 7/9 of the company for £700K with the previous owners retaining 2/9 which you contract to buy back off them at a pre-agreed price at a more tax convenient time for them? (Listing the caveats of this plan is beyond the scope of this post; rest assured you need to get professional advice on the wording of the contract).

There may also be a way to buy a £200K asset from the company prior to the main transaction and resell that asset to the company once you've acquired the shares. Yeah, yeah, I know the flaw. You'll have to find some "consideration" to give them in exchange for the £200K asset you're acquiring. It's very easy to end up on the wrong side of legal here, but there are clever ways in which it has been done in the past.

Anyway, long story short, I help owners sell their businesses, I'm not in the legal, accounting or corporate finance games. Don't take my advice as professional advice - go pay £10K or £20K to the people who are qualified to structure this for you (yes, that's the kind of money they'll charge). Save £10K in professional fees and you could spent 10 years in the slammer.

Interesting problem though , thanks for posting it.