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You have decided to sell part or all of your business and taken the critical first step: determining what kind of buyer your business is likely to attract.
To proceed tax efficiently and get the most from your deal, it is vital to understand how your buyer may want to acquire your business, and what that means to you.
While a trade buyer or family office will likely look to buy 100% of your business, a private equity (PE) buyer may propose to acquire a majority or minority stake in your business.
Before there’s a letter of offer on the table, you need a plan. Your success depends on understanding the different deal structures, group structures and the taxes associated with them.
Types of deal structures typically used include:
Where a buyer pays some or all of the consideration on completion of the sale. For example, if you agreed to sell your business for €10m with 100% upfront consideration, you would receive €10m when the transaction is completed.
Where some of the consideration is deferred until a certain condition or target is met. The condition could simply be the passage of time, allowing the buyer time to secure the rest of the funding.
Typically, deferred consideration is fixed. If we use the same example where you agree to sell your business for €10m, this time €8m could be paid upfront with €2m deferred and payable two years after the deal completes.
Where some of the consideration is subject to an earnout. Essentially, this means there is potential for further consideration to be paid if certain performance targets are achieved.
Earnout consideration is another way the buyer can incentivise you as a seller to continue growing your business post-sale, typically for a period of two to three years. Where a valuation gap exists between what a buyer is willing to pay and a vendor is willing to accept for a business, an earnout mechanism is often negotiated to bridge the gap.
Earnout targets are typically based on revenue, gross profit or earnings before interest, tax, depreciation and amortisation (EBITDA). Targets can be at a specific point in time or averaged over a period of time. As a seller, you agree to the target and consider the earnout as part of the deal consideration e.g. an upfront payment of €8m, with a further amount €2m payable only where certain earnout conditions are met.
An earnout can be ascertainable or unascertainable – and this distinction affects your tax situation. An ascertainable earnout is one where future payments have a fixed amount or maximum cap. For example, an additional €2m consideration will be paid if certain targets are met. On the other hand, in an unascertainable earnout, the final value is unclear. It may be based on a formula, such as five times your EBITDA in three years’ time.
Where buyers offer shares to your employees, which will incentivise the staff to stay on within the business and grow it. It is important you consider the tax implications of these shares before offering them to employees, as they may have a tax bill to fund at the time of the award of shares.
When negotiating a deferred consideration or an earnout, you need to understand your capital gains tax (CGT) liability as a seller.
In the deferred consideration example above, with your buyer paying €8m upfront and a guaranteed €2m later, you are subject to CGT on the full €10m upfront – despite not receiving the €2m until, potentially, years later.
Where the earnout is an ascertainable amount, the situation is similar and you subject to CGT on the full amount. For the €8m deal with a potential for an additional €2m down the road, you’ll pay CGT on the full €10m – even though your business might not hit its earnout targets. If it transpires that you don’t achieve the set targets and the earnout is not payable, you can apply to the Revenue Commissioners for a refund on the CGT overpaid.
If your earnout is an unascertainable amount, you have a decision to make. You can pay the CGT on the initial amount, and put an estimated value on the unascertainable amount, thereby paying the CGT on the full value (similar to the ascertainable scenario) or, you can seek to treat the unascertainable amount as a separate asset, and pay CGT on this at a future date.
Some buyers offer shares as part of the deal to keep you or your team motivated to grow the business. For a €10m deal, for example, they could offer €6 million in cash and €4 million worth of shares.
This gives you a deferral of tax, as you are not subject to CGT on those shares – only on the cash amount. You get what's known as rollover relief on the €4m, since CGT is deferred until you sell those shares.
Another tax relief to note is entrepreneur relief, which reduces your CGT to 10% on your first €1m when you sell your company.
If you hold property within your company, you need to decide if it will form part of the sale, or if you want to keep it and potentially lease it back to the company. If the plan is to extract the property, ideally you should look to set up a property company (PropCo) to hold it separately from the main business.
You can do this tax-efficiently, if you plan in advance, so as to avoid any unnecessary tax clawbacks.
Have you built up cash in your business over the years? A buyer is unlikely to want to pay for excess cash on completion and you might wish to consider some tax-efficient options for dealing with this surplus (cash above the cash required for working capital purposes):
In the past, management teams often used excess cash in a business for a management buyout (MBO). But since 2017, the Revenue Commissioners no longer treats that payment as capital gains, but as a distribution from the company. This makes an exiting shareholder – you – subject to income tax (roughly 55%) on those funds. As a seller, you’re better off paying CGT at a rate of 33% and availing of entrepreneur relief.
For a tax-efficient MBO, the management team can set up a bid company (BidCo), draw debt into it, and then use that debt for the buyout.
One other thing to consider is the mechanism by which you hold your shares. Rather than holding your shares personally in the trading company, you might wish to consider setting up a holding company (HoldCo). It’s important that the structure is put in place for bona fida commercial reasons, well in advance of any proposed sale. These bona fida considerations should be well documented.
Then, if at a future date you decide to sell your business, you can sell your trading company tax free to a trade player or private equity fund, once certain conditions are met. The sales proceeds go into your HoldCo and you incur taxes when you use them, rather than paying the tax at the date of sale.
If you’re considering selling part or all of your company, seek deal advisory and tax advice as early as possible. You need your structure and strategy in place well before a deal comes along.
Grant Thornton’s experts offer hands-on commercial and strategic advice, tailored to your business and your goals. We have broad experience in maximising value, mitigating risk, optimising structures and helping sellers plan for tax-efficient deals.
Through our offices in Dublin, Cork, Galway, Limerick and Belfast, we provide advice to Irish and international clients across a range of industries.
Grant Thornton Ireland ranked #1 Deal Advisor for 2024 by Experian and PitchBook league tables. To find out more about how Grant Thornton can support your business, talk to our Deal Advisory team.
