With Tax Changes Expected In The Spring Is Now The Time To Sell Up

Capital Gains Tax (CGT) is currently under review and is seen as an obvious area for change in the deferred Budget which has been moved to Spring 2021.

Following recent changes in Entrepreneurs Relief this means the net proceeds for business owners disposing of their businesses are likely to reduce again, which begs the question: is now a good time to sell? Corporate disposals are rarely rapid affairs, with marketing periods usually 6-12 months in duration.

For those looking to dispose ahead of the Spring budget, the chances of execution are therefore small albeit not completely out of the question. For those business owners close to retirement however, with a consistent track record of profitability and a robust business model, a sale process could be a wise strategy and could yield quite significant upside should CGT rates be moved toward their income tax equivalents. Management Buy Outs and disposal to known parties who have disclosed previous appetite could also present a viable option to transact in the short window ahead.

COVID-19 has clearly disrupted the M&A markets with a reported 50% contraction noted in deal volumes during April and May 2020. However, recovery appears afoot with August 2020 tracking 20% down on August 2019. Deal statistics suggest that most of the activity is taking place in the higher value realm of the market, with an absence of liquidity being a key factor behind the deceleration in small-cap transactions. Financing risk should therefore be considered should you sit in the smaller end of the market, quite often represented by deal values beneath £10m in value.

Should a disposal be pursued it will be vital that business owners have kept their financial records up to date and can demonstrate the COVID-19 impact and general story behind trading results, with buyers also inevitably likely to extend their due diligence to include a thorough review of the risk which may sit in supply chains and customers bases. Poorly credit rated counterparts, slow payment and concentration will therefore be an issue which vendors should present and address in an optimal way.

Valuation is an area which will naturally come under attack, with COVID-19 likely to lead to several approaches from buyers : discount to price, higher percentage of deal values pushed onto deferred paymen profiles, and the shift toward target based consideration payments. This will again have tax implications as the use of straight deferred payments or vendor loan notes may yield different tax points and therefore tax rates given what is anticipated in the Spring.

The MHA Tait Walker Corporate Finance team is working with a multitude of acquisitive parties which should bring vendors with some hope, albeit again caution should be taken as to the credibility, track record, financing and means to execute by those parties.

In short, a disposal prior to the Spring could be a great means to maximise shareholder value, albeit any such businesses should seek professional advice as soon as possible. Robust planning and a defined marketing strategy could be the difference between execution or otherwise, with value leakage a pertinent risk in the current climate.