Do your clients have any skeletons in the cupboard to clear out prior to selling their business?

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Your clients have worked all their life and set up a successful company and now you want to “cash everything in” and retire.

So, what’s stopping them?

Plenty. Specifically, all those questionable working practices or skeletons in the cupboard that they may have collected over the years without you knowing. Put together, they could be a big hurdle to either selling their business or achieving their desired sale value.

What skeletons in the cupboard could be holding your client’s business sale back?

Suppose they haven’t declared all their sales for several years, but they have declared all the purchases. Now they are wanting to sell, they may naturally want to tell the buyer because the sale price is based on actual turnover and profits.

Hmmm. That’s a problem.

Then there’s the cash incentives they may have been paying out tax free from the undeclared sales (leaving enough for them to profit from it too). Those concerned will expect the new owners to carry the incentivisation programme as well.

Hmmm. That’s another problem.

Heads of Terms are drawn up and numerous valuations are prepared both including and excluding the skeletons. The price is agreed.

What will the new owner do?

Keep quiet and carry on or confess all to HMRC.

The new owner will no doubt have included a clause or two under Warranties and Indemnities to cover themselves financially in such a situation. But then the sale price is payable in tranches and maybe the new owners think that this can fund any shortfall identified by HMRC.

The new owner has taken advice and contacts HMRC and tells them what has go on. HMRC then come knocking at the seller’s door and that ticking time bomb is now on a very short fuse.

Not everything can be picked up in a due diligence exercise.

In this situation the buyer is sitting pretty and is bombproof. They had nothing to do with it, but they will want to clear out these skeletons ASAP. Money is often no object as the seller’s funds are being used to sort it all out. The seller has no input or control over what work is done, by whom and at what cost.

How do your clients overcome these hurdles?

The seller is better off sorting it all out for themselves before the sale. No doubt HMRC will welcome the seller’s confession with open arms. So, in order to retain some control and achieve the valuation, arguably the seller needs to take advice in advance of the eventual sale going through.

How does the seller tell HMRC?

It sounds easy enough, but what HMRC considers that the seller has committed fraud. You can be prosecuted for fraud. But there are ways and means to overcome these issues and keep it out of the courts, if the client uses a specialist like myself.

As a specialist in helping taxpayers who have been caught evading tax (or are going to be caught in due course), there is a pathway. That pathway will depend upon exactly what has been done. But there is no one size fits all approach that can be used.

Is there any good news?

Thankfully yes.

By rectifying matters before the sale, the seller can actually command a higher price for the shares. That’s because there are no skeletons left in the cupboard, it’s a “clean” company as such. There is no need to contemplate a claim in the future under Warranties and Indemnities.

Post Covid and over the past few years, there are more sellers out there with these sorts of problems.

My advice

Take the initiative. Advise your clients to deal with the issue now, it will allow them to sleep better at night, command a higher price for their business at the point of sale and potentially find a better pathway and outcome with HMRC than if they wait for HMRC to come knocking.

If you have a client with skeletons in the cupboard that is considering the sale of their business and you need someone to advise them on the best course of action, call me on 07979 313 010 or email me at paul@pmc.tax.

Anyone seeking help can call me on 07979 313 010 or…

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