Your clients have worked their entire lives, building a successful company, and now they want to “cash everything in” and retire.
Selling a company is never a quick process. This is especially true if the company or owner has ‘skeletons in the cupboard’ that get uncovered during the due diligence process.
Will they be a deal breaker?
Potentially, but not necessarily.
All those questionable transactions or other ‘skeletons in the cupboard’ that they may have collected over the years may now come home to roost. Put together, they could be a big hurdle to either selling their business or achieving their desired sale value.
But they were all done without your knowledge. And now they need your help.
Skeletons in the cupboard could totally derail the sale permanently or hold back the sale.
Suppose they haven’t declared all their sales for several years, but they have declared all the purchases. Now that they want to sell, they may naturally want to tell the buyer because the sale price is based on actual turnover and profits.
Hmmm. Now there’s a problem.
Then there’s the cash incentives paid to the workforce, paid out tax-free from the undeclared sales (but leaving enough for the bosses to profit from it too). Those concerned will expect the new owners to carry the incentivisation programme as well.
Hmmm. That’s another problem.
And what about those share transfers they did amongst themselves? Who actually owns how many shares and in which company?
Heads of Terms are drawn up, and numerous valuations are prepared, both including and excluding the skeletons. The price with the buyer 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 contacted HMRC, informing them of the situation. 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 identified during 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. Therefore, to retain some control and achieve the desired valuation, the seller arguably needs to seek advice in advance of the sale’s completion.
How and what do your clients say to HMRC?
It sounds easy enough, but 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 your client uses a specialist like myself and we work together.
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.
Over the past few years, an increasing number of sellers have faced these types of issues.
My advice
Take the initiative. Ask your client before selling if any unresolved tax issues may exist. Asking the right questions early in the sale process and before a buyer undertakes due diligence can keep the sale “on track,” potentially leading to a higher sale value and a quicker sale.
Advise your clients to deal with HMRC issues now; it will allow them to sleep better at night, rather than wait for HMRC to come knocking.
If you have a client with skeletons in the cupboard who is considering selling their business and needs advice on the best course of action, please call me on 07979 313 010 or email me at paul@pmc.tax.