With debt funding still difficult to obtain, other forms of finance for corporate acquisitions are becoming more attractive. One of the most popular options for buyers is to seek part-funding from the vendor of the business.
Vendor finance can be a bridge between the target purchase price and the purchaser's other resources and enable corporate sales to proceed, or to proceed at a higher price than would otherwise be obtained.
Giving the purchaser time to pay
A vendor may opt to receive part of the purchase price a pre-determined time after completion. This type of vendor finance is typically unsecured and non-interest bearing. Vendors remain liable to tax on capital gains (CGT) in the period in which the sale occurs by reference to the full purchase price - even if it is not immediately received.
Some vendors may find this unattractive but for other vendors it may be feasible.
Cash Earn-outs
Earn-outs involve part of the purchase price being based on the profitability of the business over a specific post completion "earn-out period". The transaction documents often contain detailed rules regulating the business's conduct during this period. The role that earn-outs play in CGT liabilities can be complex. Subscribers to the Business Sale Report can access more information on earn-outs and how buyers should calculate their CGT payments.
Loan Note Earn-outs
It is possible for vendors to roll over their gains on their shares into any purchaser shares or loan notes they receive by way of consideration. Problems for the vendors in this situation however include the loss of entrepreneurs relief.
Nevertheless there are ways to retain the relief and more information on this can be obtained by subscribing to the Business Sale Report.
Individual vendors can elect to recognise an immediate CGT liability on the value of an earn-out upon sale instead. Although this accelerates the charge, it may attract individuals who qualify for entrepreneur's relief on sale (with a 10% CGT rate) but who would not qualify when redeeming or selling loan notes (and face a 18% CGT rate).
Vendors who are eligible for entrepreneurs' relief at the time of sale may prefer to negotiate payment in loan notes structured as qualifying corporate bonds (QCBs) to lock in their entrepreneurs' relief (assuming some deferral of payment is required for commercial reasons).
The complexities surrounding QCBs are explained in more detail for subscribers of the Business Sale Report.
There are major disadvantages with a QCB loan note, more details of which are features in the Business Sale Report.
If entrepreneurs' relief is not available on the sale, a vendor may instead prefer to take a non-QCB.
The advantages of this are also discussed more fully in the Business Sale Report.
Corporate Vendors
Certain chargeable gains made by companies can be exempt from corporation tax if the qualifying conditions of the Substantial Shareholdings Exemption are met.
An outline of these conditions is included in the Business Sale Report and is available to subscribers.
One benefit for corporate vendors is that the loan relationship rules provide tax relief if loan notes decline in value (unless the purchaser and vendor are connected).
Employee Vendors
Earn-outs raise issues for individual vendors who are or become employees (including directors) of a target or purchaser. This can involve taxation at different levels depending on the specifics of the deal.
Stamp Duty
Purchasers can escape UK stamp duty on any earn-out that is unascertainable. However, no refund is available if less consideration ultimately is paid. Vendor finance will become a more attractive means of vendors securing company sales at a favourable price.
Conclusion
While conditions for obtaining finance for acquisitions remain tight, the use of vendor finance will become more commonplace. It should also enable vendors with good businesses to achieve a higher price, albeit with some risk, than would have otherwise been the case.
Fully let business / industrial park comprising eight small industrial units let to four tenants and a bungalow let on an AST on a total site area around 4.9 acres (including 2 acres of allocated, undeveloped land).
FREEHOLD
A highly regarded business operating in the new build, commercial and domestic property markets. Offers comprehensive electrical installation services, including lighting, alarm and CCTV systems. Generates further revenue via planned and preventive m...
LEASEHOLD
Supplies a comprehensive range of welding equipment and cutting consumables for both commercial and private customers. Stocks products from an unrivalled portfolio of brands, which enable it to offer a complete package of products to all end users of...
FREEHOLD
Sign up to receive our acquisition alert emails to get your FREE guide
Business Sale Report is your complete solution to finding great acquisition opportunities.
Join today to receive:
All this and much more, including the latest M&A news and exclusive resources